The Tennessee Indebtedness Tax in Practice (Part 2)
While not as well-known as the Florida documentary stamp tax, the Tennessee indebtedness tax crops up in secured transactions and increases transaction costs associated with lending transactions. In this three-part series, Waller attorneys Robert Harris and Lindsay O’Tousa will unpack the Tennessee indebtedness tax, detail the process of calculating and paying it, and explore statutory methodologies to minimize it. A must-read for banks, finance companies and private equity firms doing lending transactions with a Tennessee nexus.
As discussed in Part I of the Tennessee Indebtedness Tax blog series, Tennessee law requires a recording tax of eleven and one half cents (11.5¢) for each one hundred dollars ($100) of indebtedness to be paid on any financing statement filed with the Tennessee Secretary of State, including any amendment to a financing statement that increases the maximum principal indebtedness. Given the tax is due at the time of filing, lenders need to consider certain factors prior to filing financing statements in Tennessee. The most obvious of which is ensuring the correct amount of tax is paid at the time of filing.
Lenders can accomplish this by utilizing a Tennessee tax affidavit to calculate the amount of tax at issue and to create a contemporaneous record of the calculation for both the company and the lender. In more complex multi-state transactions, the parties may calculate the tax by using a methodology called multi-state pro-ration that focuses on the amount of collateral within and outside of the State. The affidavit assists holders of the indebtedness in calculating the aggregate value of total collateral securing the indebtedness, as well as the portion of collateral located in Tennessee. For purposes of the Tennessee Indebtedness Tax, total “value” is defined as “the value that the collateral would command at a fair and voluntary sale.” Thus, most companies are equipped to complete the affidavit with book values or general balance sheet values which are routinely made available for initial debt issuance in the underwriting process, or in the case of acquisition financing the calculation can be done on a pro forma basis.
The Tennessee Tax Affidavit can also assist companies in determining how the tax will be paid when multiple Tennessee entities have pledged collateral in Tennessee. For instance, given the tax is paid based on the aggregate amount debt being secured, not based on the entity, companies may appropriately decide that only the first UCC-1 filed will reflect the total indebtedness for purposes of the Tennessee indebtedness tax. All other UCC-1 financing statements filed in connection with the same transaction can then reflect a “$-0-” amount as the maximum principal indebtedness for recording tax purposes. The first UCC-1 can then be easily amended as needed to increase the debt amount, as the credit facility is expanded or additional tranches of debt are added. Companies may opt for this option because tracking a single UCC-1 keeps records streamlined for both historical and audit purposes. Moreover, if the entity on the lead UCC-1 ceases to be a pledgor, is merged out of existence, or is otherwise no longer a credit party, the Tennessee Tax Affidavit can be adjusted to reflect this transactional history, to consider the amount of prior payment of tax and to note the amendment of the next-filed UCC-1. As transactions continue to increase in complexity, keeping a record of tax affidavits is essential to recreate the chain of events showing the tax was paid and to ensure continued compliance with the statute.
Because of the issues unique to filing a financing statement in Tennessee, it is helpful to get UCC-1 documents, debt amounts, and the tax affidavit finalized early in a transaction. This additional time can help the parties structure the collateral package appropriately and pay only the amount of indebtedness tax due and avoid overpayments. With fast-moving, multi-state transactions increasing in frequency, it is increasingly important to involve Tennessee counsel, who understands the statutory requirements and can facilitate efficient compliance strategies that minimize the overall transaction costs.
To read the full series:
“Caveat Lender” - The Tennessee Indebtedness Tax (Part 1)
The Tennessee Indebtedness Tax in Practice (Part 2)
Saving clients money: statutory methodologies to minimize tax (Part 3)