Can a parent company file one combined sales and use tax return covering both itself and its wholly-owned single-member LLC leasing subsidiary, instead of the subsidiary registering and filing separately?

Subject

Sales and use tax registration and reporting requirements for affiliated entities.

Plain-English summary

The Tennessee Department of Revenue ruled that a parent manufacturer can file one combined sales and use tax return covering both itself and its wholly-owned, single-member LLC leasing subsidiary -- the subsidiary doesn't need to register or file separately.

"Parent" manufactures and leases equipment (and sells related supplies and maintenance), and conducts its leasing business through "Subsidiary," a single-member LLC it wholly owns. Because pricing pressure in the industry pushes companies to send customers one bundled invoice covering lease payments, supplies, and maintenance together, Parent handles all invoicing, collects all payments (including sales tax), and forwards the lease-payment portion to Subsidiary -- even though legally Subsidiary owns the leased equipment and is the lessor of record.

The key legal move: under Tenn. Code Ann. § 48-249-1003, a Tennessee LLC is classified for all state and local tax purposes the same way it's classified for federal income tax purposes. A single-member LLC that either elects, or defaults under the federal "check-the-box" rules (Treas. Reg. § 301.7701-3), to be a disregarded entity is therefore disregarded for Tennessee sales and use tax too -- treated as a mere division of its owner rather than a separate taxpayer. Since Subsidiary is disregarded, the Department will (1) let Parent pay Subsidiary's sales and use tax on Parent's own return as an "agent filer" if requested at registration, (2) create a linked account for Subsidiary but not require it to file its own returns, with the Department's records showing Parent as the remitter, and (3) disregard intercompany transactions (like Parent's sale of equipment to Subsidiary) entirely, since they're just internal transfers within the same disregarded structure. The Department declined to rule on a third question about how a future audit of either entity would be conducted, calling that outside the scope of a ruling.

What this means for you

Businesses using a single-member LLC leasing or holding subsidiary

If your SMLLC is disregarded for federal income tax purposes (by election or by default), Tennessee will disregard it for sales and use tax too -- meaning you can register the parent, request agent-filer status, and file one combined return instead of maintaining separate registrations and returns for the subsidiary. Disclose the subsidiary's existence and its relationship to the parent at the time of registration.

Accountants and tax professionals

This ruling extends the same disregarded-entity logic already established in other Tennessee tax contexts (Tenn. Code Ann. §§ 67-4-2006(a)(6), 67-4-2007(d), 67-4-2106(c) for franchise and excise tax) to sales and use tax registration and reporting specifically. Note the Department expressly declined to address audit mechanics or loss/overpayment offsetting between the two entities -- that remains an open question outside the scope of this ruling.

Common questions

Q: Does a disregarded single-member LLC subsidiary need its own Tennessee sales tax registration?
A: The Department will create a linked account for it at the time the parent registers, but the subsidiary itself is not required to file separate returns -- the parent can remit tax for both on one combined return as an agent filer.

Q: What makes an LLC "disregarded" for Tennessee tax purposes?
A: Tennessee classifies an LLC for all state and local tax purposes exactly as it's classified federally -- so an SMLLC that elects, or defaults under the federal check-the-box rules, to be disregarded as separate from its owner is disregarded in Tennessee too.

Q: Are sales between the parent and its disregarded subsidiary taxable?
A: No. Intercompany transactions -- including sales of equipment from Parent to Subsidiary -- are disregarded entirely because they're treated as internal transfers within a single taxpayer, not sales between separate entities.

Q: Does this ruling settle how an audit of the parent and subsidiary would be handled?
A: No. The Department expressly declined to rule on whether both entities would be audited together or how any overpayment/underpayment would be offset between them.

Q: Does this ruling apply to other companies with similar SMLLC leasing structures?
A: No. A Tennessee revenue ruling is advisory only and not binding on the Department, even for the requesting taxpayer, though the disregarded-entity analysis applies generally to similarly structured single-member LLCs.

Citations and references

Statutes:

• Tenn. Code Ann. § 48-249-1003 (LLC classified for Tennessee tax purposes per its federal income tax classification)
• Tenn. Code Ann. § 48-211-101 (predecessor 1994 LLC classification statute with nearly identical language)
• Treas. Reg. § 301.7701-3 (federal "check-the-box" entity classification rules)
• Tenn. Code Ann. §§ 67-4-2006(a)(6), 67-4-2007(d), 67-4-2106(c) (disregarded-entity treatment recognized in other Tennessee tax contexts)

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/sales/06-40.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 06-40

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
Sales and use tax registration and reporting requirements for affiliated entities.
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.
FACTS
“Parent” manufactures, sells, and leases to its ultimate customers equipment and supplies
that are necessary to operate that equipment. Parent also provides maintenance services
for the equipment that it has sold or leased to its customers.
Parent conducts its leasing activities through its “Subsidiary,” a wholly-owned single
member LLC. Both Parent and Subsidiary occupy the same physical location.
Due to the competitive pricing within the industry, it is the common practice to bundle, as
a single charge, the lease payment, the fee for maintenance, and the charge for supplies.
Parent and its customers desire a composite invoice for the above-mentioned charges.
When Parent’s customers lease (rather than purchase) the equipment, Subsidiary is
involved in the following two steps:

1. Parent sells the equipment to Subsidiary under a sales and service agreement.
2. Then, Parent and Subsidiary enter into a leasing contract with the customer.

The terms of the two contracts mentioned above result in:

1. Parent invoices the customer for the lease payments.
2. Parent collects lease payments from the customer.
3. Parent forwards the lease payments to Subsidiary.
4. Customer is responsible for paying (to Parent) any sales or use tax due on the
   leased equipment.
5. Customer makes its lease payments, with applicable sales tax, to
   Parent.
   Customers who lease the equipment from Subsidiary rather than purchase the equipment
   from Parent usually purchase the related supplies and maintenance services from Parent.
   Parent performs all invoice processing for both its own sales transactions and
   Subsidiary’s lease transactions. Parent sends the customer a single invoice that includes
   all charges for lease payments, supplies furnished, and maintenance services in a single
   bundled amount, plus applicable sales tax.
   Parent is registered with the Department and collects tax on sales to its Tennessee
   customers. Currently, the Subsidiary does not lease any property within Tennessee.
   Subsidiary anticipates providing Parent with a resale certificate and leasing the
   equipment to its customers in Tennessee.
   QUESTIONS
6. May Parent submit sales and use tax returns under Parent’s account as an “agent filer”
   for Subsidiary?
7. If such a filing is permitted, is Subsidiary required to register with the Department and
   file returns?
8. If either Parent or Subsidiary should be audited by the Department, will both be
   audited and any overpayment or underpayment offset between the two companies?

RULINGS

1. Parent may pay the tax owed by Subsidiary on its own return, if such an arrangement
   is requested at the time of registration.
2. In conjunction with the registration of Parent, the Department will create an account
   for Subsidiary. Subsidiary will not be required to file its own returns.
3. The Department declines to issue a ruling on this question.
   ANALYSIS

2

Tenn. Code Ann. § 48-249-1003, enacted by the General Assembly in 2005, makes the
following provisions concerning the classification of a limited liability company for
Tennessee tax purposes:
For purposes of all state and local Tennessee taxes, a domestic or foreign
LLC shall be treated as a partnership or an association taxable as a
corporation, as such classification is determined for federal income tax
purposes. The members, and any other equity owners of a foreign LLC
treated as a partnership, are subject to all state and local Tennessee taxes
in the same manner and extent as partners in a foreign partnership. The
members and holders of financial rights of a domestic LLC are subject to
all state and local Tennessee taxes in the same manner and extent as
partners in a domestic partnership.
The Tennessee Revised Limited Liability Company Act was passed in 2005 and took
effect on January 1, 2006. The foregoing language is nearly identical to the original
language promulgated in 1994 in the Tennessee Limited Liability Company Act at Tenn.
Code Ann. § 48-211-101. The apparent legislative intent of Tenn. Code Ann. § 48-211101 was to classify limited liability companies for Tennessee state and local tax purposes
in the same manner that they are classified for federal income tax purposes. Tenn. Code
Ann. § 48-211-101, however, was enacted in 1994 prior to the adoption of Treas. Reg. §
301.7701-3, 1 better known as the “check-the-box” provisions. The check-the-box
provisions created standards under which a single member limited liability company
would be disregarded as an entity separate from its owner. Neither the original language
of Tenn. Code Ann. § 48-211-101 nor the language of Tenn. Code Ann. § 48-249-1003
specifically address federal income tax classification elections by eligible limited liability
companies under the check-the-box provisions or an election by a limited liability
company to be disregarded as an entity separate from its owner. The new Tenn. Code
Ann. § 48-249-1003 simply repeats the substantive language from Tenn. Code Ann. § 48211-101 and does not update the language for the check-the-box provisions. The failure
of Tenn. Code Ann. § 48-249-1003 to update the language does not negate the
legislature’s original intent to classify a limited liability company for state and local
purposes in the same manner as its federal classification, unless specifically otherwise
provided.
If a single member limited liability company has made a valid election to be disregarded
as an entity separate from its owner under Treas. Reg. § 301.7701-3 or is so classified by
the default provisions, it will be disregarded as an entity separate from its owner for
Tennessee state and local tax purposes, unless an applicable statute requires otherwise. 2
Based on the foregoing, the Department will treat Subsidiary as a disregarded entity for
sales and use tax purposes. Subsidiary will be treated as a division of Parent, and
intercompany transactions, including intercompany sales, will be disregarded. The
1
2

Treas. Reg. § 301.7701-3 (1997).
See, e.g., Tenn. Code Ann. §§ 67-4-2006(a)(6); 67-4-2007(d); and 67-4-2106(c).

3

Department will require registration by Parent and permit all sales and use tax liability for
both Parent and Subsidiary to be reported on a single return. In conjunction with the
registration of Parent, the Department may obtain necessary information regarding
Subsidiary and create a registration for Subsidiary. However, the account for Subsidiary
will be coded by the Department such that no returns will be required to be filed, and the
Department’s records will show sales and use tax is to be remitted by Parent. The
existence of Subsidiary and its relationship to Parent should be disclosed to the
Department at the time of registration.
With respect to the third question, decisions on which taxpayer may or may not be
audited or how an audit will be conducted are not generally addressed in a ruling of this
type. The Department, therefore, declines to issue a ruling on this issue.

Deborah A. Toon
Tax Counsel

APPROVED: Loren L. Chumley

DATE: 12/15/06

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