Updated June 27, 2023
Significant legislative tax changes were passed by the Tennessee General Assembly on April 27, 2023, as part of the Tennessee Works Act and were approved by Governor Bill Lee. Key highlights of the legislation are summarized below.
Franchise and Excise Tax
Single sales factor apportionment
While most states have adopted a sales-only method of apportionment, or way of determining how much of a business’s activity is attributable to a particular state, Tennessee has long held to a multi-factor formula considering sales, property and amount of payroll located in the state. The Tennessee Works Act will slowly transition this formula to a sales-only approach. The transition begins for businesses with a tax year end of Dec. 31, 2023, and by Dec. 31, 2025, will be a fully sales-based apportionment. This is favorable news for businesses whose operations reside in Tennessee but conduct sales elsewhere. Certain telecommunications companies will continue to use the current apportionment formula.
Other significant changes to franchise and excise tax
- There will be a $50,000 standard excise tax deduction for tax years ending no sooner than Dec. 31, 2024. This is a reduction to income before the 6.5 percent Tennessee excise tax rate is applied.
- Tennessee will conform excise tax law to the depreciation rules established by the federal Tax Cuts and Jobs Act beginning with tax years ending on or after Dec. 31, 2023. Tennessee depreciation will now incorporate federal bonus depreciation, an 80 percent rate for 2023.
- A $500,000 property exemption will apply to the franchise tax for tax years ending on or after Dec. 31, 2024.
- Tax credits earned from 2008 onward may now carryforward for 25 years instead of 15.
- There will be a potential tax credit through Dec. 31,2025, for employers paying paid family and medical leave.
Sales and Use Tax
The first change to be implemented is a three-month sales tax holiday on retail food and food ingredients from Aug. 1 – Oct. 31, 2023.
Additional changes to sales tax changes will take effect on Jan. 1, 2024, instituting a sales tax on repair and installation services conducted on property located outside the state, when the ultimate destination of property for customer use is within Tennessee borders. Conversely, the same services performed inside Tennessee for property shipped elsewhere will be sourced to the destination location for sales tax purposes. A previous sales and use tax exemption on magazines and books sold to consumers by mail, as well as direct mail advertising to in-state recipients, will end on Jan. 1, 2024.
Business Tax
Changes to business tax, also referred to as gross receipts tax, are coming as well. Any business whose tax year ends on or after Dec. 31, 2023, will see the following changes:
- An increase from $10,000 to $100,000 of gross receipts for a filing threshold on the state and local business tax.
- Class 4 businesses will see the filing threshold increase from $50,000 to $100,000.
- The manufacturing business exemption will now incorporate facilities located within 10 miles of the original manufacturing place of production. The exemption will also include sales to locations outside the state.
- Tax rate shift of 0.3 to 0.1 percent for industrial loan and thrift companies.
To mitigate the lost revenues to localities, instead of 43 percent of tax proceeds moving to the state general fund, only 42.62 percent will be remitted.
For more comprehensive analysis of how these changes can be expected to impact your business, please consult your trusted tax advisor, or reach out to Tim Clancy.
