Franchise tax amended
Franchise tax overview
Tennessee imposes both an income and franchise tax on business taxpayers with nexus in Tennessee. The franchise tax component is based on the greater of the taxpayer’s apportioned net worth, or the book value of the property owned and the rental value of property used in the state. Many taxpayers with Tennessee assets paid the franchise tax on the alternative minimum base (property base). However, the property base calculation came under recent scrutiny as Tennessee lawmakers and taxpayers considered whether the property base could be challenged under the Commerce Clause of the U.S. Constitution. Numerous taxpayers had filed refund claims specifically asserting that the property base calculation violated fair apportionment and nondiscrimination under the Complete Auto Transit decision. Tennessee lawmakers were advised that the state could be exposed to significant legal risk from taxpayers filing lawsuits for refund claims.
The fix
As passed, Senate Bill 2103 would allow taxpayers who paid franchise tax on the greater property base to recalculate their tax liability using the lesser net worth base and file refund claims for the difference in franchise tax due. The legislature agreed to allow taxpayers to submit refund claims for tax returns originally filed on or after Jan 1, 2021, applicable to tax periods that ended on or after March 31, 2020. The remaining apportioned net worth base calculation would be the sole method to calculate the franchise tax due going forward. Refund claims must be submitted between May 15, 2024, and Nov. 30, 2024, on a form prescribed by the commissioner for the exclusive purpose of seeking a refund for this issue.
Takeaways
Taxpayers who paid Tennessee franchise tax on the property base should consider filing a refund with the Tennessee Department of Revenue. However, taxpayers must affirmatively waive the right to claim that the franchise tax is unconstitutional under the internal consistency test (i.e., the analysis of whether every state adopting such a law could burden interstate commerce) for any prior periods. Also required by the bill, the department will publish a list of businesses receiving refunds for the recalculated tax indicating the taxpayer received a refund in one of the following ranges: $750 or less; more than $750 and less than $10,000; and greater than $10,000. This list will be available on the department’s website from May 31, 2025, through June 30, 2025. Taxpayers sensitive to certain publicity should be aware that refunds will be published.
Aside from the costs of defending against constitutional challenges to the tax, advocates have also argued that the property base disadvantages businesses in the state. Eliminating the property base from the franchise tax could encourage businesses to invest capital within the state, or at least would be tax-neutral for businesses with respect to developing and maintaining a physical presence within the state. Recently, North Carolina, which provided a similar ‘greater of’ calculation for the state’s franchise tax, eliminated two alternative base calculations based on property effective in 2023.
Senate Bill 2103 paves the way for taxpayers that paid franchise tax on the property base to file refund claims in Tennessee for tax years ending on or after March 31, 2020. Taxpayers with questions on how to proceed should consult their Tennessee state tax advisors.
