Tennessee Franchise Tax Refund: Is Your Business Eligible?

An overview of recent changes to Tennessee’s franchise tax

The Commerce Clause in the U.S. Constitution grants Congress the power “to regulate Commerce . . . among the several States.” Although states have broad powers to impose and collect taxes, the U.S. Supreme Court has explained that the negative or “dormant” implication of the Commerce Clause prohibits states from passing economic protectionist laws that discriminate and burden interstate commerce. To identify state tax schemes that discriminate against interstate commerce, courts employ the internal consistency test, which examines whether a state’s tax structure, if applied identically by every state, would place interstate commerce at a disadvantage compared to intrastate commerce.

Tennessee imposes a Franchise and Excise Tax on companies doing business in “The Volunteer State.” The franchise tax is essentially 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. Historically, the franchise tax is based on the greater of Tennessee apportioned (i) net worth (assets less liabilities) or (ii) the book value (cost less accumulated depreciation) of real and tangible property owned or used in Tennessee. The tax rate is $0.25 per $100 (0.25%) of the tax base, and there is a $100 minimum tax. This tax can be higher for in-state businesses versus out-of-state businesses.

Is your business eligible for a Tennessee franchise tax property measure refund?

To address potential constitutionality concerns with Tennessee’s franchise tax, Governor Bill Lee recently signed Public Chapter 950 (2024), legislation which eliminates the property measure of the franchise tax — also known as the “minimum measure” — for tax years ending on or after January 1, 2024. Going forward, the franchise tax will instead be based on a taxpayer’s apportioned net worth. The Tennessee Department of Revenue subsequently released Notice #24-05, which outlines the procedure by which taxpayers who paid franchise tax based on the Schedule G property measure may request a refund for tax years ending on or after March 31, 2020, for which a return was filed with the Department on or after January 1, 2021. Eligible taxpayers must file amended returns with the Department for the applicable tax years along with the refund claim, as well as a completed Report of Debts form for refunds of $200 or more is requested. The Department strongly encourages taxpayers to file the Franchise Tax Property Measure (Schedule G) Repeal refund claim in TNTAP to expedite the refund claim process. Public Chapter 950 (2024) requires that by accepting a refund claim, the taxpayer knowingly waives any claim in any court against the Department on the theory that the franchise tax is unconstitutional by failing the internal consistency test.

Tennessee franchise tax refund deadline

Refund claims must be filed between May 15, 2024, and November 30, 2024.  For entities doing business in Tennessee, let us help you take advantage of the franchise tax refund today. Contact your Keiter Opportunity Advisor.

Sources:

• S. Const. art. I, § 8, cl. 3.
• Nat’l Pork Producers Council v. Ross, 598 U.S. 356, 369-70 (2023).
• Comptroller of the Treasury v. Wynne, 575 U.S. 542 (2015).
• Tennessee Department of Revenue: Franchise & Excise Tax
• Tennessee Department of Revenue: Franchise Tax Computation
• Tennessee Department of Revenue: Franchise & Excise Tax Notice
• Tennesse Department of Revenue – Report of Debts
• Tennesse Department of Revenue: TNTAP