February 7, 2024
Tennessee legislative proposal to modernize the franchise tax calculation would create a refund opportunity
The Tennessee legislature is currently considering bills, HB 1893/SB 2103, that would change how the Tennessee franchise tax is calculated by repealing the alternative minimum property measure and requiring the tax to be calculated solely using a taxpayer's apportioned net worth. The proposed bills would also authorize refunds of previously paid franchise tax calculated under the alternative minimum property measure.
Currently, Tennessee's franchise tax is calculated based on the greater of (1) apportioned net worth, or (2) book value of Tennessee property (the "alternative minimum property measure").1 The alternative minimum property measure, however, has come under scrutiny because of litigation and refund claims challenging the measure's constitutionality — specifically, whether it passes the dormant Commerce Clause's internal consistency test.2 Due to these concerns, Tennessee Governor Bill Lee on January 4, 2024, announced plans to modernize the state's franchise tax by changing the way it is calculated and provide tax relief to businesses operating in the state. The Tennessee Commissioner of Revenue, citing potentially significant legal and financial risks to the state on this issue, has likewise recommended updating the franchise tax.
HB 1893 and SB 2103 were introduced on January 22, 2024 and January 29, 2024, respectively.
Proposed changes and refunds of previously paid tax
The proposed legislation would repeal the franchise tax's alternative minimum property measure, requiring the tax to be calculated based solely on a taxpayer's apportioned net worth, and would authorize refunds for franchise previously paid under the alternative minimum property measure. These changes would take effect upon becoming law.
As proposed, the bills would authorize refunds in open periods equal to the amount of "tax actually paid"3 under the alternative minimum property measure, less the amount that would have been paid under the net worth measure. Refunds would not be automatic; rather, refund claims would have to be filed within three years from December 31 of the year in which the payment was made. Refund claims would have to be filed on a form(s) prescribed by the Commissioner for this specific franchise tax refund and include information necessary to determine the amount of the refund. A claim for refund on any other basis (e.g., something other than this specific franchise tax refund) would need to be filed under the traditional refund process. The Commissioner would also have the authority to approve a timely filed refund claim that was filed before January 1, 2024 if the claim alleges that the franchise tax is unconstitutional for failing the internal consistency test.
Franchise tax refunds claimed under the proposed legislation would first be used to offset any outstanding tax liabilities (for all tax types) and would be subject to the report of debts requirement.
To the extent a taxpayer previously utilized credits to offset franchise tax due as calculated under the alternative minimum property measure, the credits will be reinstated but not paid as a refund.
Interest would be added to the refund beginning 90 days from the date the commissioner receives the refund claim and proper proof that the refund or credit is due and payable.
Finally, the Commissioner would be authorized to audit, adjust or deny refunds as appropriate.
If enacted, the proposed legislation would significantly change Tennessee's franchise tax and provide refund opportunities to taxpayer's that have historically paid on the alternative minimum property measure. The proposed bills are in the early stages of the legislative process, so they could be amended by the House and Senate before being approved by the General Assembly, which is scheduled to be in session until the end of April 2024. As the proposed legislation advances through the legislative process, taxpayers should review recent franchise tax calculations to gauge potential impact (if any) and to the extent refunds may be available, consider all options including filing protective claims for open years.