A bill introduced in the Tennessee legislature in January 2024 would change the method for computing state franchise tax. Current law imposes a tax on the greater of apportioned net worth (apportioned net worth measure) or the value of property owned or used in the state (property measure). In response to claims that assert franchise tax paid based on the property measure is unconstitutional, the bill would repeal that measure and impose the state’s franchise tax on apportioned net worth only. If enacted, the change in law is estimated to result in $1.6 billion in refunds for taxpayers.
Tennessee franchise tax challenge
Currently, the Tennessee franchise tax is levied at 0.25% on the greater of the taxpayer’s net worth (generally, total assets less total liabilities) multiplied by the taxpayer’s Tennessee franchise tax apportionment ratio or the actual value of all real and tangible property owned or used by the taxpayer in Tennessee.
Tennessee’s franchise tax has come under constitutional scrutiny because it has the potential to impose tax based on property value, rather than apportioned net worth, if property value is the greater of the two tax bases. North Carolina, which also had a greater of apportioned net worth or property value franchise tax regime, repealed its property measure in 2022. Tennessee is the last state that imposes a franchise tax based on the greater of apportioned net worth or property value.
House Bill 1893 was introduced in the Tennessee legislature to repeal the property measure and impose franchise tax on apportioned net worth only. In addition, the bill would require refunds to be paid for all open tax years.
Crowe observation
The bill has wide support, including from the commissioner of revenue and the governor. The legislature is expected to act quickly to pass the legislation once procedures for orderly processing of refund claims have been established.
Refunds under the bill
The bill includes the following provisions for the Department of Revenue to issue refunds to taxpayers that paid franchise tax under the property measure:
- Eligible taxpayers are entitled to a refund equal to the amount of taxes actually paid using the property measure less the amount of tax due under the net worth measure.
- Taxes actually paid include credits that were used against the franchise tax computed under the property measure. Credits used will be reinstated but not paid as a refund. More guidance is needed from the Department of Revenue to understand how the reinstatement of credits will be implemented.
- Refunds must be claimed within three years from Dec. 31 of the year in which the payment was made or within any period covered by a statute of limitations extension.
- The refund claim, including information necessary to determine the proper amount due, must be filed on a form prescribed by the commissioner. Taxpayers are also required to file a Form RV-F1406501, “Report of Debts,” with the refund request.
- Refund claims will accrue interest beginning 90 days from the date the commissioner receives the refund claim and proper proof to verify that the refund or credit is due and payable. However, refunds will not include attorney fees incurred.
- The commissioner is authorized to issue refunds to taxpayers that filed refund claims prior to Jan. 1, 2024, for claims alleging franchise tax imposed on the property measure is in violation of the Constitution.
Looking ahead
This bill is expected to pass soon, and the Department of Revenue likely will provide guidance shortly after the bill’s enactment. Businesses subject to the Tennessee franchise tax should discuss the bill with their tax advisers to determine if they are eligible to receive refunds.
