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Tennessee legislature approves franchise tax refunds
April 2024
In brief
Update: The legislation was signed into law on May 10, 2024.
What happened?
Legislation passed by the Tennessee House and Senate on the last day of session would repeal the alternative property measure of the franchise tax effective for tax years ending on or after January 1, 2024. The legislation would authorize refund claims for taxpayers to the extent that the tax they paid under the property measure exceeded the net worth measure of the tax. The Governor is allowed 10 days (Sundays excepted) after a bill is presented to him to approve or veto the bill; if he takes no action within that period, the bill becomes a law without his signature. [S.B. 2103, passed legislature, 4/25/24]
Why is it relevant?
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.
Actions to consider
Taxpayers who paid tax on the minimum, tangible property base should consider whether they want to claim the benefit of the refunds offered under the conditions imposed by the legislation. That decision needs to be made before a November 30, 2024 deadline for filing refund claims authorized under the legislation. Further, taxpayers will want to consider the impact of the law change on future estimated tax payments for the 2024 tax year to the extent the taxpayer anticipated it would be paying franchise tax on the minimum base.
In detail
The Tennessee franchise tax is a privilege tax imposed on entities for the privilege of doing business in Tennessee. The franchise tax is imposed on a taxpayer’s apportioned net worth at the close of the tax year covered by the required return. However, “the measure of the tax levied...shall in no case be less than the actual value of the real or tangible property owned or used in Tennessee, excluding exempt inventory and exempt required capital investments.” (Tenn. Code Ann. Sec. 67-4-2108(a)(1)) The franchise tax rate is $0.25 per $100 (0.25%, or 0.0025) of the franchise tax base.
For more detail on the franchise tax and potential legal challenges to the tax, please see our Insight on the introduction of this legislation.
As passed by the legislature and sent to the Governor, S.B. 2103 would delete the alternative property measure of the franchise tax base, effective for tax years ending on or after January 1, 2024. This would leave only the net worth measure of the tax in place for such years. Also, taxpayers would be allowed to annually elect to continue to apply the alternative property measure, but only if it results in a higher tax liability.
Observation: Taxpayers who anticipated paying on the tangible property base will want to adjust their remaining 2024 estimated payments to account for the fact they will be subject to tax on a lower apportioned net worth base.
Be aware: Taxpayers with credit carryforwards will need to evaluate whether a reduction in future franchise tax could place pressure on their ability to use the credits. If there is a risk that credits could expire, those taxpayers may consider making the annual election to remain subject to the minimum base to avoid the need to recognize a valuation allowance. Further, taxpayers considering refunds and still paying tax on the equity or excise portion of the tax should evaluate whether Tennessee credits such as jobs, investment, or other activities are available to offset those remaining liabilities.
Refunds authorized
Also under the legislation, the Department of Revenue would be directed to issue refunds “equal to the amount of tax actually paid minus the amount of tax otherwise due without regard to Sec. 67-4-2108" (the alternative property measure of the tax). “Tax actually paid” includes any credits applied on the return. Credits must be reinstated but not paid as a refund.
The tax subject to refund must have been reported to the Department on a return filed on or after January 1, 2021, covering a tax period that ended on or after March 31, 2020, and the refund claim must be filed between May 15 and November 30, 2024.
Interest would accrue at the federal short-term rate plus 0.5% beginning 90 days from the date the Department receives the refund claim and supporting information.
Claim procedures
The claim would need to be filed on a form prescribed by the commissioner “exclusively for the purpose of seeking a refund pursuant to this section and must not include a claim for refund on any other basis.” Claims on any other basis would need to be filed separately under the general refund provisions in Tenn. Code Ann. Sec. 67-1-1802.
Observation: Taxpayers claiming refunds pursuant to the legislation must be careful to follow the procedures and use the form the Department directs for refund claims. Taxpayers that do not conform to the yet-to-be prescribed methods could be rejected on procedural grounds, and the November 30 deadline could make it impossible to cure a defective filing.
Be aware: Taxpayers making claims under the legislation should consider the complexities of calculating the net worth measure of the Tennessee franchise tax and whether adjustments should be made separately on an amended FAE170 to correct any errors in the previously reported net worth.
The refund claim form authorized under the legislation would need to include a statement that the taxpayer, upon accepting the refund, waives any claim or the right to file suit alleging that the franchise tax is unconstitutional by failing the constitutional internal consistency test. The Department is authorized, however, to refund a claim timely filed prior to January 1, 2024 that alleges that the franchise tax is unconstitutional by failing the internal consistency test. Any further suits challenging the constitutionality of the tax would need to be filed by November 30, 2024, under the legislation.
Observation: Taxpayers should consider that any claims made under the legislation will require that they surrender their rights to further challenge the constitutionality of the tax. For taxpayers who are considering the possibility of litigating potential constitutional issues with the tax, they need to be cognizant of the November 30 deadline to file suit in Chancery Court and the possibility that refund claims need to be filed well in advance of that date.
Publication of taxpayer information
The legislation directs the Department to publish on its website the name of each taxpayer issued a refund and the applicable range corresponding to the total amount refunded. These ranges are 1) $750 or less, 2) $10,000 or less, or 3) more than $10,000. This publication would only be for the period from May 31 through June 30, 2025. If a refund is not issued by May 31, 2025, then the publication would show the taxpayer’s refund claim as “pending” without a corresponding refund range.
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