TSCPA Franchise Tax Update

April 26, 2024

On Thursday, April 25, 2024, the 113th General Assembly adjourned sine die.

On the final day of the session, the House and Senate reached an agreement on the highly debated tax reform proposed by Gov. Bill Lee in his State of the State in February. As TSCPA previously reported, Gov. Lee asked the legislature to amend Tennessee’s franchise tax law. He proposed repealing the property provision of the franchise tax going forward and proposed a window of time that Tennessee businesses could seek a refund for prior tax years (See SB 2103/HB 1893).

The governor’s legislation addressed a legal risk for the state and potential legal challenges to the state’s franchise tax if no action was taken. Notably, 80 taxpayers had threatened legal action, and many had filed for refunds based upon a Maryland court case. The case, Maryland v. Wynne, 575 U.S. 542, upheld a Maryland Supreme Court case that found Maryland’s tax structure violated the dormant commerce clause if it did not provide a tax credit for taxes paid to other states by a taxpayer. The Maryland case caused other states like North Carolina to remove or reform their franchise measure in 2021. Tennessee has become an outlier by imposing our franchise tax in this manner, both calling it into legal question and also affecting potential economic development in Tennessee.

The governor proposed setting aside over $1.6 billion to pay the refunds and to repeal the property provision of the franchise tax. The administration projected the repeal of the property portion would cost the state approximately $400 million on a recurring basis and the refunds that could be returned to taxpayers in the amount of over $1.2 billion.

The House and Senate debated the bills and took very different approaches to resolve this issue, but both agreed that Tennessee’s property portion of the franchise tax should be repealed going forward. However, the chambers disagreed over much of the rest of the bill, including whether refunds should be given at all; whether disclosure of recipients of refunds should be published; if refunds are given, for how many years they should be given; and several other details as well. Many House members were concerned that approximately 50% of the total amount of refunds would be paid to out-of-state businesses, but the Senate focused on the fact that the property provision of the tax is paid by over 100,000 taxpayers, with 80% of those domiciled in Tennessee.

Ultimately, the House and Senate could not resolve their differences, and the bill was sent to conference. Early Thursday morning, the House and Senate held a conference committee, came to a consensus and passed the conference report later that afternoon. For more information, find the conference report here. We anticipate that the bill will be signed by the governor next week.

Below are the notable points of the legislation adopted by both chambers:

  • There is a full refund lookback period consistent with current law. The tax subject to refund must have been reported to the Department on a return filed on or after Jan. 1, 2021, covering a tax period that ended on or after March 31, 2020.
  • The refund claim must be filed between May 15, 2024, and Nov. 30, 2024.
  • The Department of Revenue will publish a list of companies claiming the refund on May 31, 2025, until June 30, 2025, and the list will be grouped in four categories: (i) companies receiving $750 or less; (ii) companies receiving between $751 and $10,000; (iii) companies receiving $10,001 or more; and (iv) companies whose refund claims are still pending but have not been resolved by the Department of Revenue.
  • For any company that receives a refund, the company will waive a right to sue.
  • For any company that litigates the refund claim, a lower interest rate will apply on the refund amount during the litigation and no attorney fees will be paid.
  • Unused but available franchise and excise tax credits will be used to offset any refund amount.

TSCPA will be providing a complimentary CPE course to members to provide a complete understanding of the legislation and the process that will be required to amend franchise tax returns and submit the refund claim. Please watch your email for more information about how to register for the course.

In the coming days, TSCPA’s advocacy team will provide a complete wrap-up of the 113th General Assembly and the notable legislation that impacts the profession.