GYF’s tax professionals are always monitoring the federal and state tax landscape for any legislative changes that could impact our clients. A new tax refund opportunity is available taxpayers in Tennessee, due to recently enacted legislation that changes how the franchise tax is calculated in that state.
Background
On May 10, 2024, Tennessee Governor Bill Lee signed House Bill (HB) 1893/Senate Bill (SB) 2103 into law. This legislation significantly changes the Tennessee franchise tax calculation, repealing the real and tangible personal property base from the Tennessee franchise tax. Historically, the Tennessee franchise tax base was imposed on the greater of a taxpayer’s (1) apportioned net worth (assets minus liabilities); or (2) the net book value of property owned or used by the taxpayer in Tennessee (“alternative property measure”). In recent years, the alternative property measure has been challenged for its underlying constitutionality, ultimately leading to the state’s push for an overhaul of the franchise tax calculation.
Primary Provisions
Taxpayers should pay close attention to several key aspects of the new legislation when evaluating the implications for their businesses.
Repeal of Alternative Property Measure – For tax years ending on or after January 1, 2024, the legislation repeals the franchise tax’s alternative property measure. This is a prospective change, which will require taxpayers to calculate their franchise tax based solely on the net worth measure moving forward. Since this repeal is made effective for tax periods starting in 2024, taxpayers must still complete Schedule G and calculate their franchise tax obligation based on the greater of Schedule F (net worth) or Schedule G (alternative property) for any franchise tax returns filed for tax years ending on or before December 31, 2023.
Authorized Refunds for Previously Paid Franchise Tax – The passage of this law presents taxpayers with a refund opportunity for franchise taxes paid on the alternative property measure for previous years. The legislation requires that tax refunds must be issued for the difference in franchise tax had the former law regarding the value of property as the franchise tax base not existed. The tax subject to a refund must have been reported on a franchise tax return filed on or after January 1, 2021, for a tax period ending on or after March 31, 2020.
Taxpayers should note that these eligible refunds will not be made automatically; the taxpayer must submit the refund claim. Franchise and Excise Tax Notice #24-05 provides guidance and specific instructions on the required procedures taxpayers should follow to claim these eligible tax refunds, which include filing amended tax returns along with a separate prescribed refund claim form. Tax refund claims filed pursuant to this franchise tax Schedule G repeal must be filed between May 15, 2024, and November 30, 2024.
Taxpayer Disclosure of Claims – Under the new legislation, the Tennessee Department of Revenue (DOR) must publish on its website from May 31, 2025, through June 30, 2025, the name of each taxpayer issued a refund and the applicable refund range ($750 or less; $751 to $10,000; and $10,001 or greater). If a taxpayer has not been issued a refund by this time, the name of the taxpayer will be listed in a separate category as “pending.”
Additional Considerations
In connection with the refund claim process, the taxpayer will be required to waive the right to file a suit alleging that the franchise tax under prior law is deemed unconstitutional. In lieu of requesting a refund for these changes, a taxpayer may choose to bring a suit to claim the franchise tax under prior law is unconstitutional by failing the internal consistency test. However, the legislation has specific requirements for such a suit, and the suit must be filed on or before November 30, 2024.
Because this is one of the more significant franchise tax law changes ever enacted, the Tennessee DOR is anticipating processing greater than 100,000 refund claims. As such, taxpayers are encouraged to evaluate their Tennessee franchise tax positions and begin the refund claim process as soon as possible to avoid any potential processing delays in receiving the eligible tax refunds pursuant to these changes.
GYF will continue to monitor this process as well as other legislative developments impacting taxpayers. If you need assistance with a Tennessee franchise tax refund claim or other state tax issues, please reach out to your GYF Executive or contact our office at 412-338-9300.
Xi Peng assisted with the research and writing of this article. Xi joined GYF 2023, following her graduation from the University of Pittsburgh. She is currently working as an associate in the Tax Services Group.
