As COVID Decimates State Revenues Tennessee Franchise Tax Comes for out of State Performers

Most people do not realize this, touring bands end up paying income taxes in multiple states. It tends to be the high population states in the West and Northeast. Think California and New York. This makes sense in some ways as the income tax is based on revenue you make in these states. Big states big revenue. It’s a pain to file multiple state returns but at least there is a reasonable rationale.

A franchise tax is different and is not usually based on a businesses income. It is essentially a flat fee tax on the corporate or LLC entity doing business in that state. The idea is that a business based in that state should pay for the services the state provides. These franchise taxes generally have minimum fees between $150-$800. Bands that use a corporate or LLC structure pay these taxes in their home state because they have a “nexus” in that state. A nexus generally means you have some regular place of business in that state. However some states try to apply the franchise tax even when an out of state business or band has no nexus in that state. However it is exceedingly rare. At least until recently…

Over the last couple months I’ve been hearing anecdotal stories about bands suddenly getting tax bills from the State of Tennessee. Odd. The music state? Aggressively taxing musicians? I didn’t think much of this as, it’s pretty common for bands to not realize they owe sales or income tax in states in which they perform frequently.

But last week I received a surprising notice from the State of Tennessee. A retroactive assessment for 7 years of Tennessee franchise tax. As far as I can tell we have no nexus in that state. I have not heard back from the Tennessee Department of Revenue, but apparently the State of Tennessee considers us to be subject to their franchise tax (now?) because we played a single show in the state in each of these years. Wow. This is ridiculous. Imagine if every state you played in required you to file taxes and pay $150-500 in franchise taxes for the privilege of playing a single show in the state?

Further, this retroactive assessment (including penalties and interest) comes at a time when most states are facing tax revenue shortfalls. When states and local governments face revenue shortfalls they have a bad habit of enacting dubious “revenue enhancement” schemes. Often these amount to badgering businesses and taxpayers into paying taxes and fees they would not normally be assessed. I have no evidence this is what is happening here, but something has changed with way my band is being treated by Tennessee tax authorities. And it is apparently happening to other bands.

WTF? I won’t be rushing back to Tennessee to play shows, record albums or even co-write songs until I have some clarity on the tax situation. I suggest other bands also exercise caution.

One last thought: The federal Music Licensing Collective will come online next year. The MLC is based in Tennessee. Does this mean every songwriter and publisher will now have to pay the Tennessee Franchise Tax? Hardly seems fair but it’s possible.

About Dr. David C Lowery

Platinum selling singer songwriter for the bands Cracker and Camper Van Beethoven; platinum selling producer; founder of pitch-a-tent records; founder Sound of Music Studios; platinum selling music publisher; angel investor; digital skeptic; college lecturer and founder of the University of Georgia Terry College Artists' Rights Symposium.