Recording Tax

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Recordation tax provisions are located in Tenn. Code Ann. § 67-4-409. The opening paragraphs of subsection (b) lay out parameters of recordation taxes on instruments and read:

(1) Mortgages, Deeds of Trust and Other Instruments. Prior to the public recordation of any instrument evidencing an indebtedness, including, but not limited to, mortgages, deeds of trust, conditional sales contracts, financing statements contemplated by the Uniform Commercial Code, compiled in title 47, and liens on personalty, other than on motor vehicles, there shall be paid a tax, for state purposes only, of eleven and one-half cents (11.5¢) on each one hundred dollars ($100) of the indebtedness so evidenced.
(2) The tax shall not be required for the recordation of judgment liens, contractors' liens, subcontractors' liens, furnishers' liens, laborers' liens, mechanics' and materialmen's liens, financing statements filed pursuant to the Uniform Commercial Code, compiled in title 47, that secure an interest solely in investment property, as defined in § 47-9-102(a), as amended by chapter 846, § 1 of the Public Acts of 2000, and mortgages or deeds of trust issued under the Home Equity Conversion Mortgage Act, as compiled in title 47, chapter 30, and that are labeled on the face under such chapter."

Amount and Applicability of Tax. The tax imposed by TCA § 67-4-409(b) applies to the public recording or filing of any instrument "evidencing an indebtedness", including UCC financing statements, in the amount of eleven and one-half cents (11.5¢) for each one hundred dollars ($100), or major fraction thereof, principal indebtedness in excess of two thousand dollars ($2,000). This tax does not apply to true leases because they do not involve indebtedness. The tax does apply to conditional sales contracts and other secured transactions denominated to be leases, in which case the amount of the tax is calculated on the principal portion of the obligation, with the first $2,000 exempt. The tax is also not payable with respect to motor vehicles. While it is unclear whether this exemption was intended to be limited to liens noted on certificates of title, we are unaware on any authority that has held that it is so limited. TRAC leases not otherwise constituting security interests are treated as true leases pursuant to TCA § 47-2A-110, and thus the motor vehicle exemption issue is moot as to them. TCA § 67-4-409 (b)(5)(C) requires that each instrument to be recorded contain on its face the statement, "Maximum principal indebtedness for Tennessee recording tax purposes is $[___________]." For true leases, the amount should be "-0-"; this may be followed by the words "No indebtedness-True Lease." The Tax is payable only once for the same indebtedness, so that if more than one instrument is recorded with respect to the same transaction, the tax should be paid only upon the recording of the first. Some recording officers will require a receipt from this payment as a condition of recording a subsequent instrument; others will accept a (b)(5)(C) statement completed with "-0-" as sufficient evidence that no tax is payable. For revolving lines of credit the tax is payable on the maximum amount of the line pursuant to TCA § 67-4-409 (b)(5)(D). Tax Payable on Increases in Indebtedness. In the event of an increase in the indebtedness beyond the amount stated subsequent to the filing or recordation of the instrument, the holder of the indebtedness must pay the tax on the amount of the increase. The additional tax is due on the date the increase occurs, but may be made without penalty within sixty (60) days after the increase occurs. TCA § 67-4-409(b)(8). A UCC amendment to the original financing statement should be filed to evidence the increased indebtedness amount, and this filing should be accompanied by the additional tax payment. Calculation of Tax in Multistate Transactions. Under TCA § 67-4-409(b)(7), if some of the property securing the payment of the indebtedness is located in Tennessee and some is located outside Tennessee, as an optional method of computing the tax, the tax may be apportioned and paid on the basis of the ratio of the value of the Tennessee collateral to the value of all collateral, by applying the following mathematical formula: Val.of Tenn. collateral = __% x indebtedness = taxable Tennessee indebtedness Val. of Total collateral If the tax is apportioned pursuant to subdivision (b)(7), no evidence of the calculation or statement is required other than the statement required by subdivision (b)(5)(C), which should be completed with the amount resulting from the calculation made pursuant to subdivision (b)(7). For purposes of the apportionment calculation these statutory definitions, found in subdivision (b)(7), apply: "Collateral" means any real property or personal property securing the indebtedness evidenced by the instrument to be filed or recorded. "Mobile goods" means goods that are mobile and that are of a type normally used in more than one (1) jurisdiction, such as trailers, rolling stock, airplanes, shipping containers, road building and construction machinery, commercial harvesting machinery and the like. "Taxable Tennessee indebtedness" means the amount of "indebtedness" on which tax is to be calculated as provided in subdivision (b)(4) above, with the $2000 exemption to be applied to the taxable Tennessee indebtedness. "Tennessee collateral" means all collateral in which a security interest, deed of trust, mortgage lien or other consensual lien is perfected by filing or recording one or more instruments in the State of Tennessee or by other methods where the laws of the State of Tennessee govern perfection; provided, however, that the Tennessee collateral of a debtor that is located in Tennessee (as determined pursuant to TCA § 47-9-307) does not include such debtor's interests in (1) any personal property physically located outside the State of Tennessee, including goods (other than mobile goods) and any property that is of a type in which a security interest could be perfected by possession under Tennessee law if such property were located in Tennessee (such as certificated securities, chattel paper, documents, instruments and money), or (2) unless such debtor's chief executive office is also located in the State of Tennessee, any intangible property and mobile goods. Any subsequent change in the location of the debtor or any collateral, in the facts supporting the categorization of any particular collateral, or in the relative quantities or values of collateral shall not in itself result in the imposition of additional tax. "Total collateral" means all collateral, including the Tennessee collateral. "Value" of collateral means the value that the collateral would command at a fair and voluntary sale. Consequences of Nonpayment or Underpayment of Tax. The extent of the secured party's perfection is not affected by failure to pay the proper tax, thanks to an amendment to the statute that followed a period of extreme lender paranoia brought about by case law to the contrary. TCA § 67-4-409(b)(10)(A), overturning that case law, provides as follows: Nonpayment or underpayment of tax on an indebtedness, or failure timely to pay tax on an increase in indebtedness, shall not affect or impair the effectiveness, validity, priority, or enforceability of the security interest or lien created or evidenced by the instrument, it being declared the legislative intent that the effectiveness, validity, priority, and enforceability of security interest and liens are governed solely by law applicable thereto and not by this title. The underpayment or nonpayment of the tax are not, however, without sanctions: Despite the fact that the initial tax is payable by the debtor pursuant to an isolated amendment to TCA § 67-4-409(b)(4), significant penalties fall upon the secured party for nonpayment or underpayment of the tax pursuant to TCA § 67-4-409(b)(10)(B) (11), (12) and (13). These include imposition of a tax lien, significant fines and the inability to maintain a legal action on the underlying obligation until the tax and other penalties are paid.