On April 26, 2017, Tennessee Gov. Bill Haslam signed Tennessee House Bill 534, also known as the IMPROVE Act. In part, the new law allows taxpayers whose principal business in Tennessee is manufacturing to elect to apportion their net worth and net earnings using a single sales factor for Tennessee franchise and excise tax purposes. Elections may be made for tax years beginning on or after January 1, 2017.
The new law provides that a taxpayer’s principal business in Tennessee is considered manufacturing if more than 50 percent of its revenue from in-state activities is from fabricating or processing tangible personal property for resale and consumption off the premises. Excluded from this 50 percent is passive income, such as dividends, interest, income derived from the sale of securities and income derived from the licensing or sale of patents, trademarks, tradenames, copyrights, know-how or other intellectual property.
The elections are binding and remain in effect for five tax years. After five tax years, the elections can be revoked by notifying the Tennessee Department of Revenue in writing on the tax return that follows the minimum tax period. Once revoked, a new election can’t be made again for a five-tax-year waiting period.
In addition, the new law includes a phaseout of the Hall income tax. The tax rate will drop from 5 percent to 4 percent in 2017 and be reduced 1 percent each following year to zero by 2021. Enacted in 1929, the Hall tax taxes income from taxable stock dividends and certain interest.
Effective July 1, 2017, the act also authorizes local governments to levy a surcharge on a number of local privilege taxes, including the Tennessee business tax. If implemented, any levy is subject to the same conditions and requirements of the associated local privilege tax.
Tennessee previously adopted significant income and franchise tax changes. For tax years beginning on or after January 1, 2016, the definition of nexus was expanded to include a bright-line factor-based economic presence test. In addition, for tax years beginning on or after July 1, 2016, Tennessee enacted market-based sourcing for sales of services and a triple-weighted sales factor for excise and franchise tax purposes. Read our previous article for more information.
Contact your BKD advisor if you have questions on how the IMPROVE Act affects your organization.