On January 24, two Tennessee House Republicans introduced House Bill (HB) 1893. As introduced, HB 1893 deletes the provision requiring that the measure of the franchise tax must not be less than the actual value of the real or tangible property owned or used by a taxpayer in Tennessee. The Bill also authorizes the commissioner of revenue to issue refunds under certain conditions to taxpayers who properly file a claim for refund for taxes paid under that provision.
Taxpayers would no longer calculate franchise tax based on the higher net worth or the value of real and tangible personal property owned or used in Tennessee. Taxpayers would only calculate franchise tax on net worth. Consequently, the changes impact companies that currently pay franchise tax on the value of real and tangible personal property owned or used in Tennessee.
HB 1893 proposes to make the following changes:
- Deletes all references to calculating franchise tax based on the value of real or tangible property owned or used.
- Provides the ability for affected taxpayers to apply for refunds of franchise tax within three years from December 31 of the year in which the payment was made or within any period covered by a permitted extension.
- A refund could be issued for refund claims filed prior to January 1, 2024, if those claims alleged that the franchise tax is unconstitutional by failing the internal consistency test.
- A refund may not be issued unless a claim is filed.
- Current Tennessee law allows a deduction for exempt inventory from the property apportionment factor if the property is located in Tennessee. HB 1893 removes the location requirement, thereby, allowing taxpayers to deduct exempt inventory from the property apportionment factor even if it isn’t located in Tennessee.
The introduction of this Bill reflects a push to change provisions that have been challenged (or alleged) to be unconstitutional. For example, the franchise tax provision may fail the internal consistency test of the Commerce Clause, and the location requirement in the exempt inventory provision may fail the discrimination test of the Commerce Clause.
Next Steps
This is a proposed Bill that just got introduced. There will likely be amendments and a Senate version of the bill. We will be monitoring this legislation as it moves forward.
If you have any questions on how it may impact your business, please contact your Frazier & Deeter tax advisor or Brian Strahle, Partner-in-Charge of the State and Local Tax Practice, based in Nashville at brian.strahle@frazierdeeter.com. If the Bill is enacted, it will be effective upon the Governor’s signature, and refund claims will need to be filed timely.