Tennessee Works Tax Acts Includes Multiple Tax Law Changes

On May 11, Tennessee Governor Bill Lee signed the Tennessee Works Tax Act of 2023 into law. The Act makes changes to franchise and excise taxes, sales and use taxes, and the business tax. 

Below, we summarize the most significant provisions in the Act.

Franchise and Excise Taxes 

The Act makes changes to franchise and excise taxes that are imposed on Tennessee’s corporations, including S corporations, limited partnerships, and limited liability companies taxed as partnerships for federal purposes. Among the notable changes are:  

• Apportionment. Perhaps the most significant change included in the Act is the phased-in adoption of a standard single sales factor (SSF) apportionment formula. 

Most Tennessee taxpayers doing business inside or outside the state of Tennessee, with the exception of financial institutions, apportion net earnings or losses for excise tax purposes and net worth for franchise tax purposes using a ratio based on three factors: property, payroll, and sales, with a triple-weighted sales factor. The Act adopts SSF, will transition applicable taxpayers from the three-factor apportionment formula to a SSF apportionment formula over a three-year period as follows:

• Tax years ending on or after December 31, 2023, the sales factor is weighted five times.
• Tax years ending on or after December 31, 2024, the sales factor is weighted 11 times.
• Tax years ending on or after December 31, 2025, the SSF will be fully phased in. 

Manufacturers: The legislation repeals the 2017 elective SSF apportionment available to manufacturers and is mandatory effective for tax years ending on or after December 31, 2025.  It provides an annual elective apportionment formula using three factors with triple-weighted sales for tax years ending on or after December 31, 2023. The election may be made only if the three-factor formula results in a higher apportionment ratio for the taxpayer and the taxpayer has net earnings rather than a net loss. 

• Federal 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 of 2017.  

• Standard Excise Tax Deduction. For tax years ending on or after December 31, 2024, the Act creates a $50,000 standard deduction to reduce net earnings, but not below zero, when calculating the Tennessee excise tax.   

• Franchise Tax Base Property Measure. For tax years ending on or after December 31, 2024, the Act creates an exclusion of up to $500,000 of a taxpayer’s aggregate property value from the real and tangible property measure of the franchise tax base. The $500,000 exclusion does not apply to the net worth tax base measure. 

• Tax Credit Carryforward Periods. The Works Tax Act extends the carryforward period from 15 years to 25 years for excess statutory tax credits These credits are offered by Tennessee to new and expanding businesses in some industries (manufacturing, call centers, research and development, etc.) if the business creates new jobs and/or purchases qualifying assets used in the state.

• Paid Family and Medical Leave Credit. The bill enacts a new tax credit based on the federal paid family and medical leave credit. Taxpayers may claim the credit for tax years ending on or after December 31, 2023, but before December 31, 2025.  

Sales and Use Taxes 

The Act makes several changes to Tennessee’s sales and use tax laws for businesses. The following take effect July 1, 2024:   

• Taxation of the repair of tangible personal property (TPP) or computer software, installing TPP that remains TPP after installation, and installing computer software when (1) the repair or installation occurs outside Tennessee and (2) the seller delivers the serviced TPP or computer software to the purchaser or purchaser’s designee in Tennessee or to a carrier for delivery in Tennessee for use or consumption in the state.
• Repeal of the exemption for magazines and books that are distributed and sold to consumers by U.S. mail or common carrier.  
• Repeal of the exemption on the sale or use of direct mail advertising materials.  
• Clarification of rules for sourcing some taxable retail products, including sales of TPP and digital goods and services.    

Smith + Howard’s sales and use tax professionals, powered by Synexus Tax Solutions, stays on top of sales and use tax filing requirements in every state. We would be happy to speak with you about how businesses are spending more time focusing on growth because we’re doing the work on their sales tax compliance. 

Business Tax 

The Act makes several changes to Tennessee’s business tax to benefit smaller businesses and some industries, including:    

• Increased Filing Threshold. For tax years ending on or after December 31, 2023, the filing threshold for taxable sales in any individual county or incorporated municipality is increased from $10,000 to $100,000. 

• Manufacturing Exemption. Under previous Tennessee Department of Revenue policy, manufacturers were exempt from business tax only if sales were made from the same facility where manufacturing occurs. Effective immediately, the location requirement is removed. The Department now considers the cumulative activity in the state to determine whether a taxpayer qualifies for the manufacturing exemption. In addition, the exemption is expanded to include sales made from a storage or warehouse facility located within a 10-mile radius of the manufacturing location.

Smith + Howard: Experienced Tax Advisors

For business owners located in or doing business in Tennessee, a tax advisor with the knowledge, skills and experience to navigate these laws and build an effective tax strategy is crucial.

At Smith + Howard, we’re proud to serve as tax advisors to business owners across the nation. Our team of experienced tax professionals brings a sophisticated approach to tax planning that combines business and personal tax strategies to build an optimal path forward for businesses and their owners. 

To learn more about Smith + Howard’s tax services, contact an advisor today.