On April 25, 2024, the Tennessee General Assembly passed House Bill (HB) 1893/Senate Bill (SB) 2103, an amended Conference Committee bill. The legislation repeals the real and tangible personal property base, or property measure, from the Tennessee franchise tax. The legislation also requires refunds for open years to be paid under certain conditions to requesting taxpayers who paid Tennessee franchise tax on the property measure. While Gov. Bill Lee appeared to support an earlier version of the bill, he may choose to allow it to become law without his signature.
According to a recent fiscal estimate impact from the Tennessee General Assembly Fiscal Review Committee, the state anticipates over $1.5 billion of refunds. The Department of Revenue (DOR) previously reported that it anticipates approximately 100,000 refund requests from taxpayers.
Prior Law
All entities doing business in Tennessee and having a substantial nexus in the state, except for nonprofits and other exempt entities, are subject to the Tennessee franchise tax, a privilege tax imposed on entities for the privilege of doing business in Tennessee. Entities subject to the franchise tax include C corporations, subchapter S corps, 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, real estate investment trusts, state-chartered or national banks, and state-chartered or federally chartered savings and loan associations.
Prior to HB 1893/SB 2103, the franchise tax was imposed on the greater of a taxpayer’s
- apportioned net worth (reported on Schedule F1 or F2 of FAE170), or
- value of the real and tangible property owned or rented in the state (reported on Schedule G).
The franchise tax rate is $0.25 per $100 (0.25%, or 0.0025) of the franchise tax base.
Changes Enacted
Refund Claims
The legislation removes any reference to real or tangible personal property owned or used from the franchise tax base. Thus, the property measure is repealed, effective for tax years ending on or after January 1, 2024.
In addition, the legislation adds a new section to the Tennessee Code requiring that tax refunds must be issued for the difference in franchise tax had the present law regarding the value of property as the franchise tax base not existed. The refunds are subject to certain provisions:
- The tax subject to refund must have been reported to the DOR on a return filed on or after January 1, 2021 for a tax period that ended on or after March 31, 2020;
- The claim for refund must be filed between May 15, 2024 and November 30, 2024;
- The claim for refund must be filed on a form prescribed by the commissioner exclusively for the purpose of seeking a refund pursuant to this bill and must not include a claim for refund on any other basis;
- The taxpayer will knowingly waive any claim by the taxpayer or the right to file suit alleging that the franchise tax under prior law is unconstitutional;
- Any credits applied may be reinstated but not paid as a refund;
- Interest on the refund (at a rate less than applicable to other refunds) will not begin to accrue until 90 days after the claim is filed; and
- Other provisions relating to refund claims as currently enacted by present law.
Disclosure of Claims
The bill requires the DOR to publish on its website from May 31, 2025 through June 30, 2025 the name of each taxpayer issued a refund and the applicable range corresponding to the refund issued. If a taxpayer has not been issued a refund by this time, the name of the taxpayer will be listed in a separate category as “pending.” The applicable refund ranges are:
- $750 or less
- $751 to $10,000
- $10,001 and greater
This legislation requires that all refunds paid pursuant to this legislation must be paid from an appropriately designated fund established by the commissioner of finance and administration known as the “Franchise Tax Refund Fund.”
In lieu of requesting a refund for these changes, a taxpayer may choose to bring suit to claim the franchise tax under prior law is unconstitutional by failing the internal consistency test. However, the legislation has specific requirements for such a suit. The suit must be filed on or before November 30, 2024 in the Chancery Court of Sumner County.
Actions to Consider
Taxpayers should consider the benefits of filing refund claims if they have been paying franchise tax on the property base in any open years.
How We Can Help
If you have any questions or need assistance, please reach out to one of our tax professionals.