Franchise Tax Potential Refund Opportunity for Tennessee Taxpayers That Own or Rent In-State Property
Pending legislation could lead to potential refunds and future tax reductions for companies with Tennessee property. This legislation is expected to be signed by the Tennessee governor by the end of the week, or it will automatically become a Tennessee state law.
On April 25, 2024, the Tennessee General Assembly voted to revise the state’s franchise tax structure and authorize refunds for all taxpayers who paid franchise tax on the value of their real and tangible personal property owned or used in Tennessee over the past three years.
The Background
The Tennessee Franchise Tax is currently imposed on the greater of:
- The apportioned net worth, or
- The actual value of real and tangible personal property owned or rented in Tennessee (also known as the “alternative minimum property measure”)
The constitutionality of the alternative minimum property measure component has been challenged recently. Simply put, a tax cannot cause a taxpayer engaged in interstate commerce to pay more in taxes than a similarly situated taxpayer that is only engaged in in-state commerce. If every state imposed a tax on such basis, it would be discriminatory.
Due to pending lawsuits in Tennessee over the constitutionality of the property measure, recommendations were made that it be repealed and refunds be issued to taxpayers.
The Refund Opportunity
The legislation will require the commissioner to issue refunds for the difference between the amount of the franchise tax actually paid under the “alternative minimum property measure” and the tax that would otherwise have been due under the net worth base. If a taxpayer utilized any tax credits, the refund will be the actual tax paid and any credits will be carried forward.
Under the legislation, franchise tax refunds will be paid for taxes reported to the Tennessee Department of Revenue on returns filed on or after January 1, 2021, covering tax periods that ended on or after March 31, 2020. (In general, the refunds will be available for a three-year period.)
Action is required to take advantage of this refund if applicable.
Once legislation is signed, there will be a six-month window beginning in May 2024 during which refunds can be requested. Preliminary guidance indicates the state will have a specific methodology for requesting the refund. Refund claims are not automatic and are subject to possible audit, like any refund claim. Additionally, interest will be paid for any refunds not paid within 90 days of receipt of the refund claim by the Tennessee Department of Revenue.
Taxpayers should be aware that those who receive a refund under this opportunity will be restricted from filing a lawsuit on the matter and will have their names and a range of the refund value published on the Tennessee Department of Revenue website for a short period of time.
Next Steps for Taxpayers
Due to the time constraints on filing refund claims, taxpayers should take steps now to assess applicability. Additionally, this change impacts the future computation of Tennessee franchise tax. Taxpayers using the property measure for franchise tax in prior years should take this into consideration for their 2024 Tennessee estimated payments.
Likewise, if a taxpayer has significant Tennessee credit carryforwards, consideration should be given to the ability to use the credits in the carryforward period and whether a valuation allowance might be warranted for financial statement purposes.
To evaluate if this refund opportunity will apply to your situation, please reach out to your Warren Averett advisor directly for assistance.
