What does a company have to show to qualify as a 'bona fide Tennessee advertising agency' so that a film or TV production company's payments to it count toward Tennessee's 15% movie/TV production tax incentive?

Plain-English summary

The Taxpayer is a new company headquartered in Tennessee, formed to promote, advertise, arrange, and oversee distribution of film productions. Its headquarters staff work from its Tennessee address, and it plans to hire mostly Tennessee residents as it grows, with several film projects already in negotiation. It asked the Department whether it qualifies as a "bona fide Tennessee advertising agency" — a status that matters because Tennessee offers qualified film/TV production companies a 15% franchise and excise (F&E) tax credit on "qualified expenses" incurred in Tennessee (§ 67-4-2109(k)), and promotion/advertising payments only count toward that credit if they go to a genuine Tennessee advertising agency, not just any vendor.

The Department ruled yes, and laid out the test. To be a bona fide Tennessee advertising agency for this purpose, a company must: (a) actually be in the business of providing promotion and advertising services to clients; (b) conduct operations with substantial economic substance and business purpose apart from generating tax benefits; (c) normally have more than nominal income and expenses, operate from an actual Tennessee location, and employ people with real expertise in movie/TV promotion; (d) if it subcontracts to an out-of-state agency, keep those subcontracted payments to no more than 50% of what it charges the production company; (e) not act as a mere conduit letting the production company effectively buy out-of-state advertising services while still claiming the credit; and (f) not be a sham business whose real purpose is just receiving fees and passing them to an out-of-state agency.

The ruling includes two illustrative examples: if a Tennessee agency with no real experience simply passes a $500,000 fee straight through to a California agency, the fee doesn't qualify (it's a conduit). But if a genuinely substantial Tennessee agency subcontracts only 49% of a $500,000 fee to a New York agency for assistance, the fee does qualify. Applying these factors, the Department found the Taxpayer — with a real Tennessee headquarters, an experienced owner-manager, and a credible business model — meets the test, so payments made to it by qualifying production companies will count as qualified expenses, provided it continues to comply with the criteria.

What this means for you

Film/TV production companies and investors seeking Tennessee's 15% production credit

Promotion and advertising fees only count toward the 15% credit if paid to a genuinely substantial Tennessee-based agency — not a shell that simply forwards the money out of state. Before relying on an agency's fees to build your qualified-expense total, confirm the agency has real Tennessee operations, real staff expertise, and isn't subcontracting more than half the work elsewhere.

Companies setting up as Tennessee advertising agencies serving the film industry

Document your economic substance: a real office, real staff with industry expertise, non-nominal income/expenses, and a subcontracting ratio that keeps at least 50% of the fee with genuine in-state work. The Department will scrutinize agencies that look like pass-throughs.

Accountants and tax professionals

This is a companion ruling to LR 11-05 (statutory requirements for the broader $1M qualified-expenses/headquarters-facility incentive framework) — read together, they cover both the "is this an eligible Tennessee advertising agency" question and the underlying production-company eligibility mechanics for the same § 67-4-2109(k) credit program.

Common questions

Q: Can a Tennessee advertising agency subcontract any of the promotion work to an out-of-state firm without losing credit eligibility?
A: Yes, up to 50% of the total fee charged to the production company — beyond that, or if the Tennessee agency is merely a pass-through, the fee won't qualify.

Q: What's the difference between legitimate subcontracting and an impermissible "conduit"?
A: A bona fide agency with real substance, expertise, and a Tennessee location that subcontracts a minority share of the work is fine; an agency with no real operations that exists mainly to route the production company's money to an out-of-state agency is a conduit and disqualifies the fee.

Q: Can another film-promotion company rely on this letter ruling to confirm its own agency status?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to. This summary is informational only, not legal or tax advice.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-4-2109(k) (15% F&E tax credit for movie/episodic TV production expenses)
• § 67-4-2109(k)(1)(A) (definition of "qualified expenses"); § 67-4-2109(k)(1)(B) ("qualified investor"); § 67-4-2109(k)(1)(C) (definition of "qualified production company")
• § 67-4-2109(k)(2)-(5) (credit amount, documentation, approval, refund procedures)
• § 67-6-224(3)/(b)(3) (definition of "headquarters facility," cross-referenced)
• § 39-17-901(10), (2), (11), (12), (14) (definition of "obscene" and related terms)
• § 67-1-1802 (referenced, refund procedures)

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/11-03fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 11-03
Letter Rulings are binding on the Department only with respect to the
individual taxpayer being addressed in the ruling. This presentation
of the ruling in a redacted form is informational only. Rulings are
made in response to particular facts presented and are not intended
necessarily as statements of Department policy.

SUBJECT
Whether [Taxpayer] qualifies as a bona fide Tennessee advertising agency and the
criteria that must be met for payments made to a Tennessee advertising agency to
promote and advertise a movie or television production to qualify for the 15% incentive
credit administered by the Department of Revenue that is available for the production of
movies or episodic television programs in Tennessee.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a
specific set of existing facts furnished to the Department by the taxpayer. The rulings
herein are binding upon the Department, and are applicable only to the individual
taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such
revocation or modification shall be effective retroactively unless the following conditions
are met, in which case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted
material facts involved in the transaction;
(B) Facts that develop later must not be materially different
from the facts upon which the ruling was based;
(C) The applicable law must not have been changed or
amended;
(D) The ruling must have been issued originally with respect
to a prospective or proposed transaction; and
(E) The taxpayer directly involved must have acted in good
faith in relying upon the ruling and a retroactive revocation of
the ruling must inure to his detriment.
FACTS
The [Taxpayer] is a new venture organized for the purpose of promoting, advertising,

arranging and overseeing the distribution of primary [Type of Film Productions]. Its
international headquarters are located at [Street Location Address], [City], Tennessee
[Zip Code]. Its headquarters staff employees are located and employed at this address
and its primary headquarters related functions and services are performed there.
Attached to this Letter Ruling is a summary [Summary Redacted] of the services that
[Taxpayer] offers to its customers. [Taxpayer] will increase its staff for each film project
by hiring sufficient personal, primarily Tennessee residents, to perform the services that
it offers. As its client list and business volume grows over time, [Taxpayer] will add
permanent employees at its headquarters facility in Tennessee.
[Taxpayer] is owned and managed by [Individual] who has [Experience Record] with an
entertainment industry focus. [Individual] has done extensive work and research in the
areas of film marketing and distribution and has developed a unique hybrid
marketing/distribution model that addresses many of the inherent risks associated with
film investment. He lives in the [Tennessee City] community and has raised and
educated [Number] children in area schools, including [Names of Schools]. [Individual]
serves on [Various Organizations].
Currently, [Taxpayer] has [Number] film projects in negotiation. These film projects are
entitled [Names of Projects]. [Reference to Projects] films have a promotion and
entertainment budget roughly estimated at just under [Dollar Amount in Excess of $1
Million]. [Taxpayer] is also engaged in discussions with [Number] other film projects.
All [Number] of these films will be Tennessee projects.
None of the Tennessee movie or episodic [Type of Projects] productions that [Taxpayer]
plans to promote and advertise from Tennessee and [That] plan to qualify for the
incentive provided by Tenn. Code Ann. § 67-4-2109(k) will be vulgar in nature or
“obscene,” as the word is defined in Tenn. Code Ann. § 39-17-901.
QUESTIONS PRESENTED

1. Will [Taxpayer] qualify as a bona fide Tennessee advertising agency to which
   payments by a “qualified production company,” as the term is defined in Tenn. Code
   Ann. § 67-4-2109(k)(1)(C), will be considered “qualified expenses,” as the term is
   defined in Tenn. Code Ann. § 67-4-2109(k)(1)(A), for purposes of the 15% incentive
   credit offered by Tenn. Code Ann. § 67-4-2109(k) and administered by the
   Tennessee Department of Revenue?
2. What criteria must be met for payments made to a Tennessee advertising agency to
   promote and advertise a movie or television production to be considered “qualified
   expenses,” as the term is defined by Tenn. Code Ann. § 67-4-2109(k), for purposes
   of the 15% incentive available for the production of movies or episodic television
   programs in Tennessee?

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RULINGS

1. Yes, provided that the qualified production company making promotion and
   advertising payments to [Taxpayer] meets all applicable statutory requirements set
   forth in Tenn. Code Ann. §§ 67-4-2109(k) and 67-6-224(3) and provided that
   [Taxpayer] meets the criteria set forth in this Letter Ruling.
2. (a) The advertising agency must be a bona fide Tennessee advertising agency that
   is engaged in the business of providing promotion and advertising services to its
   clients.
   (b) The Tennessee advertising agency must conduct operations that have
   substantial economic substance and business purpose aside from securing tax
   benefits for its clients.
   (c) The Tennessee advertising agency will normally have more than nominal
   income and expenses, will operate from a Tennessee business location and will
   have employees with expertise and experience in promoting and advertising movies
   and episodic television programs.
   (d) If a Tennessee advertising agency subcontracts with an out-of-state advertising
   agency, or agencies, to assist with promoting and advertising a movie or episodic
   television program, payments to the out-of-state advertising agency under the
   subcontract cannot exceed 50% of the total amount that the Tennessee advertising
   agency charges the qualified production company for promoting and advertising the
   movie or episodic television program.
   (e) The Tennessee advertising agency cannot act as a conduit to enable the
   qualified production company to secure the services of an out-of-state advertising
   agency.
   (f) The Tennessee advertising agency cannot operate as a sham business
   enterprise whose primary activity and purpose is to receive advertising fees from a
   qualified production company and then contract with an out-of-state advertising
   agency in a scheme that attempts to enable the qualified production company to
   secure the services of an out-of state advertising agency and still qualify for a tax
   credit amounting to 15% of its advertising expenses.
   ANALYSIS
   REQUIREMENTS FOR THE PRODUCTION OF A MOVIE OR AN EPISODIC
   TELEVISION PROGRAM IN TENNESSEE TO QUALIFY FOR THE STATUTORY
   INCENTIVE PROVIDED BY TENN. CODE ANN § 67-4-2109(K)
   The following definitions are set forth in Tenn. Code Ann. § 67-4-2109(k)(1) with regard
   to the availability of a credit for a percentage of the expenses incurred in producing a

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movie or episodic television program in Tennessee.
(A) “Qualified expenses” means those expenses incurred in this state that are
necessary for the production of a movie or episodic television program in this
state; provided, however, that such expenses shall not qualify under this
subdivision (k)(1)(A) unless both the commissioner of revenue and the
commissioner of economic and community development determine, in their
sole discretion, that the production and the allowance of the credit are in the
best interests of this state. For purposes of this subdivision (k)(1)(A), “best
interests of this state” means a determination by the commissioner of revenue
and the commissioner of economic and community development that the
production is a result of the credit provided in this subsection (k) and that the
production is not found to be obscene as defined in § 39-17-901;
(B) “Qualified investor” means any entity that has established a headquarters
facility as defined in § 67-6-224 that has invested in a qualified production
company; and
(C) “Qualified production company” means any entity that incurs at least one million
dollars ($1,000,000) in qualified expenses.
The word “obscene” used in Tenn. Code Ann. § 67-4-2109(k)(1)(A) set forth above is
defined in Tenn. Code Ann. § 39-17-901(10) as follows:
(10) “Obscene” means:
(A) The average person applying contemporary community standards would find
that the work, taken as a whole, appeals to the prurient interest;
(B) The average person applying contemporary community standards would find
that the work depicts or describes, in a patently offensive way, sexual
conduct; and
(C) The work, taken as a whole, lacks serious literary, artistic, political, or
scientific value[.]
The terms “community,” “patently offensive,” “prurient interest,” and “sexual conduct”
used in Tenn. Code Ann. § 39-17-901(10), set forth above, are defined as follows in
Tenn. Code Ann. § 39-17-901(2), (11), (12) and (14):
(2)

“Community” means the judicial district, as defined in § 16-2-506, in which a
violation is alleged to have occurred[.]

(11) “Patently offensive” means that which goes substantially beyond customary
limits of candor in describing or representing such matters;

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(12) “Prurient interest” means a shameful or morbid interest in sex;
(14) “Sexual conduct” means:
(A) Patently offensive representations or descriptions of ultimate sexual acts,
normal or perverted, actual or simulated. A sexual act is simulated when it
depicts explicit sexual activity that gives the appearance of ultimate sexual
acts, anal, oral or genital. “Ultimate sexual acts” means sexual intercourse,
anal or otherwise, fellatio, cunnilingus or sodomy; or
(B) Patently offensive representations or descriptions of masturbation, excretory
functions, and lewd exhibition of the genitals[.]
Tenn. Code Ann. § 67-6-224(b)(3), referenced in Tenn. Code Ann. § 67-42109(k)(1)(B), set forth above, defines a “headquarters facility” as follows:
(3) “Headquarters facility” means a facility in this state that houses the international,
national, or regional headquarters of a taxpayer, where headquarters staff
employees are located and employed, and where the primary headquarters
related functions and services are performed.
Tenn. Code Ann. § 67-4-2109(k) makes the following provisions for a qualified
production company or a qualified investor that has established a headquarters facility
in Tennessee to obtain a credit for a percentage of the expenses incurred in producing
a movie or episodic television program in Tennessee:
(2) A credit in an amount equal to fifteen percent (15%) of any qualified expenses
shall be allowed against the combined franchise and excise tax liability of any
qualified production company that has established a headquarters facility as
defined in § 67-6-224. If the qualified production company does not have a
headquarters facility as defined in § 67-6-224, then any qualified investor shall be
allowed a credit equal to the amount of credit to which the qualified production
company would have been entitled had it established a headquarters facility as
defined in § 67-6-224, multiplied by the qualified investor’s percentage ownership
interest in the qualified production company.
(3) In order for either a qualified production company or a qualified investor to
become entitled to a credit under this subsection (k), the qualified production
company shall submit documentation verifying that the qualified expenses have
been incurred and paid.
(4) The commissioner shall review the documentation and notify the qualified
production company of the approved credit.
(5) Once the qualified production company has been notified of the approved credit,
either the qualified production company or the qualified investment company, as

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appropriate, may submit a claim for the credit. To the extent that any amount
allowed as a credit under this subsection (k) exceeds the current and outstanding
combined franchise and excise tax liability of the claimant, the amount of such
excess shall be deemed an overpayment and shall be refunded to the claimant.
For qualified expenses incurred and paid during any tax year, the commissioner
is authorized to issue a refund as described in this subdivision (k)(5) prior to the
expiration of such tax year if the amount of the approved credit exceeds the
claimant’s current and outstanding franchise and excise tax liability on the date of
such refund. Any refund under this subsection (k) shall be subject to the
procedures of § 67-1-1802; provided, however; notwithstanding any procedure of
§ 67-1-1802 to the contrary, that a claim for refund shall be filed with the
commissioner within three (3) years from December 31 of the year in which the
qualified expenses were incurred. In no case shall a refund for the same
qualified expenses be allowed twice.
For purposes of this Letter Ruling, it is assumed that the production company that is
engaged in the production of a movie or episodic television program in Tennessee and
that is making payments to [Taxpayer] to promote and advertise such production is a
“qualified production company,” as the term is defined in Tenn. Code Ann. § 67-42109(k)(1)(C) and meets all of the all statutory requirements set forth in Tenn. Code
Ann. §§ 67-4-2109(k) and 67-6-224(3).

1. & 2

PAYMENTS MADE TO [THE TAXPAYER] BY A “QUALIFIED
PRODUCTION COMPANY” WILL BE CONSIDERED “QUALIFIED
EXPENSES” ELIGIBLE FOR THE INCENTIVE CREDIT PROVIDED
TENN. CODE ANN § 67-4-2109(k) IF CERTAIN REQUIREMENTS ARE MET

Under the definition of “qualified expenses” contained in Tenn. Code Ann. § 67-42109(k)(1)(A), promotion and advertising expenses “. . . incurred in this state that are
necessary for the production of a movie or episodic television program in this state . . .”
are “qualified expenses” if paid by a qualified production company to a bona fide
Tennessee advertising agency that is engaged in the business of providing promotion
and advertising services to its clients.
In order to be considered a bona fide Tennessee advertising agency that is engaged in
the business of providing promotion and advertising services to its clients, the
Tennessee advertising agency must conduct operations that have substantial economic
substance and business purpose. It will normally have more than nominal income and
expenses, will operate from a Tennessee business location and will have employees
with expertise and experience in promoting and advertising movies and episodic
television programs. It cannot operate as a sham business enterprise whose primary
activity and purpose is receiving advertising fees from a qualified production company
and then contracting with an out-of-state advertising agency in a scheme that attempts
to enable a qualified production company to secure the services of an out-of state
advertising agency and still qualify for a tax credit amounting to 15% of its advertising
expenses.

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For example, suppose that a qualified production company pays a fee of $500,000 to a
Tennessee advertising agency to promote and advertise a movie production. The
Tennessee advertising agency has no experience or expertise in promoting and
advertising a movie production and has little substance. The Tennessee advertising
agency subcontracts with a California advertising agency to do all promotion and
advertising of the movie production for a $500,000 fee. The $500,000 promotion and
advertising fee that the qualified production company pays to the Tennessee advertising
agency will not qualify for the statutory 15% incentive credit because the Tennessee
advertising agency is merely acting as a conduit to enable the qualified production
company to secure the services of an out-of-state advertising agency.
A bona fide Tennessee advertising agency may subcontract with an out-of-state
advertising agency, or agencies, to assist with promoting and advertising a movie or
episodic television program; provided, that payments to the out-of-state advertising
agency do not exceed 50% of the total charge that qualifies for the 15% incentive credit.
For example, suppose that a Tennessee advertising agency with a Tennessee business
location and employees who have expertise and experience in promoting and
advertising movies and episodic television programs, receives $500,000 from a qualified
production company to promote and advertise a movie. The Tennessee advertising
agency has substantial promotion and advertising operations but subcontracts with a
New York advertising agency to assist in doing 10% of the promotion and advertising
work with regard to the movie. Under the subcontract, a fee of $255,000, which is 51%
of the $500,000 fee, is paid to the New York advertising agency. The $500,000 that the
qualified production company pays to the Tennessee advertising agency will not qualify
for the 15% incentive credit.
In another example, suppose that a Tennessee advertising agency with a Tennessee
business location and employees who have expertise and experience in promoting and
advertising movies and episodic television programs, receives $500,000 from a qualified
production company to promote and advertise a movie. The Tennessee advertising
agency subcontracts with a New York advertising agency to assist in doing 90% of the
promotion and advertising work with regard to the movie. Under the subcontract, a fee
of $245,000, which is 49% of the $500,000 fee, is paid to the New York advertising
agency. The $500,000 that the qualified production company pays to the Tennessee
advertising agency will qualify for the 15% incentive credit.
The facts presented state that [Taxpayer] is an advertising agency with a Tennessee
business location. Its owner and chief manager is a Tennessee resident who has done
extensive work and research in the areas of film marketing and distribution and has
developed a unique hybrid marketing and distribution model that addresses many of the
inherent risks associated with film investment. Its functions and activities are consistent
with those of a bona fide Tennessee advertising agency that is engaged in the business
of providing promotion and advertising services to its clients and its operations appear
to have substantial economic substance and business purpose aside from securing tax
benefits for its clients. The facts presented show that the operations of [Taxpayer] are

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not nominal and that it is not sham business enterprise.
Promotion and advertising fees paid to [Taxpayer] by qualified production companies
that meet the movie and episodic television production incentive requirements set forth
in Tenn. Code Ann. § 67-4-2109(k) will qualify for the 15% incentive credit; provided that
[Taxpayer] complies with the requirements set forth in this Letter Ruling.

Arnold B. Clapp
Assistant Commissioner for
Compliance and Integrity

APPROVED: Charles A. Trost, Commissioner

DATE:

1-12-11

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