Could Proposed Tennessee Franchise Tax Changes Bring Potential Refund Opportunities?

Legislation pending in the Tennessee legislature could provide businesses with a refund for a portion of franchise taxes paid during the past three years. HB 1893/SB 2103, if enacted, changes the determination of Tennessee’s franchise tax by eliminating property as the minimum tax base and instead requires the tax to be calculated using the taxpayer’s apportioned net worth. Most significantly for taxpayers, if enacted, the change authorizes refunds projected to cost the state around $1.2 billion and projected to save taxpayers $400 million annually going forward.

A Constitutional Challenge

Tennessee imposes a franchise tax on each taxable entity registered or doing business in the state. Currently, taxpayers calculate the tax as either – the greater of apportioned net worth or the value of real and tangible personal property owned or used in Tennessee. Tennessee officials, however, have concerns of a taxpayer challenge to the second calculation, known as the “alternative minimum property measure,” for failing the “internal consistency test” of the dormant Commerce Clause of the U.S. Constitution.

The “internal consistency test” assesses the “structure of the tax at issue to see whether its identical application by every state would place interstate commerce at a disadvantage as compared with commerce intrastate.” Taxpayers challenging the alternative minimum property measure option of the tax have argued that double taxation would result if other states adopted a similar tax resulting in an unconstitutional restraint on interstate commerce.

Proposed Legislative Changes

The proposed legislation, if enacted, repeals the “alternative minimum property measure” of the minimum tax base, leaving the tax to be calculated only on a taxpayer’s apportioned net worth. If enacted as drafted, this legislation authorizes refunds for the amount of the “tax actually paid” under the alternative minimum property calculation reduced by the amount otherwise due under the apportioned net worth calculation.

The proposed bill, if enacted, would require refund claims to be filed on a specific form. These potential refunds offset any outstanding tax liabilities and would be subject to the report of debts requirements. Credits applied to the franchise tax would be reinstated but not refunded. Interest would be added to the refund after 90 days from when a refund claim is approved.

If enacted, taxpayers have three years from December 31 of the year in which the tax was paid to claim a refund (calendar year and fiscal year filers). Estimated taxes would be deemed to have been paid on the original due date of the return. Additionally, a claim filed prior to January 1, 2024, that alleges the franchise tax is unconstitutional because it fails the internal consistency test of the dormant Commerce Clause is also eligible for a refund.

Next Steps for Tennessee Taxpayers

The Tennessee General Assembly is scheduled to be in session until late April 2024. The proposed legislation was referred to the Senate Finance, Ways and Means Subcommittee and assigned to the House Finance, Ways and Means Subcommittee on February 13, 2024 and January 30, 2024 respectively.

Weaver’s State and Local Tax  team is closely monitoring the advancement of this proposed legislation   and can help you review your franchise tax calculations to determine if you could be eligible for a potential refund if the bill becomes law. Contact us for more information.

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