Tennessee Basic Business Taxes 2011
Tennessee's economic development, finance, and tax organizations provide a range of incentive programs to initiate new business and commercial investment. Specific programs include franchise taxes and industrial machinery tax credits.
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 on a state apportionment of total earnings of multistate corporations. All taxes, except federal income tax and state excise taxes, are deductible in determining excise tax base. In allocating the 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 between 1-10 percent of the cost of 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. For purposes of the one percent credit, the equipment must have been 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 warehouse or distribution facility, the taxpayers must make a capital investment of $10 million in a new or existing building or qualified equipment 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.
The percentage of Industrial Machinery Credit allowed to any taxpayer is dependent upon the capital investment made during the investment period as follows:
Capital Investment Percentage of Credit Must File a Business Plan
Less than $100,000,000 1% No
$100,000,000 3% Yes
$250,000,000 5% Yes
$500,000,000 7% Yes
$1,000,000,000 10% Yes
Job tax credit:
A qualified business enterprise that makes a capital investment of $500,000 and hires 25 net new-full time employees in a fiscal year 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.
• Qualified business enterprises that are in a Tier 2 economically distressed county shall have three years in order to create the minimum number of 25 jobs necessary to qualify for the Job Tax Credit.
• Qualified businesses in a Tier 3 county shall have five years to create the minimum number of 25 jobs to receive the Job Tax Credit.
• $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.
The percentage of liability offset from 50-100 percent for employment ranging from 25 to 5,000 or more.
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:
Tennessee recently enacted new legislation that allows for an additional tiered Job Tax Credit. This credit had been 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.
• $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.
• Must increase enterprise within a fiscal year and create 25 net new full-time jobs during the investment period of three years in a Tier 2 county and five years in a Tier 3 county.
• 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.
• Credit is in addition to the regular Job Tax Credit.
Super Job Tax Credit:
Tennessee recently enacted legislation that provides 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. The average occupational wage for 2011 is $37,360.
However, if a headquarters meets the investment and job creation thresholds ($10 million and 100 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 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 which will still have the 15-year carry forward and normal percentage of offset. 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.
• 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.
• The super credit investment period is three years but can be expanded to five years for qualified headquarters facilities investing $10 million and creating 100 new jobs, and to seven years for investments of $1 billion or more with the approval of the Commissioner of ECD.
• The number of years a company may take the annual super credit of $5,000 per job is dependent upon the capital investment and number of jobs created as follows:
Capital Investment Number of Net New Occupational Wage Jobs Number of Years for Annual Credit
$100,000,000 or more 100 3
$250,000,000 or more 250 6
$500,000,000 or more 500 12
$1 billion or more 500 20
Sales and use taxes:
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. Energy fuels and water that come in direct contact with the product and are separately metered may be tax exempt.
There is no sales tax on the purchase of qualified material handling equipment and racking systems associated with the minimum capital investment ($10 million) by a distribution or warehouse facility.
There is a credit for state sales and use taxes paid on building materials, machinery, and equipment for new or expanded corporate headquarters meeting the requirements of $50 million capital investment or $10 million with 100 headquarters employees paying an average of 150 percent of the state's average occupational wage. The average occupational wage for 2011 is $37,360, and 150 percent is $56,040.
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.
Industrial fuels and raw materials:
Component parts, containers and packaging materials, and repair parts used in manufacturing are not subject to sales and use taxation. Water and energy fuel used in the manufacturing process that come into direct contact with the product and are separately metered are completely exempt.
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:
Department of Economic and Community Development
Business Development Division
William Snodgrass/TN Tower, 11th Floor
312 Eighth Avenue North
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.