The franchise tax is a privilege tax based on the taxpayer's net worth, or the book value of all real and tangible property owned or used in Tennessee, whichever is greater. The franchise tax rate is 25 cents per $100 with a minimum tax of $100. The franchise tax applies to corporations, foreign or domestic, limited liability companies, and limited partnerships doing business in Tennessee.
Corporate income or excise tax:
Tennessee levies an excise tax of 6.5 percent on net earnings of companies, foreign or domestic, from business conducted in the state or an apportionment of federal net earnings.
Apportionment - In allocating the net worth or income of a multistate corporation, the state uses a three-factor formula, comparing the sales, payroll, and property in the state to the overall corporation. The sales factor is double weighted. The state of Tennessee does not have a throwback provision.
Franchise and Excise Tax Credits
Industrial Machinery Credit:
Tennessee offers an industrial machinery credit of 1 percent of the cost of qualified industrial machinery purchased or leased during the tax year and located in Tennessee. Any unused credit may be carried forward for up to 15 years. Industrial machinery includes computer equipment and software, including peripheral devices such as printers, external drives, modems, and telephone units purchased in making the required capital investment for the job tax credit.
To qualify for an industrial machinery credit on the purchase price of material handling and racking systems purchased by a qualified warehouse or distribution facility, the taxpayers must make a capital investment of $10 million in a period not to exceed three years. A business plan and application must be filed with the Department of Revenue and approved before taking the credit.
The Industrial Machinery Credit is available whether the company is creating jobs or not.
Job Tax Credit:
A qualified business enterprise that makes a capital investment of $500,000 and hires 25 net new-full time employees in an investment period not to exceed 36 months qualifies for a job tax credit as follows:
$4,500 per net new full-time job in a Tier 1, Tier 2, and Tier 3 Economically Distressed County. Tier 2 and Tier 3 counties are entitled to additional enhanced incentives as detailed below.
The percentage of liability offset is 50 percent.
Any unused Job Tax Credit may be carried forward up to 15 years. A business plan must be filed on or before the last day of the fiscal year in which the investment is made and must describe the investment made, the number of jobs the investment will create, and the expected dates the jobs will be filled.
Enhanced Job Tax Credit in Tier 2 and Tier 3 Economically Distressed Counties:
This credit was created to promote new industry locations and expansions in the more rural areas of the state. The tiers are based on each Tennessee counties' per capita income, unemployment, and poverty level. Annual analysis is performed to determine each Tennessee county’s tiered status. Projects that locate in a Tier 2 or Tier 3 county will be eligible for this additional credit.
Super Job Tax Credit:
$4,500 per net new full-time job applied to offset both Franchise and Excise Tax
Tier 2 counties - credit is taken for each year for three years after the investment period.
Tier 3 counties - credit is taken each year for five years after the investment period.
• Enhanced Job Tax Credit can offset up to 100 percent of the total Franchise and Excise tax liability each year for the three- or five-year period but it does not have a carry forward provision.
Credit is in addition to the regular Job Tax Credit.
A Super Job Tax Credit ("super credit") for taxpayers investing in excess of $100 million in a qualified project creating 100 or more jobs paying at least 100 percent of the average occupational wage in the state.
$5,000 per net new full-time job for companies that qualify for the Super Job Tax Credit by investing over $100 million and creating at least 100 net new full-time jobs paying 100 percent of the average occupational wage. However, if a headquarters meets the definition of a qualified headquarters facility, investment and job creation thresholds ($10 million and 100 net new full-time employee jobs paying 150 percent of the average occupational wage) for a qualified headquarters facility, then it will also qualify for a Super Job Tax Credit as set forth below.
This super credit is a three-year annual credit and may be used to offset up to 100 percent of a taxpayer's Tennessee franchise and excise tax liability annually beginning with the first tax year after the investment and job creation thresholds have been met. The super credit is taken annually, but does not have a carry forward provision.
The super credit is in addition to the regular job tax credit. The only difference is by qualifying for the super credit, the amount of the regular job tax credit increases to $5,000 per job instead of the regular $4,500.
Sales and use taxes:
In addition to the jobs portion of the credit, a company that qualifies for the super credit may exclude 2/3 of its capital investment made during the investment period from its franchise tax base on Schedule G of the Franchise and Excise Tax return in the years the annual credit is taken.
A 7 percent state sales tax plus a 1.5-2.75 percent local sales tax are levied on the sale price of each item or article of tangible personal property and some specific services sold at retail. A use tax of the same rate is levied on the cost price of each article used, consumed or stored for use in the state, upon which the sales tax is not imposed.
Qualified manufacturing equipment is tax exempt. Energy fuels and water used by manufacturers are taxed at 1.5 percent.
There is no sales tax on the purchase of qualified material handling equipment and racking systems associated with the minimum capital investment ($10 million, land and inventory not included within three years) by a distribution or warehouse facility.
Component parts, containers and packaging materials, and repair parts for qualified industrial machinery used in the manufacturing process are not subject to sales and use taxation.
There is a credit for state sales and use taxes paid on building materials, machinery, and equipment for new or expanded qualified headquarters meeting the requirements of $10 million with 100 net new headquarters employees paying an average of 150 percent of the state's average occupational wage.
The state levies no property tax. Counties and cities levy property tax on real and personal property. Tax rates of industrial and commercial real property vary with locality. Property is assessed by county assessors.
There is a sales and use tax for pollution-control equipment used by a qualified manufacturer or processor.
Finished goods inventory in excess $30 million may be excluded from the franchise tax base when held by manufacturers or warehouses and distribution facilities.
Goods in transit:
Interstate and foreign sales are exempt from sales and use taxation. Railroad rolling stock and barges used in interstate commerce or outside the state are also exempt. Personal property passing through the state or stored or repackaged while passing through the state is exempt from property taxation.
Tennessee State Contact:
Allen Borden, Assistant Commissioner
Department of Economic and Community Development
Business Development Division
William Snodgrass/TN Tower, 27th Floor
312 Rosa L. Parks Ave.
Nashville, TN 37243-0405
Incentive and tax information is provided to Area Development by each state's economic development or commerce agency for information purposes only and is subject to revision at any time by the state government. Please contact the state agency directly for full requirements and offerings.