Proposed Tennessee bills provide potential franchise tax refund opportunity

In detail 

The Tennessee franchise tax is a privilege tax imposed on entities for the privilege of doing business in Tennessee. All entities doing business in Tennessee and having a substantial nexus in Tennessee, except for not-for-profits and other exempt entities, are subject to the franchise tax. This includes corporations, subchapter S corporations, limited liability companies, professional limited liability companies, registered limited liability partnerships, professional registered limited liability partnerships, limited partnerships, cooperatives, joint-stock associations, business trusts, regulated investment companies, REITs, state-chartered or national banks, and state-chartered or federally chartered savings and loan associations.

The franchise tax is imposed on the greater of a taxpayer’s apportioned net worth (reported on Schedule F1 or F2 of FAE170), or the value of the real and tangible property owned or rented in the state (reported on Schedule G). The franchise tax rate is $0.25 per $100 (0.25%, or 0.0025) of the franchise tax base.

Observation: Given the bills’ direct reference to the internal consistency test, it appears that the legislation was proposed due to concerns that the franchise tax in its present form may violate the Commerce Clause of the United States Constitution. Specifically, it is possible that the requirement that the tax must be paid on the greater of two alternative bases fails internal consistency, a test originally established by the U.S. Supreme Court in Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (1983) as a test of fair apportionment. In general, internal consistency is not met if the hypothetical adoption of the tax in question by all fifty states could result in a multistate taxpayer paying more tax than a similarly situated taxpayer who conducts only an intrastate business. 

The bills provide that the amount of the refund would be limited to the difference in tax between what was paid on the tangible/real property base and what would have been paid using the apportioned net worth base. Further, the bills direct that claims for refunds allowed under the legislation must be filed on a form prescribed by the Commissioner specifically for this purpose. Interest on refunds will not begin to accrue until 90 days after the claim is filed, and it will be at a rate that is less than the rate applicable to other refunds.

Taxpayers subject to franchise tax in Tennessee who may be considering filing a refund claim prior to the legislation’s potential enactment should consider the following: 

• Statute of limitations: The statute of limitations for refunds in Tennessee is fixed for all filers, both calendar year and fiscal year, by reference to December 31st of the year in which the tax was paid. Specifically, refund claims may be filed within three years of December 31st of the year the tax was paid. Estimated taxes are deemed to have been paid on the original due date of the return. For a calendar year taxpayer, the earliest year open under statute would likely be 2020. Accordingly, taxpayers who choose to wait to see whether or not the legislation passes before deciding to take action need to remain cognizant of the fact that a year will drop from statute after December 31st of this year. 
• Effect of not using the prescribed form: The legislation does direct that the Commissioner must prescribe a form specifically for making claims under the legislation, and it states that claims for refund under the legislation must be filed on the prescribed form. Accordingly, persons who opt to file protective claims may find their claims rejected on procedural grounds, and may be required to resubmit their claim. 
• Delayed legislative action: By law, a taxpayer only has one year from the date a refund claim is filed to file suit in court to try and enforce the claim. Accordingly, filing a protective claim in advance of passage of the legislation could put stress on the litigation deadline if the legislation is delayed or not passed, and action on the refund claim is delayed.