Tennessee ends franchise tax property measure, allows refunds

On May 10, 2024, Tennessee Gov. Bill Lee approved legislation which eliminates the property measure for computing the Tennessee Business Privilege Tax (franchise tax) for tax years ending on or after Jan. 1, 2024.¹ This legislation allows taxpayers that were required to use this method to file tax refund claims for the three prior tax years. Specifically, taxpayers who paid franchise tax based on the property measure may request a refund of franchise tax for tax years ending on or after March 31, 2020, for which a return was filed with the Tennessee Department of Revenue on or after Jan. 1, 2021.² Refund claims must be filed between May 15, 2024, and Nov. 30, 2024.

Calculation of franchise tax

Tennessee imposes a franchise tax on entities for the privilege of doing business in the state.³ All entities doing business in Tennessee and having substantial nexus in the state, except for certain exempt entities, are subject to the franchise tax.⁴ On returns filed for tax years ending before Dec. 31, 2023, the franchise tax is based on the greater of Tennessee apportioned: (i) net worth (assets less liabilities) computed on Schedule F of the franchise tax return;⁵ or (ii) the book value (cost less accumulated depreciation) of real and tangible property owned or used in Tennessee computed on Schedule G of the return.⁶ The tax rate is 0.25% of the tax base and the minimum franchise tax is $100.⁷ The recent legislation repeals the property base for computing the tax. On returns filed for tax years ending in 2024 or subsequent years, taxpayers should omit Schedule G from their return and calculate franchise tax based on Schedule F (net worth).

Calculation of refund amount  

Taxpayers who paid franchise tax based on the Schedule G property measure may request a refund for the three prior tax years as discussed above.⁹ The amount of tax that may be refunded is the difference between the amount of franchise tax paid based on the Schedule G property measure and the amount of tax that would have been owed based on the Schedule F net worth measure for the applicable tax years. Also, taxpayers that timely filed a claim under Tennessee law¹⁰ prior to Jan. 1, 2024, that alleged the franchise tax was unconstitutional by failing the internal consistency test are eligible for the Schedule G refund for all years included in the original claim. However, a new Schedule G refund claim form must be filed.

Refund procedures  

The Department’s guidance provides specific refund procedures.¹¹ Taxpayers must file amended returns with the Department for the applicable tax years to calculate the franchise tax based solely on Schedule F net worth (and omitting Schedule G from the return). Specifically, taxpayers filing amended returns through the Tennessee Taxpayer Access Point (TNTAP) must submit the amended returns in chronological order by tax year. After filing the amended return(s) for all periods, taxpayers must then allow the amended returns to process (overnight) before filing the refund claim. Taxpayers should verify that the overpayment generated by the amended return filings has posted to their account in TNTAP before filing the refund claim.

After filing amended returns, taxpayers must then file the refund claim form.¹² The Department strongly encourages taxpayers to file the Franchise Tax Property Measure (Schedule G) Repeal refund claim form in TNTAP to expedite the refund claim process. However, taxpayers alternatively may file the refund claim using the Claim for Refund of Franchise Tax Paid on Property Measure (Schedule G) form. The Department notes that this refund cannot be claimed using the Department’s standard refund claim form. Refund claims must be accompanied by a completed Report of Debts form if a refund of $200 or more is requested. Although not required, a balance sheet, schedule of assets/liabilities, pro forma, or federal return pages supporting the net worth calculation by entity may be provided to support the amount due per Schedule F, and potentially expedite the refund claim process. 

Waiver of future litigation 

Upon acceptance of a refund claim by the Department, the taxpayer knowingly waives any claim in any federal or state court against Tennessee on any theory that the franchise tax as it existed prior to the recent legislation is unconstitutional by failing the internal consistency test.¹³ The legislation preserves the right of a taxpayer to file a lawsuit claiming that any prior provision of the franchise tax is unconstitutional by failing the internal consistency test, if such lawsuit is filed by Nov. 30, 2024.¹⁴

Publication of taxpayers receiving refunds

The Department is required to temporarily publish the name of each taxpayer issued a refund and the applicable range corresponding to the total amount refunded to the taxpayer.¹⁵ This information will be published in a list on the Department’s website on May 31, 2025, through June 30, 2025. The applicable ranges are: $750 or less, between $751 and $10,000, and more than $10,000. Specific refund amounts will not be disclosed. 

Commentary

This legislation, which resulted from an internal consistency challenge against the Tennessee franchise tax that was filed in 2022,¹⁶ is expected to provide significant refund opportunities and future tax benefits to many taxpayers. In fact, Tennessee has estimated that it ultimately will pay refunds of nearly $1.6 billion and experience a future annual tax revenue reduction of approximately $400 million due to this legislation.¹⁷ Because of the predicted large effect on state tax revenue, there is a possibility that Tennessee may need to consider adjustments to its other taxes in the future as a means to offset this revenue reduction.