Refund Opportunities for Tennessee Franchise Tax Taxpayers Beginning May 15

After much debate and compromise, Tennessee Gov. Bill Lee signed Tennessee SB2103, which eliminates the real and tangible property base from the franchise tax calculation applicable to tax years beginning on or after Jan. 1, 2024. The repeal is the state’s response to questions of constitutionality – specifically, whether the alternative tax base of the franchise tax violates the internal consistency doctrine under the dormant Commerce Clause of the United States Constitution and provides a refund opportunity to taxpayers that paid franchise tax on the property base.

Refunds are available for tax reported on a return filed on or after Jan. 1, 2021, and must be claimed between May 15, 2024, and November 30, 2024. Taxpayers eligible for refunds must file amended returns to calculate tax solely on the net worth basis. Once the amended returns have been processed, the taxpayers must file the refund claim as prescribed by the Tennessee Commissioner of Revenue. In anticipation of taxpayer refunds, the Department of Revenue issued Notice #24-05 and published an extensive list of frequently asked questions. Taxpayers should be diligent in following the Commissioner’s instructions, as claims filed outside the identified refund window and/or not on the prescribed form may be rejected on procedural grounds.

The repeal in the property tax base should offer relief for asset-heavy taxpayers with substantial operations in Tennessee. The franchise tax has historically been imposed on the greater of a taxpayer’s apportioned net worth or the value of real and tangible property owned or rented in the state. The imposition of tax on the property base was challenged as failing the internal consistency test, which asks whether interstate commerce would be burdened if every state imposed the same taxing scheme. In other words, if the tax was applied across all jurisdictions, would the tax burden be greater on an interstate taxpayer than an intrastate taxpayer? First introduced by the U.S. Supreme Court in 1983 and often dismissed as focused on hypothetical tax burdens, the internal consistency test has become a deadly weapon for taxpayers in challenging state taxing regimes.

Tennessee’s legislative action to repeal the property measure of the franchise tax attempts to circumvent additional litigation and limit unexpected budget hits. To this end, taxpayers are required to include a statement with the refund claim waiving any right to claim the franchise tax is unconstitutional. Furthermore, taxpayers should be aware that the legislation requires the Department make public the names of taxpayer’s and range of refunds issued.

Tennessee expects to pay out refunds in excess of $1 billion as a result of the retroactive repeal.

KSM’s State & Local Tax Group follows legislative activity across the country. If you have questions about how these or other pieces of legislation might affect your business, please contact your KSM advisor or complete this form.