Tennessee's Franchise Tax Reform: What You Need to Know

The Tennessee government recently finished its legislative session on April 25, 2024. During this final session, lawmakers reached an agreement on a significant tax reform proposed by Governor Bill Lee earlier in the year.

The focus of this reform was on Tennessee's franchise tax law. Governor Lee wanted to make changes by eliminating a part of the franchise tax related to property and allowing businesses in Tennessee to claim refunds for taxes paid in previous years.

Key points of the new legislation include:

• Businesses can claim refunds for taxes paid after January 1, 2021, covering periods ending after March 31, 2020.
• Refund claims must be submitted between May 15, 2024, and November 30, 2024.
• The Department of Revenue will publish a list of companies getting refunds and group them based on refund amounts.
• The refund claims must be filed on forms prescribed by commissioner for this purpose.
• Businesses that get refunds must agree not to sue the state.
• Companies that do sue will have lower interest rates on their refunds during the lawsuit, and they won't have to pay attorney fees.
• Any unused tax credits will be used to reduce the total amount of refunds paid out.

Why the change?

Well, Tennessee faced legal risks because some taxpayers threatened to sue the state over its franchise tax system. This was influenced by a court case in Maryland (Maryland v. Wynne) which found that Maryland's tax system was unfair if it didn't credit taxpayers for taxes paid to other states. Other states like North Carolina had already updated their tax laws because of this case.

To address these issues, Governor Lee proposed setting aside a large amount of money—over $1.6 billion—to pay back these taxes and to remove the property part of the franchise tax. It was estimated that repealing this property tax part would cost the state around $400 million every year, but taxpayers could potentially receive over $1.2 billion in refunds.

The Tennessee House and Senate debated how to implement this reform. They agreed to get rid of the property part of the franchise tax moving forward, but they disagreed on other details, like who should get refunds, how long they should be given for, and whether refund recipients should be made public.

After struggling to reach an agreement, the House and Senate held a final meeting and finally agreed on a compromise. The reform bill is expected to be signed into law by Governor Lee soon.

In conclusion, the Tennessee legislature's agreement on tax reform is a significant step in addressing legal concerns and promoting economic stability. This development emphasizes the importance of staying informed about legislative changes that directly impact taxpayers and businesses. Stay tuned for more updates on this evolving issue.