On May 11, 2023, Tennessee Gov. Bill Lee signed into law the Tennessee Works Tax Act (House Bill 323/Senate Bill 275), which implements a variety of tax relief provisions, including the phase-in of single-sales factor apportionment, conformity to federal bonus depreciation provisions in the federal Tax Cuts and Jobs Act of 2017 (TCJA), a three-month sales tax holiday for food, and sales and use tax sourcing provisions, among other tax relief.
Phase-In of Single-Sales Factor Apportionment
Single-sales factor apportionment will be phased in over three years for most taxpayers and applies for both the excise tax and franchise tax:
- For tax years ending on or after December 31, 2023, but before December 31, 2024, the numerator of the apportionment formula is the property factor, plus the payroll factor, plus five times the receipts factor.
- For tax years ending on or after December 31, 2024, but before December 31, 2025, the numerator of the apportionment formula is the property factor, plus the payroll factor, plus 11 times the receipts factor.
- For tax years ending on or after December 31, 2025, the single receipts factor apportionment formula applies.
Conformity to Federal Bonus Depreciation Provisions
The law conforms the excise tax to federal bonus depreciation in the TCJA, applicable to assets purchased on or after January 1, 2023. The law also limits the requirement to adjust depreciation taken in computing federal taxable income for assets purchased on or before December 31, 2022.
Other Franchise & Excise Tax Provisions
For tax years ending on or after December 31, 2024, the law creates an excise tax standard deduction that is equal to the lesser of net earnings or $50,000. The deduction cannot create or increase a net loss.
For specific franchise and excise tax credits earned in tax years ending on or after December 31, 2008, the law extends the carryforward provisions from 15 years to 25 years.
For tax years ending on or after December 31, 2024, the law exempts up to $500,000 of property from the property base of Tennessee’s franchise tax.
Sales & Use Tax Provisions
The law establishes a three-month sales tax holiday for food. Sales tax will not apply to retail sales of food and food ingredients sold between August 1, 2023 and October 31, 2023. This exemption does not apply to sales from a micro market or vending machine or device.
Effective July 1, 2024, sales and use tax applies to:
- Repairs of tangible personal property (TPP) or computer software
- Laundering or dry cleaning of TPP
- Installation of TPP that remains TPP upon installation
- Installation of computer software when the repair, cleaning, or installation occurs at a place outside of Tennessee and the serviced TPP or computer software is delivered to a place inside the state’s physical limits for use or consumption in Tennessee
Effective July 1, 2024, the law repeals sales and use tax exemptions for:
- Magazines and books that are distributed and sold to consumers by U.S. mail or common carrier for certain sellers
- Direct mail advertising materials by a person solely and exclusively in the business of providing cooperative direct mail advertising
Effective July 1, 2024, the law adds new sales and use tax sourcing provisions. The new sourcing provisions discuss a wide variety of transactions and apply regardless of whether the product is TPP, a digital good, a service, or other taxable product. The law also amends existing sourcing rules, adding definitions for multiple terms related to telecommunication services.
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