How did Tennessee sales and business tax apply when a travel-packager bought lodging, meals, and entertainment and resold the combined package to tour operators?

Plain-English summary

The travel-packager was reselling the lodging, food, and entertainment it bought, and it could also sell the combined package for resale to a tour operator that supplied a valid Tennessee resale certificate. Without a properly executed certificate—or if the packager knew or should have known that the buyer would consume rather than resell the package—the sale to the tour operator was taxable as a retail sale.

The taxpayer planned to contract with Tennessee motels, restaurants, and entertainment facilities, combine those items into travel packages, and sell the packages to tour operators. The Department distinguished that activity from buying property or services merely to perform a different service: the taxpayer resold the lodging, food, and entertainment "as such." It therefore could give its vendors a valid Tennessee resale certificate for package components intended for resale.

For business tax, the taxpayer was a classification 3 service business. The ruling subjected all package revenue to the historical classification 3 rates: one-eighth of one percent for retail sales and one-fortieth of one percent for wholesale sales. Under the then-current 80% rules, if more than 80% of total sales were retail or wholesale, all sales were treated as the dominant type.

The Department did not answer who had to collect the separate tourist accommodation tax imposed under Tennessee Code title 7, chapter 4. It said that tax was administered by the county or municipality's Department of Finance and was outside the Department of Revenue's ruling authority.

What this means for you

Travel-packagers

Buying taxable lodging, meals, and admissions can qualify as a resale when you resell those same components as a package. Give vendors valid resale documentation only for items genuinely intended for resale.

Tour operators

A package sale was treated as wholesale only when the operator presented a valid Tennessee resale certificate and the seller reasonably believed the package would be resold. Missing or suspect documentation shifted liability back to the seller.

Accountants and tax professionals

Sales-tax resale treatment and business-tax classification were separate questions. Even though the package components were bought and sold for resale, the packager still owed business tax on its package revenue under the 1996 classification 3 rules.

Hospitality businesses

The ruling did not decide the locally administered tourist accommodation tax. A state sales-tax resale certificate did not itself answer that separate local-tax collection question.

Common questions

Q: Did motels, restaurants, and entertainment businesses charge sales tax to the packager? A: Not when the packager properly bought their lodging, food, and entertainment for resale using a valid Tennessee resale certificate.

Q: Was every sale to a tour operator automatically a resale? A: No. The operator had to provide a valid Tennessee resale certificate, and the packager had to reasonably believe the package was for resale.

Q: What if the resale certificate was missing?
A: The ruling said unsupported resale sales were deemed retail sales, making the dealer liable for tax.

Q: What business-tax classification applied?
A: Classification 3, because selling the packages was a service not within the listed exceptions and the package's motel and entertainment components predominated over restaurant payments.

Q: Who collected the local tourist accommodation tax? A: The Department of Revenue did not rule on that issue because the county or municipality administered the tax.

Q: Can another travel business rely on this ruling? A: No. It binds the Department only for the addressed taxpayer and facts.

Citations and references

• Tenn. Code Ann. §§ 67-6-102(23)(F)(i), 67-6-202(a), 67-6-212, and 67-6-102(23)(A) — taxable retail sales and the former resale rules cited in the ruling.
• Tenn. Sales and Use Tax Rules 1320-5-1-.62(1) and 1320-5-1-.68(2)-(4) — sales-for-resale and certificate requirements.
• Tenn. Code Ann. §§ 67-4-708(3)(C), 67-4-709(a), 67-4-709(b)(3), and 67-4-702(a)(11), (a)(19) — classification 3, historical rates, and retail/wholesale definitions.
• Tenn. Code Ann. tit. 7, ch. 4 — tourist accommodation tax referenced in the ruling.
• Nashville Mobilphone Co. v. Woods, 655 S.W.2d 934 (Tenn. 1983).
• Highland Inns, Inc. v. Olsen, slip opinion (Tenn. 1985) (citation as printed in the official ruling; the slip-opinion string did not resolve in CourtListener).

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/96-28.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #96-28
WARNING

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 The applicability of state and local taxes to a business that sells travel and entertainment packages. SCOPE 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 his 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, located in Tennessee, will organize, promote and sell travel and activity packages to various tour operators. The price of the package will include lodging, food and entertainment. The Taxpayer will contract with motels, restaurants and entertainment facilities to supply lodging, food, tickets and services as part of the tour package. All the motels, restaurants and entertainment facilities are located in Tennessee. The Taxpayer will pay the motels, restaurants and entertainment facilities rates determined by preagreed contracts. The combined payments made to motels and entertainment facilities exceed payments made to restaurants. The tour operators, generally based out-of-state,

will charge the individual tourist a fee that includes the package described above, in addition to a transportation charge.

QUESTIONS
1.
Are sales to the Taxpayer by motels, restaurants and entertainment businesses retail sales or sales for resale? 2.

Are sales by the Taxpayer to the tour operators retail sales or sales for resale?

3.
What is the Taxpayer’s proper business tax classification under T.C.A. Section 67-4-708? 4. What amount of the Taxpayer’s revenue is subject to business tax under T.C.A. Section 67-4-701, et seq.? 5. If the Taxpayer contracts for lodging in a locality that imposes a tax under T.C.A. Title 7, Chapter 4, should the Taxpayer be required to collect the tax from its customers or should the lodging facility collect the tax from the Taxpayer based on the amount the Taxpayer pays? RULINGS 1. Sales to the Taxpayer by motels, restaurants and entertainment businesses are sales for resale. 2. Sales by the Taxpayer to the tour operator are sales for resale if the tour operator presents the Taxpayer with a valid Tennessee resale certificate and if the Taxpayer reasonably believes the travel and activity package is for resale. 3.

The Taxpayer is a classification 3 business.

4.
All revenue derived from the sale of travel and activity packages is subject to business tax at the rate of one-eighth of one percent of all retail sales and one-fortieth of one percent of all wholesale sales. 5. The tourist accommodation tax, T.C.A. Section 7-4-101 et seq., is administered by the Department of Finance of the county or municipality. The Department of Revenue is therefore unable to rule on the manner in which this tax shall be collected.

ANALYSIS
Sales Tax
The retail sales of lodging, food, and entertainment are all subject to sales tax. T.C.A. Sections 67-6-102(23)(F)(i), 67-6-202(a), and 67-6-212. Retail sales are taxable sales to a person for any purpose other than for resale . . . . Any sales for resale must, however, be in strict compliance with rules and regulations promulgated by the commissioner. Any dealer making a sale for resale which is not in strict compliance with rules and regulations shall be personally liable for and pay the tax. T.C.A. Section 67-6-102(23)(A). Sales for resale are sales of tangible personal property or taxable services to legitimate dealers “actually selling such property or services as such.” Sales and Use Tax Rule 1320-5-1-.62(1). As described, the Taxpayer does resell the lodging, food, and entertainment as such. This is not a situation where goods are purchased so that a different service can be provided. See, e.g., Nashville Mobilphone Co. v. Woods, 655 S.W.2d 934 (Tenn. 1983) (purchase of radio phone and signaling equipment is not for resale if used in the provision of commercial radio and communications services), Highland Inns, Inc. v. Olsen, slip opinion (Tenn. 1985) (purchase of mobile motel units is not for resale if used for purpose of leasing them to visitors). Therefore, the purchase by the Taxpayer of lodging, food, and entertainment is for resale. The Taxpayer may purchase lodging, food, and entertainment intended for resale without payment of sales tax if it provides its vendors a valid Tennessee resale certificate. Cf., Sales and Use Tax Rule 1320-5-1-.68(3) (resale certificates may not be used to obtain property or taxable services for the purchaser’s own use). Similarly, the Taxpayer may sell the described travel and activity packages to tour operators free of sales or use tax when provided with a Tennessee certificate of resale. Certificates of resale may not be accepted, however, when the Taxpayer knows, or should know in the use of ordinary care, that the travel and activity package is not for resale by the purchaser, but rather for the tour operator’s own use or consumption. Sales and Use Tax Rule 1320-5-1-.68(4). “All sales for resale which are not supported by (Tennessee) resale certificates properly executed shall be deemed retail sales, and the dealer held liable for the tax.” Sales and Use Tax Rule 1320-5-1-.68(2). Business Tax Businesses are classified for business tax purposes according to their dominant business activity. T.C.A. Section 67-4-708. Classification 3 businesses are those which make “sales of services or engag(e) in the business of furnishing or rendering services, except those described below.” T.C.A. Section 67-4-708(3)(C). Selling travel and activity packages is not one of the excepted services, so sellers of these packages engage in a

classification 3 business. Furthermore, if the separate components of the travel and activity package are examined to determine the dominant business activity, the combined payments made to motels and entertainment providers (both are classification 3 businesses) exceed payments made to restaurants (a classification 2 business). Therefore, the Taxpayer is a classification 3 business. The Taxpayer, like all businesses not specifically exempted, must pay a minimum tax of fifteen dollars for “each fixed place, location or outlet from which business is carried on.” T.C.A. Section 67-4-709(a). Additionally, as a classification 3 business, the Taxpayer must pay tax at the rate of one-eighth of one percent of all its retail sales and one-fortieth of one percent of all its wholesale sales. T.C.A. Section 67-4-709(b)(3). A retail sale is a sale of services “to any person for any purpose other than for resale.” T.C.A. Section 674-702(a)(11). A wholesale sale is a sale of services “to a licensed retailer for resale.” T.C.A. Section 67-4-702(a)(19). If more than 80% of the Taxpayer’s total sales are either retail sales or wholesale sales, all sales are deemed to be either retail sales or wholesale sales, whichever is the dominant type of sale. T.C.A. Sections 67-4-702(a)(11)(B), and (a)(19)(B).

Stephen M. Smith
Tax Counsel

APPROVED: Ruth E. Johnson

DATE: 10/4/96