Tennessee Streamlines Tax Code by Repealing Property Measure of Franchise Tax

Published: May 14, 2024
By: Josh Thomas
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In a landmark move to overhaul the structure of its franchise tax and bolster economic competitiveness, Tennessee recently enacted legislation (HB 1893 and SB 2103) to repeal the property measure of the franchise tax. This legislation, passed by the Tennessee House and Senate on April 25, 2024, and expected to become finalized in early May 2024, marks a significant departure from the state's previous tax policies and heralds a new era for businesses operating within its borders.

The franchise tax, a longstanding component of Tennessee's tax regime, traditionally levied taxes on businesses based on the greater of their tangible property holdings in the state (Schedule G) or their apportioned net worth (Schedule F1 or F2). Under the previous system, taxpayers were required to calculate their tax liability under both methods. The property measure was calculated based on the value of the taxpayer’s physical assets as well as the rental value of leased physical assets, such as real estate, equipment, and inventory, located within Tennessee.

Tennessee’s franchise tax structure has long been a subject of scrutiny regarding its compliance with the United States Commerce Clause. This clause grants Congress the authority to regulate interstate commerce and alleviate disproportionate burdens or discrimination against interstate commerce imposed by a state’s laws.

The Tennessee legislature’s decision was heavily influenced by this scrutiny. Critics of the previous tax regime argued that the property measure of the franchise tax disincentivized businesses from making in-state investments and expansions, because having in-state property resulted in a higher tax burden. Further, since the tax was based on the higher of the two tax bases, there were serious concerns that the tax discriminated against interstate commerce as multistate taxpayers would have a higher potential burden than taxpayers exclusively operating in Tennessee. By removing the property measure tax base, Tennessee seeks to level the playing field and enhance its competitiveness as a destination for business investment.

The repeal of the property measure of the franchise tax represents a paradigm shift in the state's tax framework. Henceforth, taxpayers will no longer be subject to taxation based on the book value of their tangible property holdings in the state. Instead, Tennessee has opted for a more streamlined approach, focusing solely on the apportioned net worth measure.

This law change is effective not just prospectively, but retroactively, too. For returns filed on or after January 1, 2021, and covering tax periods ending on March 31, 2020, through December 31, 2023, taxpayers may request a refund of franchise tax paid based on the property measure if it is more than the amount they would have owed under the apportioned net worth measure. See the simple example below:

		Before Repeal	After Repeal
Apportioned Net Worth		$500,000	$500,000
Tax on NW Measure	0.25%	$1,250	$1,250

Book Value of TN Property		$20,000,000	n/a
Tax on Property Measure	0.25%	$50,000	n/a

Franchise Tax Due		$50,000	$1,250

Refund Due			$(48,750)

The state recently published Notice #24-05 specifying the criteria and requirements for requesting refunds. A few important notes to consider:

Amended returns are required for all periods with claimed refunds.
Even if not filed until after the effective date of the legislation, returns filed for tax year 2023 must still be filed with a completed Schedule G, and taxpayers can subsequently request a refund for franchise tax paid based on Schedule G.
A new form will be required to claim refunds related to Schedule G – the standard refund claim form will not be sufficient.
Refund claims related to the property measure repeal must be filed between May 15, 2024, and November 30, 2024.

The elimination of the property measure of the franchise tax will simplify compliance requirements, burdens, and cost for taxpayers. By streamlining the tax structure and eliminating measures that could be perceived as discriminatory or burdensome to out-of-state businesses, Tennessee aims to create a more equitable and legally sound tax environment.

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Josh Thomas

Josh Thomas is a Manager in the State & Local Tax Group. With nearly 10 years of experience, Josh specializes in providing consulting services in a variety of industries such as financial services, personal services, and technology.

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