Refund Opportunity from Tennessee Franchise Tax Changes

In addition to its excise tax based on taxable income, Tennessee imposes a franchise tax for entities conducting business within the state. The tax is 0.25% of taxable apportioned “net worth,” defined as the book value of assets less liabilities, multiplied by an entity’s apportionment factor.

The present law prohibits the measure of the tax from being less than the actual value of the real or tangible property owned, rented, or used in the state (property measure). In other words, the tax is imposed on either:

• an entity’s apportioned net worth, or
• the value of its real and tangible property owned or rented in the state, whichever is larger.

The tax is computed and remitted on the Tennessee Franchise and Excise Tax Return (Form FAE 170).

Repeal of property measure may benefit Tennessee taxpayers

Taxpayers have been challenging the property measure as being unconstitutional, based on the United States Supreme Court’s 2015 decision, Maryland State Comptroller of the Treasury vs. Wynne; claiming the structure of Tennessee’s franchise tax, specifically the property measure, unlawfully discriminates interstate commerce under the dormant commerce clause and violates the “internal consistency test.”

On May 10, 2024, Tennessee Governor Bill Lee signed legislation that would not only eliminate the property measure from the franchise tax base going forward, but also retroactively.

This new law would allow taxpayers to claim refunds for taxes paid for the 2020 through 2023 tax years and eliminate the property measure tax for years ending on or after January 1, 2024. For tax years 2020 and forward, the franchise tax is based solely on a taxpayer’s apportioned net worth.

Assess your eligibility for a refund

It is our understanding that the Tennessee Department of Revenue has been sending out letters to eligible taxpayers, but being proactive never hurts. Refund claims can be filed during the period May 15, 2024 through November 30, 2024.

Thank you to Tony Switajewski and CLA’s national tax office and state and local tax teams for their assistance with this blog post.