On April 25, 2024, the Tennessee legislature passed SB 2103/HB 1893, which would significantly change the Tennessee franchise tax calculation; Governor Bill Lee is anticipated to sign the bill into law. Key aspects of the legislation include:

• Prospective repeal of the franchise tax alternative minimum property measure
• Authorization of refunds of previously paid franchise tax calculated under the alternative minimum property measure for tax years ending on or after March 31, 2020
• Public disclosure of a taxpayer's receipt of a refund of previously paid franchise tax calculated under the alternative minimum property measure
• Annual election to continue computing franchise tax under the alternative minimum property measure

Background

Historically, Tennessee's franchise tax was 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, came under scrutiny due to litigation and refund claims challenging its constitutionality — specifically, whether it passed the dormant Commerce Clause's internal consistency test.² Due to these concerns, and as part of his budget proposal, Governor Lee called for the modernization of the state's franchise tax by changing the calculation method and providing refunds to taxpayers that previously paid franchise tax on the alternative minimum property measure.

These changes were initially proposed in SB 2103/HB1893, but significant differences arose between both bills during the legislative process, which led to a joint House and Senate conference committee being called. Just before the General Assembly session was to adjourn, the conference committee reached an agreement, with both chambers adopting the conference committee report on April 25, 2024.

Changes to the franchise tax calculation, refunds of previously paid tax, limits on filing suit

Prospective repeal of the alternative minimum property measure

Effective for tax periods ending on or after January 1, 2024, SB 2103/HB1893 would repeal the franchise tax's alternative minimum property measure and require the tax to be calculated based solely on a taxpayer's apportioned net worth. Because the repeal would be effective for tax periods ending on or after January 1, 2024, absent guidance from the Tennessee Department of Revenue (Department), taxpayers should compute their 2023 franchise tax liability utilizing the alternative minimum property measure and, if applicable, seek refunds of tax paid as outlined next.

Refunds of previously paid franchise tax

Pursuant to the newly created Tenn. Code Ann. Section 67-4-2122, refunds of previously paid franchise tax calculated under the alternative minimum property measure would be authorized for tax reported to the state on a return filed on or after January 1, 2021 and covering a tax period ended on or after March 31, 2020. Tax eligible for refund would be the difference between the franchise tax paid based on the alternative minimum property measure and the tax that would have been owed based on the net worth measure for the applicable tax year(s). To the extent credits were claimed to reduce franchise tax calculated on the alternative minimum property measure, refund claims would operate to reinstate these credits.

Refunds authorized under Tenn. Code Ann. Section 67-4-2122 would not be per se automatic. Rather, a taxpayer would have to file a refund claim for applicable periods between May 15, 2024 and November 30, 2024. Refund claims would have to be filed on a form(s) prescribed by the Commissioner of Revenue (Commissioner) for this specific franchise tax refund and include information necessary to determine the amount of the refund. The refund form would also include a statement whereby the taxpayer, in exchange for accepting a refund, must waive any claim or right to file a suit alleging the franchise tax — both the alternative minimum property measure and apportioned net worth measure — is unconstitutional by failing the internal consistency test.

A refund claim on any other basis (e.g., something other than the franchise tax alternative minimum property measure refund) would have to be filed under the traditional refund process.

The Commissioner would also be authorized to approve a timely filed refund claim that was filed before January 1, 2024, if the claim alleges that the franchise tax, as it previously existed, is unconstitutional for failing the internal consistency test.

Franchise tax refunds claimed under Tenn. Code Ann. Section 67-4-2122 would first be used to offset any outstanding tax liabilities (for all tax types) and would be subject to the report of debts requirement (the report of debts form would have to be submitted with the refund claim form(s)).

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.

The Commissioner would also be authorized to audit, adjust, or deny refunds as appropriate. To the extent a refund claim filed under Tenn. Code Ann. Section 67-4-2122 is denied or deemed denied³ by the Commissioner, a taxpayer may seek judicial review in the Sumner County, Tennessee Chancery Court.

Finally, SB 2103/HB 1893 includes a public disclosure requirement whereby, between May 31, 2025 and June 30, 2025, the Department would be required to publish on its website the taxpayer's name and the applicable range corresponding to the total refund amount. Applicable ranges disclosed include refunds of: (1) $750 or less, (2) $751 but $10,000 or less, or (3) more than $10,000. To the extent a taxpayer's refund claim has not been issued by May 31, 2025, the taxpayer's name along with a designation of "pending" will be published.

Department guidance on refund procedures. In Franchise and Excise Tax Notice #24-05, Franchise Tax Property Measure Repeal (May 2024), the Department provides guidance on the specific refund procedures. In addition to submitting the refund claim form(s), amended returns would also be required to be prepared and filed whereby tax is calculated solely based on the net worth measure (i.e., Sch. G is omitted). Taxpayers could also, but would not be required to, submit additional information (e.g., schedule of assets/liabilities, a copy of the federal return or pro forma) to substantiate net worth reflected on the amended returns. The Department may request additional information to support the net worth amount, if necessary to complete the refund claim. Finally, the Department strongly encourages taxpayers to file the refund claim form(s) and amended returns via the online TNTAP system. If filed via TNTAP, amended returns must be submitted in chronological order by tax year; refund claim form(s) should then be submitted once the amended returns are processed, typically within 1-2 business days.

Annual election to continue computing franchise tax under alternative minimum property measure

Taxpayers would be allowed to annually elect to continue computing and paying franchise tax under the alternative minimum property measure if doing so will result in a higher franchise tax liability (e.g., to utilize tax credits). Taxpayers making this election would be required to waive any claim that the alternative minimum property measure is unconstitutional by failing the internal consistency test.

Suit challenging Tennessee's franchise tax as unconstitutional

Taxpayers would be required to file suit by November 30, 2024 if they want to challenge Tennessee's franchise tax, including the alternative minimum property measure, as unconstitutional by failing the internal consistency test, rather than seeking authorized refunds under Tenn. Code Ann. Section 67-4-2122.

Implications

SB 2103/HB1893 represents significant and historic changes to Tennessee's franchise tax and provides meaningful refund opportunities to taxpayers that have historically paid on the alternative minimum property measure. Because refund claims under Tenn. Code Ann. Section 67-4-2122 must be submitted within a relatively narrow period (May 15, 2024 through November 30, 2024), affected taxpayers should begin reviewing franchise tax calculations to gauge potential impact (if any) and the extent to which may be available.

Taxpayers should pay close attention to the Department's prescribed procedures in its latest guidance to avoid any procedural issues that could ultimately lead to a denied and/or time-barred refund claim.

Taxpayers should also evaluate their Tennessee credit posture, including potential reinstatement of credits resulting from refunds authorized under Tenn. Code Ann. Section 67-4-2122.

Because the franchise tax will be computed using apportioned net worth both prospectively and for purposes of refunds authorized pursuant to Tenn. Code Ann. Section 67-4-2122, taxpayers should conduct a detailed review of net worth calculations and Tennessee apportionment to determine if adjustments are necessary. Taxpayers should also consider whether a consolidated net worth election would be beneficial and identify the procedures for doing so on the original 2023 return or in subsequent tax periods.⁴