Tennessee Enacts Significant Tax Reform

June 28, 2023

At a glance

The main takeaway: Tennessee enacted significant tax changes that will impact franchise and excise tax, sales and use tax, and business tax.
Assess the impact: While these new tax provisions will take effect over the next few years, certain taxpayers may see lower franchise and excise tax and others may see higher tax amounts based on the various changes.
Take the next step: Aprio’s State and Local Tax (SALT) team can help you understand the impact of the new Tennessee tax rules, so you remain in compliance and do not incur any unexpected tax liabilities and penalties.

Schedule a free consultation today to learn more!

The full story:

The Governor of Tennessee recently signed legislation that makes sweeping changes to several different types of taxes in Tennessee. Below is a brief summary of the notable changes by tax type from the Tennessee Works Tax Act.¹

Franchise & Excise Tax

Single Sales Factor Apportionment Formula – Currently, most Tennessee taxpayers apportion net earnings/losses and net worth using a three-factor apportionment formula that includes a sales factor, a payroll factor and a property factor. Possibly the most impactful change from this legislation is that a single sales factor apportionment formula will be phased in over three years beginning with the tax years ending on or after December 31, 2023. During these first two years of the phase-in, Tennessee will still use a three-factor apportionment formula for which the sales factor will be more heavily weighted each year. For tax years beginning on or after December 31, 2025, Tennessee’s apportionment formula will be a single sales factor.
Standard Excise Tax Deduction – For tax years ending on or after December 31, 2024, a $50,000 standard deduction against net earnings will apply when calculating the Tennessee excise tax; however, it cannot reduce net earnings below zero.
Franchise Tax Base Exemption – For tax years ending on or after December 31, 2024, a $500,000 exemption for Tennessee franchise tax will apply to the aggregate property value from the real and tangible property otherwise included in the measure of the franchise tax base.
Conformity to Bonus Depreciation – For assets purchased on or after January 1, 2023, Tennessee will conform to the federal bonus depreciation provisions in the Tax Cuts and Jobs Act (TCJA) of 2017.
Credit Carryforward Changes – For certain franchise and excise tax credits earned in tax years ending on or after December 31, 2008, the 15-year carryforward life has been extended to 25 years.
Paid Family and Medical Leave Tax Credit – For tax years ending on or after December 31, 2023, but before December 31, 2025, the state will allow a credit equal to the federal credit taken under IRC § 45S, but only with respect to compensation paid to qualifying employees in Tennessee during the tax period. The credit cannot exceed 50% of the combined excise and franchise tax liability (with any remainder carrying forward up to 25 years).

Sales and Use Tax

Sourcing Rules – The legislation adds several sections that provide rules for when transactions are sourced to Tennessee for sales and use tax purposes. The application will depend on the type of transaction (e.g., sale, lease, etc.) and what type of good or service is involved. These new provisions are effective on July 1, 2024, and they conform more closely with the sourcing rules under the Streamlined Sales & Use Tax Agreement.²
Taxability of Certain Services Performed Out-of-State – Also effective on July 1, 2024, Tennessee sales and use tax will apply to charges for (i) the repair of tangible personal property or computer software, (ii) laundering or dry cleaning of tangible personal property, (iii) installing tangible personal property that remains tangible personal property after installation (i.e., does not become part of real property) and (iv) certain installations of computer software, when such services occur at a place of business outside this state and the serviced property/software is delivered by the seller to the purchaser in this state or to a carrier for delivery in this state.³
Repeal of Exemptions for Magazines/Books/Direct Mail Advertising – Effective July 1, 2024, sales of the following will no longer be exempt: (i) magazines and books that are distributed by U.S. mail or common carriers by sellers/distributors that performed certain limited activities in the state, and (ii) direct mail advertising materials that are distributed in Tennessee from outside the state by a person engaged in the business of cooperative direct mail advertising.⁴

Business Tax (a gross receipts tax with a state and a local component)

Filing Threshold Increase – In order to benefit smaller businesses, for tax years ending on or after December 31, 2023, the threshold that requires filing in any individual county or incorporated municipality increases from $10,000 to $100,000.
Expanded Manufacturing Exemption – Previously, a manufacturing exemption applied if sales were made from the same facility where manufacturing occurred in the state. Effective immediately, this manufacturing exemption has been expanded to include sales from a storage or warehouse facility that is situated within a ten-mile radius of the manufacturing location.

As these provisions take effect over the next few years, certain taxpayers may see lower franchise and excise tax liabilities due to the new deduction, exemption and credit provisions. On the other hand, others may see higher tax amounts under the new single sales factor apportionment formula if, for example, a business had significant sales to customers in Tennessee with nominal payroll and/or property in the state.

The bottom line

Aprio’s SALT team can help your business understand the impact of these new tax rules in Tennessee so that you remain in compliance and do not incur unexpected tax liabilities and penalties. In addition, we will work with you to ensure that you are maximizing all opportunities for reducing your Tennessee tax exposure. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

This article was featured in the June 2023 SALT newsletter.

¹ Tennessee Works Tax Act (HB 323 / SB 275)

² General information about the Streamlined Sales Tax Project can be found at https://www.streamlinedsalestax.org/home.

³ Tennessee already taxes these services when performed in the state. This amendment is another that further conforms the state to the Streamlined Sales & Use Tax Agreement.

⁴ These exemptions can be found currently in Tennessee Code sections 67-6-329(a)(6) and 67-6-344, respectively.