Did a company owe Tennessee business tax when it supplied both the entire management function and operating staff of a nonprofit health-plan corporation?

Plain-English summary

The company did not owe Tennessee business tax on the stated management and staffing services. Because it supplied the managed corporation's entire operating staff as well as management, the classification rules assigned it the activity of the business it operated.

The managed entity was a Tennessee nonprofit corporation providing hospital, medical, and other health services to subscribers under prearranged plans. The ruling classified that activity as an insurance carrier under the Standard Industrial Classification Index.

Ordinary management-service firms were described as furnishing management without operating staff. When a company provided both management and operation, the Index instead classified it according to the managed establishment's activity.

Tennessee's business-tax statute excepted insurance carriers or agents. Because the taxpayer inherited the health-plan corporation's insurance-carrier classification, the Department applied the same exception to the taxpayer.

What this means for you

Management companies

Providing only advisory or management services can be classified differently from taking over the managed business's complete operating workforce.

Health-plan operators

The ruling depended on the managed entity fitting the industrial classification for establishments providing health services under prearranged agreements or service plans.

Tax teams

Business-tax classification followed dominant activity and the cited industrial-classification descriptions. Entity labels alone did not decide the result.

Common questions

Q: Was the taxpayer treated as a standalone management-service business? A: No. It supplied the entire operating staff as well as management.

Q: What activity classification applied?
A: The managed health-plan corporation's insurance-carrier classification.

Q: Why did that eliminate business tax?
A: The statute listed an exception for insurance carriers or agents.

Q: Would every healthcare management company qualify? A: No. The ruling depended on the exact staffing, management, and managed-entity classification facts.

Q: Can another company rely on this result?
A: No. The letter ruling binds the Department only for the addressed taxpayer and facts.

Citations and references

• Tenn. Code Ann. § 67-4-708 — dominant business activity and business-tax classifications.
• Tenn. Code Ann. § 67-4-708(3)(C) — service exceptions tied to the Standard Industrial Classification Index.
• Tenn. Code Ann. § 67-4-708(3)(C)(xi) — insurance-carrier or agent exception.
• Tennessee Attorney General Opinion 94-98 (Sept. 7, 1994).
• Standard Industrial Classification Index, 1987 edition, pages 343 and 403, as quoted in the ruling.

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/business/97-25bus.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #97-25
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
Applicability of business tax to management and health services.

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 the taxpayer’s detriment. FACTS

[THE TAXPAYER], provides operating staff to [CORPORATION A], a Tennessee nonprofit corporation which provides hospital, medical, and other health services to subscribers in accordance with prearranged agreements and service plans. The Taxpayer’s primary business activity consists of supplying [CORPORATION A]’s entire management services and operating staff. The operating staff supplied by the Taxpayer performs all services necessary to the operation of
[CORPORATION A]’s business.
ISSUES
Whether the Taxpayer is required to pay business tax for supplying management services and operating staff to [CORPORATION A].

RULINGS
The Taxpayer is not required to pay business tax. ANALYSIS Tenn. Code Ann. § 67-4-708 requires all service providers to pay business tax unless the services provided fall within an express exception. Tenn. Code Ann. § 67-4-708(3)(C) provides that “[i]t is the legislative intent that the [following] exceptions . . . shall include the sales of services by those businesses or establishments so described in the Standard Industrial Classification Index of 1972, including all supplements and amendments. . ..” The Tennessee Attorney General opined that businesses exempted from paying business tax must fall directly within one of the expressly excepted categories as illustrated in the Standard Classification Index. Op. Atty. Gen. 94-98 (9/7/94). Each person or business entity is classified according to the dominant business activity. Tenn. Code Ann. § 67-4-708. The Taxpayer’s dominant activity is providing management and administrative services for [CORPORATION A]. The Standard Industrial Classification Index, 1987 Ed., (“Index”) defines management services as “furnishing general or specialized management services on a day to day basis and on a contract or fee basis . . . [and which] do not provide operating staff. Management and operation of a business, where operating staff, as well as management, is provided, is classified according to the activity of the establishment managed.” Index, 403. The Taxpayer provides [CORPORATION A]’s entire operating staff. Accordingly, the Taxpayer’s classification is derived from [CORPORATION A]’s classification and any exception applying to [CORPORATION A] will apply to the Taxpayer.
[CORPORATION A] is a nonprofit corporation which supplies services to patients through providers pursuant to established plans. Insurance carriers are in Major Group 63 in the Index, and include “[e]stablishments primarily engaged in

providing hospital, medical, and other health services to subscribers or members in accordance with prearranged agreements or service plans.” Index, 343.
[CORPORATION A], then, is an insurance carrier and accordingly, the Taxpayer is also deemed an insurance carrier. Among the listed exceptions from the business tax is an exemption for insurance carriers or agents. Tenn. Code Ann. § 67-4-708(3)(C)(xi). Accordingly, the Taxpayer is exempt from paying business tax.

______
Caroline R. Krivacka
Tax Counsel

APPROVED: _______
Ruth E. Johnson
Commissioner
DATE:

6-20-97