Note: On May 20, 2016, Governor Haslam signed into law SB 47 (now Public Chapter 1064), which decreases the Tennessee Hall income tax rate by 1% effective January 1, 2016, and eliminates the tax altogether for tax years beginning on or after January 1, 2022.

The Tennessee General Assembly adjourned on April 22, 2016, ending a session that saw enactment of several taxpayer-friendly tax law changes. These include:

— Lower penalties for deficient or delinquent excise and franchise taxes; relaxation of estimated quarterly payment thresholds and the taxpayers subject to the requirement; and a new discretionary standard for waiving deficiency penalties. (Senate Bill 2558, signed into law on April 27, 2016, designated as Public Chapter 881).

— Reduction in capital investment and job creation requirements necessary to qualify for the qualified data center sales and use tax exemption. (Senate Bill 2537, signed into law on April 27, 2016, designated as Public Chapter 1001).

— Creation of a fourth tier of counties where qualified business enterprises may qualify for the job tax credit and a reduction in the job creation requirements for businesses in Tier 3 and 4 counties to qualify for these credits. (House Bill 2570, signed into law April 28, 2016).

— Creation of a new credit against the Hall Income Tax (i.e., the state tax on interest and dividends) for investments made by "angel investors." (Senate Bill 2539, signed into law April 28, 2016).

— Immediate 1% reduction in the Hall Income Tax rate and potentially, a graduated phase-out over a number of years, subject to Governor Haslam's veto power. (Senate Bill 47, as yet unsigned).

Below is a more in-depth discussion of these changes.

Franchise and excise tax

Previously, taxpayers with a combined franchise and excise tax liability of $5,000 or more for the current tax year were required to make four equal quarterly estimated franchise and excise tax payments. Under SB 2558 only taxpayers with a combined franchise and excise tax liability of $5,000 in both the current and previous year, after applying all franchise and excise tax credits, will be required to make estimated payments. The law reduces quarterly payments from 25% to 20% of the combined liability.

SB 2558 also reduces the penalty for deficiencies and delinquencies from 5% a month to 2% and reduces the maximum total penalty from 25% to 24%. Previously, taxpayers that made four quarterly estimated payments, each of which equaled at least 25% of the current year's liability, were not subject to deficiency penalty for any quarterly payment. This bright line statutory protection is eliminated. Instead, the law now defines even underpaid estimated payments as timely filed, to allow the Commissioner discretion to waive delinquency penalties for taxpayers that made quarterly payments for two prior years. These provisions apply to all tax years beginning on or after January 1, 2016.

Sales tax

Signed into law on April 27, 2016, SB 2537 reduces the required capital investment for purposes of claiming qualified data center sales and use tax exemptions from $250,000,000 to $100,000,000 and reduces the job creation requirement from 25 net new full-time jobs to 15 net new full-time jobs. In addition, provisions of SB 2537 exempts cooling equipment and backup power infrastructure sold to or used by a qualified data center from the sales and use tax. These provisions are effective for tax years ending on or after July 1, 2016.

Credits and incentives

Under the "Rural Economic Opportunity Act of 2016" (HB 2570), newly designated Tier 4 enhancement counties are defined in terms of unemployment rates, per capita income and poverty levels, in the same manner as Tiers 1, 2 and 3 counties. HB 2570 also reduces the job creation requirement necessary to qualify for the job tax credit from 25 jobs to 20 for Tier 3 counties and from 25 to 10 for Tier 4 counties.

Provisions of HB 2570 extend the additional job tax credit to qualified business enterprises located in Tier 4 counties for five years and gives such businesses located in Tier 4 counties up to five years to create the required jobs. Further, HB 2570 allows an additional job tax credit for qualified business enterprises located in an "adventure tourism zone" in a Tier 4 county that create at least 10 qualified jobs.

In addition, HB 2570 creates a Propelling Rural Economic Progress (PREP) fund, funded through specific appropriations by the General Assembly, as well as gifts, grants and other specific donations. The fund is created for the purpose of making grants in counties where they will directly affect employment and future investment opportunities, as determined by the Commissioner of Economic and Community Development. Grant recipients will be limited to local governments, their economic development organizations, other political subdivisions of the state, any subdivision of state government, or not-for-profit organizations. Use of the funds will be limited to facilitating economic development activities in rural areas or in a manner that directly affects rural areas.

The provisions of HB 2570 are effective for tax years ending on or after July 1, 2016.

Hall Income Tax

SB 2539 establishes a credit against the Hall Income Tax for up to 33% of the investments made by an "angel investor." An angel investor is defined as a natural person who is an accredited investor under federal law and invests in a company that falls into one of three groups of small businesses. Eligible investments must be at least $15,000 but represent less than 40% of the company's capitalization. The company must have been in business for no more than five years, have no more than $3 million gross annual revenue, and 50 or fewer full time employees — 60% of whom must perform their duties in state.

The credit is limited to $50,000 per investor per year, available on a first-come-first-serve basis. Funding is limited to $3 million in 2017, $4 million in 2018, and $5 million in 2019 and thereafter.

This change is effective for tax years beginning on or after January 1, 2017.

Other legislative proposals of interest

SB 47 would immediately reduce the Hall Income Tax on dividend and investment income to 5% and eliminate the tax entirely in 2022. Under the bill, the Hall Income Tax rate would be reduced by 1 percentage point per year effective January 1, 2016, and eliminated entirely for tax years beginning on or after January 1, 2022. The bill includes a statement of the legislature's intent to reduce the tax rate by 1 percentage point annually through the enactment of general bills, beginning with the 110th General Assembly next year.

SB 47 passed the Senate on April 19, 2016, and the House on April 21, 2016, by margins of 31-1 and 78-9, respectively. A conference committee report, adding an immediate 1% reduction in the tax rate and eliminating the tax in 2022, was approved by a House vote of 66-17 and a Senate vote of 29-1.

Governor Haslam has previously signaled opposition to this repeal of the Hall Income Tax through administration surrogates Deputy Governor Henry and Tax Commissioner Martin. Under the Tennessee Constitution, the Governor has 10 days to veto the bill before it becomes law. In light of the margins with which Senate Bill 47 and the conference report passed, if the bill is vetoed by the Governor, the legislature could vote to override the veto or approve a similar measure during the next session.

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