Does an out-of-state factoring subsidiary — with no Tennessee offices, employees, or property, but whose affiliated originators pursue collection actions on its behalf against Tennessee customers — have enough nexus to owe Tennessee franchise and excise tax, and if so, must it file a combined return with another affiliated financial institution?

Subject

Whether an out-of-state factoring company has Tennessee nexus through affiliate-conducted collection activities, and must file a combined financial institution return.

Plain-English summary

The Tennessee Department of Revenue ruled that a purely out-of-state factoring company — an entity that buys its affiliates' trade receivables at a discount — is subject to Tennessee franchise and excise tax, and must file a combined return with another affiliated financial institution if the two operate as a unitary group.

The company ("Receivable Inc.," soon to convert from an LLC) buys accounts receivable from its parent corporation and a sister operating company (the "Originators") at a discount, without recourse, meaning it absorbs any loss if a customer doesn't pay. Because factoring is specifically listed in Tennessee's financial-institution statute as "loans arising in factoring," Receivable Inc. qualifies as a financial institution under Tennessee law. That classification matters because Tennessee's "doing business in Tennessee" test for financial institutions is broader than the general nexus test — it's triggered by engaging in transactions with Tennessee customers involving intangible property (like loans) that produce receipts flowing back to the taxpayer, among other triggers.

The harder question was constitutional nexus, since Receivable Inc. has zero Tennessee offices, employees, or property, and performs no collection activities itself. But its affiliated Originators — acting because they legally must, since Receivable Inc. alone owns full title to the purchased receivables — pursue delinquent Tennessee accounts through collection agencies, attorneys, and court judgments obtained in Tennessee's own courts. The Department found these substantial in-state collection activities are conducted on Receivable Inc.'s behalf (any lawsuit legally has to be filed in Receivable Inc.'s name, since it's the only party with a legal right to collect), directly benefit Receivable Inc. by letting it collect money it otherwise couldn't, and are "significantly associated with the taxpayer's ability to establish and maintain a market" in Tennessee — satisfying the Complete Auto Transit v. Brady substantial-nexus test through activities of affiliates, following the Tyler Pipe/Scripto line of cases, and consistent with Multistate Tax Commission guidance that debt collection (even through third parties) creates nexus. The fact that the Originators frame these collection efforts as protecting their own future discount rate didn't change the analysis — the direct benefit still flows to Receivable Inc.

On the combined-return question, Tennessee requires financial institutions in a "unitary group" (mutually dependent, contributory business operations) to file one combined return and compute combined net earnings, even if one member wouldn't independently be taxable in Tennessee on its own. Assuming Receivable Inc. and the affiliated financial institution ("FinanceCo") operate as a genuine unitary business, Tennessee law requires them to file combined.

What this means for you

Factoring companies and other financial-institution subsidiaries operating through affiliates

Zero physical presence in Tennessee doesn't mean zero Tennessee tax exposure. If your affiliates conduct collection activities — through collection agencies, attorneys, or court actions — on receivables you own, those activities can create substantial nexus for you even though you never set foot in the state, because the benefit and legal ownership flow to you regardless of who's doing the legwork. Structure and document collection arrangements with this exposure in mind.

Accountants and tax professionals

This ruling is a close companion to TN Revenue Ruling 06-18 (same year, nearly identical nexus analysis applied to a receivables-purchasing company using an affiliate's sales employees for in-person collection visits) — both apply the Complete Auto Transit v. Brady/Tyler Pipe/Scripto affiliate-nexus framework, plus here the Multistate Tax Commission's guidance specifically flagging debt collection (even through third parties) as an "unprotected," nexus-creating activity under P.L. 86-272 principles. Also useful for the financial-institution-specific combined-return mechanics under Tenn. Code Ann. §§ 67-4-2114(c) and 67-4-2006(a)(3), which force a combined filing for unitary group members even when one entity wouldn't be independently taxable.

Common questions

Q: Does a company need any physical presence in Tennessee to have nexus there?
A: No. Substantial in-state activities conducted by affiliates on the company's behalf — like debt collection through agencies, attorneys, or court actions — can establish nexus even without any offices, employees, or property in the state.

Q: Does labeling collection efforts as being "for the affiliate's own benefit" (like protecting a discount rate) avoid creating nexus for the receivables owner?
A: No. As long as the receivables owner directly benefits from collections it couldn't otherwise achieve, that direct benefit establishes nexus regardless of how the affiliate frames its own motivation.

Q: Is factoring (buying receivables at a discount) treated as financial institution activity under Tennessee law?
A: Yes. Tennessee's financial-institution statute specifically lists "loans arising in factoring" as qualifying business of a financial institution.

Q: If two affiliated financial institutions are a unitary group, must they file separately or combined?
A: Combined. Tennessee requires unitary groups of financial institutions to file one combined franchise and excise tax return, even if one member wouldn't be independently taxable in Tennessee on its own.

Q: Does this ruling apply to other factoring or financial-institution affiliate structures?
A: No. A Tennessee revenue ruling is advisory only and not binding on the Department, even for the taxpayer who requested it, though the affiliate-nexus and combined-filing analysis it applies is of general relevance to similar structures.

Citations and references

Statutes:

• Tenn. Code Ann. § 67-4-2004(11) (definition of "financial institution")
• Tenn. Code Ann. § 67-4-2004(4)(A)(iii)(h) (loans arising in factoring as "business of a financial institution")
• Tenn. Code Ann. § 67-4-2004(9)(A)-(B) (broader "doing business in Tennessee" test for financial institutions)
• Tenn. Code Ann. §§ 67-4-2104, 67-4-2005, 67-4-2105, 67-4-2007 (franchise/excise tax imposition on entities doing business in Tennessee)
• Tenn. Code Ann. § 67-4-2004(37) (definition of "unitary business"/"unitary group")
• Tenn. Code Ann. § 67-4-2114(c) (combined franchise return required for financial institution unitary groups)
• Tenn. Code Ann. § 67-4-2006(a)(3) (combined excise tax net earnings computation for financial institution unitary groups)

Cases and guidance:

• Quill Corporation v. North Dakota, 504 U.S. 298 (1992) (Due Process and Commerce Clause limits)
• Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) (four-part substantial nexus test)
• J.C. Penney National Bank v. Johnson, 19 S.W.3d 831 (Tenn. Ct. App. 1999) (credit cards alone insufficient nexus, no physical presence)
• Tyler Pipe Industries v. Washington, 483 U.S. 232 (1987); Scripto, Inc. v. Carson, 362 U.S. 207 (1960) (nexus via affiliates/independent contractors)
• America Online, Inc. v. Johnson, 2002 WL 1751434 (Tenn. Ct. App. 2002) (nexus requires activities in-state on the taxpayer's behalf)
• Multistate Tax Commission, "Statement of Information Concerning Practices... Under Public Law 86-272" (debt collection through third parties as nexus-creating)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/fae/06-27fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 06-27

WARNING
Revenue rulings are not binding on the Department. This presentation of
the ruling in a redacted form is information only. Rulings are made in
response to particular facts presented and are not intended necessarily as
statements of Departmental policy.

SUBJECT
Whether Receivable Inc. will be subject to Tennessee franchise, excise taxes
and whether Receivable Inc. and FinanceCo will be required to file a combined
franchise, excise tax return, assuming that they both qualify as financial
institutions and assuming that one of them is subject to franchise, excise taxes.
SCOPE
Revenue Rulings are statements regarding the substantive application of law and
statements of procedure that affect the rights and duties of taxpayers and other
members of the public. Revenue Rulings are advisory in nature and are not
binding on the Department.
FACTS1
During the final quarter of 2004, Corporation W formed Receivable LLC as a
single member limited liability company. Receivable LLC was formed for the sole
purpose of acting as an internal factoring company. Corporation W made a cash
contribution to Receivable LLC so that it would have the capital needed to
purchase trade account receivables. Receivable LLC is a disregarded entity for
federal income tax and Tennessee franchise, excise tax purposes.
Since its inception, Receivable LLC has purchased (i.e., factored) the trade
account receivables of Corporation W and one of its operating subsidiaries (the
“Originators”) at a discount. These receivables are purchased without recourse.
Receivable LLC purchases the Originators’ right, title and interest in the
receivables, including any security interests and rights to collection. Any loss
resulting from the default of a trade receivable purchased must be borne by
1

The facts originally presented were supplemented in a [DATE] telephone conversation between
a representative of [THE TAXPAYER’S REPRESENTATIVE] and a representative of the
Tennessee Department of Revenue and in an e-mail message dated [DATE] from a
representative of [THE TAXPAYER’S REPRESENTATIVE].

Receivable LLC. The Originators cannot be required to pay a factored trade
account receivable that Receivable LLC cannot collect.
Receivable LLC does not perform any collection activities and does not
compensate any party, including the Originators, to perform any collection
activities on its behalf. If Receivable LLC determines that a material number of
the accounts that it has purchased are becoming uncollectible, it will charge the
Originators a higher discount rate on future purchases of receivables.
In order to obtain the lowest discount rate possible on the future factoring of
receivables, the Originators undertake rigorous credit verification and other
measures considered necessary to minimize the number of receivables that
become uncollectible. Because the Originators have given up all right, title and
interest in the trade accounts sold, they have no right to collect such accounts on
their own behalf. The Originators do not contract to collect delinquent factored
trade accounts on behalf of Receivable LLC.
If a factored account is not paid and is considered significant enough to affect the
Originators’ future discount rate, the Originators may encourage payment by
refusing to do further business with the customer involved until the account is
paid. If this does not result in payment of the account, the Originators will
engage a collection agency to collect the account. If the collection agency is
unable to collect the account, the Originators will engage an attorney for
collection action. The attorney is authorized to pursue the matter through the
courts if necessary. Receivable LLC has received, and will continue to receive,
judgments from Tennessee courts resulting from collection actions.
Receivable LLC used the receivables that it purchased as collateral for a series
of loans from an unrelated financial institution and used the proceeds from these
loans to purchase additional receivables from the Originators. However, the fact
that Receivable LLC uses these receivables as collateral does not change or
influence the fact that the Originators are selling, and not loaning, their
receivables to Receivable LLC.
The Originators and Receivable LLC participate in an internal cash management
account maintained at [BANK X]. As a result, any transactions between these
parties do not result in a change in the overall cash management account but are
reflected as corresponding increases and decreases to the relevant operating
accounts of each of the entities. Receivable LLC’s operating account is
managed in [BANK X’s CITY, STATE – NOT TENNESSEE] branch.
Payments on trade account receivables are made to a lockbox maintained by
Receivable LLC at [BANK Y’s CITY, STATE – NOT TENNESSEE] branch. All
cash transfers between [BANK X and BANK Y] are pre-authorized and do not
require the specific consent of an officer or employee of Receivable LLC.

2

The following example illustrates Receivable LLC’s cash flow cycle:

1. The Originators wish to sell a receivable worth $100. The terms of the
   receivable are that the customer must pay the Originators the full amount
   of the receivable within one month. This one-month period will vary based
   on the number of business days in the month and other similar factors.
2. Receivable LLC agrees to purchase the receivable at a discount rate of
   5%. Therefore, Receivable LLC transfers $95 (the face value of the
   receivable less the 5% discount) in cash to the Originators operating
   account at [BANK X].
3. Within the required 30 day period, the Originators’ customer remits the
   $100 payment to Receivable LLC’s lockbox with [BANK Y].
4. Receivable LLC transfers the $100 that it received from its lockbox
   account to its operating account at [BANK X].
   Prospectively, Receivable LLC will become a corporation called Receivable Inc.
   To effect this change of entity, Receivable LLC may convert to a corporation
   under the civil law of the state of incorporation, or Corporation W may contribute
   Receivable LLC’s operations to a newly formed corporation.
   In any event and for purposes of this discussion, Receivable Inc. will operate in
   the same way as Receivable LLC. Receivable Inc. will be a separate taxable
   entity for both federal income tax and Tennessee franchise, excise tax purposes
   and will file as a member of Corporation W’s federal consolidated income tax
   return. Receivable Inc.’s sole location is in State X, that is, Receivable Inc.’s
   employees reside solely in State X. Receivable Inc. does not solicit the factoring
   of receivables in Tennessee, does not solicit or receive deposits from customers
   in Tennessee, and does not own any property in Tennessee. Receivable Inc. will
   not have any employees, representatives, or independent contractors conducting
   business in Tennessee.
   Corporation W also owns FinanceCo. FinanceCo is headquartered in State X
   and FinanceCo has not, and will not, do business in Tennessee. Receivable Inc.
   will share office space with FinanceCo and will use the same business address
   as FinanceCo. For purposes of this Revenue Ruling, it will be assumed that
   FinanceCo is a financial institution under Tennessee law.
   QUESTIONS PRESENTED
5. Will Receivable Inc. be subject to Tennessee franchise, excise taxes?
   2.

Assuming that FinanceCo and Receivable Inc. both qualify as financial
institutions under Tennessee law and that either one of them becomes

3

subject to Tennessee franchise, excise taxes, will Receivable Inc. and
FinanceCo be required to file combined Tennessee franchise, excise tax
returns?
RULINGS

1. Yes.
2. Yes, assuming that FinanceCo and Receivable Inc. are engaged in a unitary
   business and constitute a unitary group of financial institutions, as the terms
   “unitary business” and “unitary group” are defined in Tenn. Code Ann. § 67-42004(37).
   ANALYSIS
   QUESTION ONE
   Receivable Inc. is a Financial Institution
   Under Tennessee Law
   Tenn. Code Ann. § 67-4-2004(11), set forth in pertinent part below, defines a
   “financial institution” as follows:
   “Financial Institution” means a holding company, any regulated financial
   corporation, a subsidiary of a holding company or a regulated financial
   corporation, an investment entity that is indirectly more than fifty percent
   (50%) owned by a holding company or a regulated financial corporation, or
   any other person that is carrying on the business of a financial institution.
   As used in Parts 20 and 21 of Title 67, Chapter 4 of the Tennessee Code
   Annotated, the term “person” is defined by Tenn. Code Ann. § 67-4-2004(29) as
   follows:
   “Person” or “taxpayer” means every corporation, subchapter S corporation,
   limited liability company, professional limited liability company, registered
   limited liability partnership, professional registered limited liability partnership,
   limited partnership, cooperative, joint-stock association, business trust,
   regulated investment company, real estate investment trust, state-chartered
   or national bank, or state chartered- or federally chartered savings and loan
   association[.]
   Corporation W and Receivable Inc. are each a “person,” as the term is defined
   for Tennessee franchise, excise tax purposes.
   A “holding company” is defined by Tenn. Code Ann. § 67-4-2004(15) as follows:

4

“Holding company” means any corporation defined as a “bank holding
company” under 12 U.S.C. § 1841(a) of the Bank Holding Company Act of
1956, as it may be amended from time to time; or any corporation defined as
a “savings and loan holding company,” “multiple savings and loan holding
company” or “diversified savings and loan holding company,” under 12 U.S.C.
§ 1467(a(a)(1), as it may be amended from time to time.
Under Tenn. Code Ann. §§ 67-4-2004(11) and 67-4-2004(15), Receivable Inc.
and Corporation W are not holding companies or regulated financial corporations
and neither is a subsidiary of a holding company or a regulated financial
corporation. Receivable Inc. and Corporation W are not investment entities that
are indirectly more than fifty percent owned by a holding company or a regulated
financial corporation.
The term “business of a financial institution,” as it is used in Tenn. Code Ann §
67-4-2004(11), is defined by Tenn. Code Ann. § 67-4-2004(4) as follows:
(A) “Business of a Financial Institution” means:
(i) The business that a regulated financial corporation may be
authorized to do by the proper regulatory authorities;
(ii) The business that any person organized under the authority of the
United States or organized under the laws of any other taxing
jurisdiction or country does or has authority to do that is
substantially similar to the business that a corporation may be
created to do under title 45, or any business that a corporation or its
subsidiary is authorized to do by title 45;
(iii) Otherwise making, acquiring, selling or servicing loans or
extensions of credit including, but not limited to, the following:
(a) Secured or unsecured consumer loans;
(b) Installment loans;
(c) Mortgages or deeds of trust or other secured loans on real or
tangible personal property;
(d) Credit card loans;
(e) Secured or unsecured commercial loans of any type;
(f) Letters of credit and acceptance drafts;
(g) The holding of participation loans in which more than one (1)
lender is a creditor to a common borrower;
(h) Loans arising in factoring; and
(i) Any other transactions of a comparable economic effect;

5

(iv) Leasing or acting as an agent, broker or adviser in connection with
leasing real and personal property that is the economic equivalent
of an extension of credit; or
(v) Operating a credit card business;
(B) Notwithstanding the provisions of this subdivision (4), if the business of a
financial institution generates less than fifty percent (50%) of a person’s
gross income, the person shall not be considered to be a financial
institution under subdivision (11). For purposes of this subdivision (4)(B),
the computation of gross income of a person does not include income
from nonrecurring, extraordinary transactions[.]
Corporation W is not conducting the business of a financial institution and is not a
financial institution for Tennessee franchise, excise tax purposes.
Receivable Inc. is in the business of acquiring and servicing loans or extensions
of credit arising from factoring. Therefore, Receivable Inc. is carrying on the
business of a financial institution as described in Tenn. Code Ann. § 67-42004(4)(A)(iii)(h) and qualifies as a financial institution under Tenn. Code Ann. §
67-4-2004(11).
Receivable Inc. Has the Requisite Substantial Nexus in
Tennessee to be Subjected to Franchise, Excise Taxes
Tenn. Code Ann. §§ 67-4-2104 and 67-4-2005 state that the privilege of doing
business in Tennessee is a taxable privilege. Tenn. Code Ann. §§ 67-4-2105
and 67-4-2007 levy the franchise tax and the excise tax on entities that are doing
business in Tennessee. In the context of franchise, excise tax law, “doing
business in Tennessee” is defined by Tenn. Code Ann. § 67-4-2004(9)(A) as
follows:
“Doing business in Tennessee” or “doing business within this state” means
any activity purposefully engaged in, within Tennessee, by a person with the
object of gain, benefit, or advantage, consistent with the intent of the general
assembly to subject such persons to the Tennessee franchise/excise tax to
the extent permitted by the United States Constitution and the Constitution of
Tennessee.
Tenn. Code Ann. § 67-4-2004(9)(B) makes the following provisions regarding the
determination of whether a financial institution is doing business in Tennessee:
A financial institution shall be presumed, subject to rebuttal, to be doing
business in Tennessee if the sum of its assets and the absolute value of its
deposits attributable to sources within this state is five million dollars
($5,000,000) or more. For purposes of this part, tangible assets shall be

6

attributable to this state if they are located in this state. Intangible assets
shall be attributable to sources within this state if the income earned from
those assets is attributable to this state pursuant to this part. Deposits shall
be attributed to this state if they are deposits made by this state or any of its
agencies, instrumentalities or subdivisions or by any resident of this state,
regardless of whether the deposits are accepted or maintained at locations in
this state. Additionally, a financial institution shall be deemed to be doing
business in this state if the institution:
(i) Maintains an office in this state;
(ii) Has an employee, representative or independent contractor conducting
business in this state;
(iii) Regularly sells products or services of any kind or nature to customers
in this state that receive the product or service in this state;
(iv) Regularly solicits business from potential customers in this state;
(v) Regularly performs services outside this state which are consumed in
this state;
(vi) Regularly engages in transactions with customers in this state that
involve intangible property, including loans, and result in receipts
flowing to the taxpayer from within this state;
(vii) Owns or leases property located in this state; or
(vii) Regularly solicits and receives deposits from customers in this state[.]
Receivable Inc.’s Tennessee activities of factoring trade account receivables are
conducted purposefully and with the object of gain, benefit, or advantage.
Receivable Inc. engages in transactions with customers in Tennessee that
involve intangible property, including loans, and such transactions result in
receipts flowing to Receivable Inc. from within Tennessee. Thus, Receivable Inc.
is conducting at least one of the activities enumerated in Tenn. Code Ann. § 674-2004(9)(B) as doing business in Tennessee. However, the determination of
whether Receivable Inc. has the requisite Tennessee nexus to be subjected to
franchise, excise taxes must be made in the light of the United States
Constitution’s limitations on the taxing power of the states.
The power of a state to impose a tax on an entity is limited by the United States
Constitution. Quill Corporation v. North Dakota, 504 U.S. 298 (1992). Both the
Due Process Clause and the Commerce Clause impose limits on the taxing
power of a state. Id. at 305.

7

The Due Process Clause of the United States Constitution requires that
Receivable Inc. have “minimum contacts” with the taxing state in order for the
taxing state to impose its tax. Id. at 307. If an entity’s contacts with the taxing
state make it reasonable, in the context of our federal system of government, to
require the entity to defend a lawsuit in the taxing state, the Due Process Clause
is satisfied. Id. If a potential lawsuit against the taxpayer is reasonably
foreseeable in the taxing state, the Due Process Clause is satisfied. Id.
If contacts are sufficient to subject an entity to personal jurisdiction in the forum
state, then imposition of a tax on the entity’s business in the state will be
sustained under the Due Process Clause even though the entity has no physical
presence in the taxing state. J.C. Penney National Bank v. Johnson, 19 S.W.3d
831 at 837 (Tenn.Ct.App. 1999) appeal denied, (Tenn. May 8, 2000), cert.
denied, Johnson v. J.C. Penney National Bank, 531 U.S. 927 (2000). So long as
a commercial actor’s efforts are purposefully directed toward residents of a state,
the absence of physical contacts cannot defeat the personal jurisdiction of such
state under the Due Process Clause. Burger King Corp. v. Rudzewicz, 471
U.S. 462, at 476 (1987).
Receivable Inc. has purposefully directed its efforts toward the residents of
Tennessee by purchasing accounts receivable due to the Originators from their
customers in Tennessee. Under the facts presented, it appears that subjection
of Receivable Inc. to Tennessee franchise, excise taxation would not violate the
requirements of the Due Process Clause of the U.S. Constitution. But, in order to
subject Receivable Inc. to such taxation, the requirements of the Commerce
Clause of the United States Constitution must also be met.
The Commerce Clause of the United States Constitution grants to Congress the
power to “regulate Commerce with foreign Nations, and among the several
States.” U. S. Constitution, Article I, § 8, cl. 3. Although the Commerce Clause
does not explicitly limit the power of the states, the United States Supreme Court
has held consistently that the Commerce Clause implicitly limits the power of
states to interfere with interstate commerce. Quill Corporation v. North Dakota,
504 U.S. 298, at 309 (1992). This implicit limitation on the power of states to
interfere with interstate commerce is known as the “negative” or “dormant”
Commerce Clause. Id.
Dormant Commerce Clause jurisprudence in the area of state taxation changed
dramatically with the U.S. Supreme Court’s decision in Complete Auto Transit,
Inc. v. Brady, 430 U.S. 274 (1977). The Complete Auto decision rejected the line
of cases that held impermissible the direct taxation of interstate commerce by the
states and enunciated a four-part test providing that imposition of a tax will be
sustained so long as the tax meets all of the following criteria:

1. The tax must be applied to an activity with a substantial nexus in the taxing
   state.

8

2. The tax must be fairly apportioned.

3. The tax must not discriminate against interstate commerce.
4. The tax must be fairly related to the services provided by the taxing state.
   The substantial nexus test in the first prong of the Complete Auto decision is
   critical in determining whether Receivable Inc. can be subjected to an income
   based tax in Tennessee where its debtors reside.
   In J.C. Penney, 19 S.W.3d 831, the Tennessee Court of Appeals was presented
   with an opportunity to consider application of the doing business in Tennessee
   criteria found in Tenn. Code Ann. § 67-4-2004(9)(B) to determine whether J.C.
   Penney National Bank had the requisite substantial Tennessee nexus to be
   subjected to franchise, excise taxes. J.C. Penney National Bank had no physical
   presence of consequence in Tennessee, but was making credit card loans to
   customers in Tennessee.
   The Tennessee Court of Appeals refused to uphold the Department’s imposition
   of franchise, excise taxes on J.C. Penney National Bank. The Court reached this
   decision because, other than credit cards issued to its customers, which the
   Court held were “in and of themselves virtually worthless,” J.C. Penney National
   Bank had no Tennessee physical presence and thus did not have the requisite
   “substantial nexus” in Tennessee to satisfy the first prong of the Complete Auto
   test. However, in J.C. Penney, 19 S.W.3d at 842, the Tennessee Court of
   Appeals stated that it was not their “. . . purpose to decide whether ‘physical
   presence’ is required under the commerce clause” to subject a business entity to
   state taxation.
   In America Online, Inc. v. Johnson, WL 1751434 at 2 (Tenn.Ct.App. 2002), the
   Tennessee Court of Appeals observes that the U.S. Supreme Court has rejected
   state taxes on interstate commerce where no activities are carried on in the
   taxing state on the taxpayer’s behalf. Citing Tyler Pipe Industries v. Washington,
   483 U.S. 232 (1987) and Scripto v. Carson, 362 U.S. 207 (1960), the Court
   further comments that “[i]n other cases where the out-of-state taxpayer did not
   actually have offices or employees in the taxing state, the [U.S. Supreme Court],
   nevertheless, found a substantial nexus based on in-state activities carried on by
   affiliates or independent contractors on the taxpayer’s behalf.” Id. at 2. In any
   case, “[t]he activity taxed must have substantial nexus with the state.” Id. at 2.
   “We know that a substantial nexus may be established by activities carried on
   within the state by affiliates and independent contractors.” Id. at 3. “Where . . .
   activities are ‘being conducted in the taxing state that substantially contribute to
   the taxpayer’s ability to maintain operations in the taxing state,’ a substantial
   nexus does exist.” Id. at 3, citing J.C. Penney, 19 S.W.2d at 841 (referencing

9

Tyler Pipe, 483 U.S. 232 and Scripto, 362 U.S. 207). The crucial factor
governing nexus is whether the activities preformed in [the] state on behalf of the
taxpayer are significantly associated with the taxpayer’s ability to establish and
maintain a market in this state . . .[.]” Tyler Pipe, 483 U.S. 232 at 250.
Although Receivable Inc. has no physical presence in Tennessee and performs
no collection activities, the following collection activities are taking place with
regard to the accounts receivable purchased from the Originators by Receivable
Inc.:

1. The Originators may refuse to do business with customers that do not pay
   accounts receivable purchased from the Originators by Receivable Inc.
2. The Originators may engage a collection agency to collect delinquent
   accounts purchased from the Originators by Receivable Inc.
3. The Originators may engage an attorney and authorize him to take legal
   action in the courts to collect delinquent accounts purchased from the
   Originators by Receivable Inc.
4. Receivable Inc. receives judgments from Tennessee courts as a result of
   collection actions filed with regard to delinquent accounts purchased from
   the Originators by Receivable Inc.
   The Originators claim that the above collection activities are undertaken on their
   own behalf in order to ensure collection of the maximum number of accounts
   purchased from the Originators by Receivable Inc. and thus keep the discount
   rate charged by Receivable Inc. as low as possible. However, it is axiomatic that
   these collection efforts result in Receivable Inc. being able to collect accounts
   that it would not otherwise be able to collect and that Receivable Inc. directly
   benefits from such collection activities. Although the Originators may also
   indirectly benefit from the collection activities in Tennessee, the direct benefits
   that inure to Receivable Inc. cannot be ignored.
   The Originators have sold all of their right, title and interest in the accounts
   receivable that have been purchased by Receivable Inc., including any security
   interests and rights to collection. Receivable Inc. has purchased such accounts
   without recourse. Under these terms and circumstances, any collection actions
   would legally have to be conducted on behalf of Receivable Inc., the only party
   having right, title and interest in the factored accounts and the only party having
   the legal right to collect such accounts. The collection agency engaged by the
   Originators would have to collect the accounts on behalf of Receivable Inc. and
   the attorney engaged by the Originators would have to file suit in the name of
   Receivable Inc. to collect the accounts.

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Despite the indirect benefits that the Originators receive from the collection
activities being conducted in Tennessee, under the facts presented it appears
that such collection activities are being conducted on behalf of Receivable Inc.
The Multistate Tax Commission (“MTC”) offers guidance as to whether collection
activities establish tax nexus in a taxing jurisdiction. The MTC has issued a
statement entitled “Statement of Information Concerning Practices of Multistate
Tax Commission and Signatory States Under Public Law 86-272.” (P.L. 86-272
is the name under which Title 15 U.S.C.A. § 381 is commonly known.) This
statement has been adopted in whole or in part by states that are members of
the Multistate Tax Compact and it has identified activities considered directly
related to solicitation of sales in interstate Commerce in the light of Wisconsin
Department of Revenue v. William Wrigley, Jr., Co. 505 U.S. 214 (1992). J.
Healy and M. Schadewald, Multistate Corporate Tax Guide, I-48 (2006).
Although Tennessee is not a full member of the Multistate Tax Compact, it is an
associate member and has adopted rules and regulations similar to the
Compact’s Uniform Division of Income for Tax Purposes Act (UDITPA) rules.
The Multistate Tax Commission statement lists activities that are considered to
be entirely ancillary to the solicitation of orders (protected activities) and activities
that are considered to serve an independent business function (unprotected
activities). Among the activities considered to serve an independent business
function and thus create tax nexus in the state where they are conducted is the
following activity:
Collecting current or delinquent accounts, whether directly or by third parties,
through assignment or otherwise.
Substantial collection activities conducted in Tennessee by an out-of-state
business entity, or on its behalf by an affiliate or an independent contractor,
would contribute to the entity’s ability to maintain operations in Tennessee and
would result in the entity having the requisite substantial nexus to be subjected to
Tennessee franchise, excise taxes.
Under the facts presented, Receivable Inc. will be subject to Tennessee
franchise, excise taxation.
QUESTION TWO
Receivable Inc. and FinanceCo are Required to
File a Combined Franchise, Excise Tax Return if Either
Is Doing Business in Tennessee
For purposes of this Revenue Ruling, it is assumed that FinanceCo is a “financial
institution,” as the term is defined in Tenn. Code Ann. § 67-4-2004(11). Under the

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analysis set forth above in response to the first question presented, Receivable
Inc. is a financial institution for franchise, excise tax purposes.
Tenn. Code Ann. § 67-4-2114(c) makes the following provisions concerning the
filing of combined franchise tax returns by unitary groups of financial institutions:
Financial institutions subject to tax in this state that are members of a unitary
group, as defined in § 67-4-2004, shall file a combined return, and pay the tax
imposed by this part, after apportionment, based on all operations of the
unitary business. This report shall include the information set out in
subsections (a) and (b), for every member of the unitary group, even if some
of the members would not otherwise be subject to taxation under this part.
Dividends, receipts and expenses resulting from transactions between
members of a unitary group shall be excluded from the return, for purposes of
apportionment under § 67-4-2118. The members shall designate one (1)
member that would otherwise be subject to tax on a separate entity basis to
file the combined return. Each member subject to tax in this state shall be
jointly and severally liable for the tax imposed by this part.
With regard to combined excise tax returns required for financial institutions,
Tenn. Code Ann. § 67-4-2006(a)(3) makes the following provisions:
For financial institutions that form a unitary business, as defined in § 67-42004, “net earnings” or “net loss” is defined as the combined net earnings or
net loss, as defined in subdivision (a)(1), for all members of the unitary group,
with all dividends, receipts and expenses resulting from transactions between
members of the unitary group excluded when computing combined net
earnings, and subject to the adjustments in subsections (b) and (c) on a
combined basis, even if some of the members would not be subject to
taxation under this part, if considered apart from their unitary group.
A “unitary business” or “unitary group” is defined by Tenn. Code Ann. § 67-42004(37) as follows:
“Unitary business” or “unitary group” means business activities or operations
of financial institutions that are of mutual benefit, dependent upon, or
contributory to one another, individually or as a group, in transacting the
business of a financial institution. “Unitary business” may be applied within a
single legal entity or between multiple entities. “Unitary business” or “unitary
group” includes those entities that are engaged in a unitary business
transacted wholly in, or in and out of, the state of Tennessee, even if some of
the entities would not be subject to tax in this state, if considered apart from
their unitary group.

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The facts presented do not contain sufficient information to determine whether
FinanceCo and Receivable Inc., as financial institutions, are engaged in a unitary
business and constitute a unitary group of financial institutions.
Under Tennessee law, it is likely that FinanceCo and Receivable Inc. are
engaged in a unitary business and constitute a unitary group of financial
institutions. Assuming this to be the case, Tennessee law clearly requires them
to file a combined franchise, excise tax return if one of them is subject to
franchise, excise taxes even though the other would not be subject to such
taxation if considered apart from the unitary group.

Arnold B. Clapp
Special Counsel to the Commissioner

APPROVED: Loren L. Chumley, Commissioner

DATE: 7-20-06

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