Tennessee Governor Signs Significant Tax Legislation into Law

The IMPROVE Act (the Act) was signed into law by Governor Bill Haslam on April 26, 2017. The Act provides for:

  1. An election to use single-sales factor apportionment for excise and franchise tax purposes for certain Tennessee manufacturers
  2. A reduction of 1% each year in the Hall income tax rate on certain investments until the tax rate reaches 0% in 2021
  3. A 1% reduction in the sales and use tax on food
  4. Increases in the tax rates on gasoline, diesel fuel and other motor fuels
  5. Authorization for local governments to enact certain surcharges on some existing taxes
  6. Enhanced property tax relief programs for low-income and disabled persons1

1. Corporate and franchise tax election to use single factor apportionment

For tax years beginning on or after January 1, 2017, the Act permits a taxpayer whose principal business in Tennessee is manufacturing2 to elect to apportion net earnings and net worth to Tennessee by using single-sales factor apportionment.3 Single-sales factor apportionment means that the share of a corporation’s total profit that a particular state would tax would be based solely on the share of the corporation’s nationwide sales occurring in the state.4 In switching to a single sales factor formula, this automatically provides an immediate tax savings to any instate business that sells a large share of its goods or services in other states.5

Election

A taxpayer may elect single-sales factor apportionment but once elected the election remains “in effect for a minimum of five tax years and thereafter until revoked.”6 Once revoked though, a taxpayer is not “permitted to newly elect the [single-sales factor] apportionment for…five tax years, beginning with the tax year in which the taxpayer revoked the previous election.”7

Other Exemptions and Credits

Under the IMPROVE Act, taxpayers who qualify as manufacturers may enjoy additional tax savings, specifically manufacturers who have large amounts of property but a small amount of sales in Tennessee. As a result, qualifying manufacturers should consider additional exemptions and credits such as exemptions on utilities and water. Manufacturers with qualifying industrial machinery may potentially take advantage of tax savings and the “job tax credit” since the IMPROVE Act encourages businesses to create jobs in Tennessee. The “job tax credit” provides monetary amounts8 to qualifying businesses who meet the required capital investment and create the required amount of jobs.

Conclusion

Thus, manufacturers who elect single-sales factor apportionment and who qualify for the industrial machinery tax credit and job tax credit, could potentially have tremendous savings from their franchise and excise tax liabilities. Therefore, any tax revenue lost from single factor apportionment should be made up by additional revenue coming from new investment, general economic growth, and personal income taxes paid by new employees of businesses who create jobs.

2. Phase-out of Hall Income Tax

The IMPROVE Act phases out the Hall income tax by reducing the tax by 1% for the next four years until it is phased completely out by January 1, 2021. Thus, for tax years beginning on or after January 2017 and before January 1, 2018, the tax rate is reduced from 5% to 4%.9 The fading away Hall income tax is imposed only on individuals and other entities receiving interest from bonds and notes and dividends from stock.10 However, the tax will be “fully repealed for tax years beginning January 1, 2021.”11

3. One Percent Reduction of Sales Tax on Food

Effective July 1, 2017 the Act reduces the sales tax rate on food and food ingredients for human consumption from 5% to 4%.12 “Tennessee is one of only 13 states (of the 45 that have sales tax) to tax food at either the general or a reduced rate; in all other states, sales of food and food ingredients are exempt.”13

4. Motor Fuel Taxes Increase

Taxpayers should buckle up and get ready for potential higher gas prices as the IMPROVE Act increases the gasoline tax rate—effective July 1, 2017—from 20¢ per gallon to 24¢ per gallon.14 Taxpayers should expect increases in the gasoline tax rate for subsequent years in 2018 and 2019.15 Diesel fuel and all other fuel other than gasoline that is used to produce power for propelling motor vehicles, will see an increase in use tax from 17¢ per gallon to 21¢ per gallon on or after July 1, 2017 through June 30, 2018.16 Like gasoline, there will be increases in the rate in the subsequent years of 2018 and 2019. Lastly, the tax on liquid gas17 and natural gas18 is set to increase starting on July 1, 2017 through July 1, 2019.

5. Local Government Surcharges

Effective July 1, 2017, the Act authorizes local governments to levy a surcharge—if the underlying tax on such privileges is being collected at the time a transit improvement program is adopted in accordance with § 67-4-3206—on the following local privilege taxes:

  • Local option sales tax
  • Business tax
  • Motor vehicle tax
  • Local rental car tax
  • Tourist accommodation/hotel occupancy tax
  • Residential development tax19

However, this surcharge must be approved by a “majority of the number of registered voters of the local government voting in an election on the question of whether the surcharge shall be levied….”20 Furthermore, “any surcharge on the local option sales and use tax will apply only to the first $1,600 on the sale or use of any single article of personal property.”21 Also, this surcharge does not apply to:

  • Water sold to or used by manufacturers that is taxed at 1% under present law
  • Sales of tangible personal property to a common carrier for use outside Tennessee
  • Video programming services
  • Telecommunication services
  • Specified digital products
  • Sales of tangible personal property when obtained from any vending machine or device and taxed at the local rate of 2.25%22

6. Property Tax Benefit Programs

Elderly Low-Income Homeowners and Disabled Homeowners

Effective July 1, 2017, the Act increases the amount of the reimbursement for property tax relief for elderly low-income homeowners and disabled homeowners. Under present law, the reimbursement is paid on the first $23,500 of the full market value. The Act increases the reimbursement to be on the first $27,000 of the full market value and the $27,000 is increased annually to reflect inflation.23 The annual percentage changes must be no less than 0% and no more than 3%.”24

Disabled Veteran Homeowners

The Act also increases the amount of the reimbursement under the provisions for property tax relief for disabled veteran homeowners. Under present law, the reimbursement is paid on the first $100,000 of the full market value of the home. The Act changes this reimbursement amount to be on the first $175,000 of the full market value.25

To learn more about how this may impact your state tax filings, contact your tax advisor or one of the DHG SALT Team professionals listed below.

Jack Small | State & Local Tax | 404.681.8215 | Jack.Small@dhg.com

Jonathon Walker | State & Local Tax | 901.684.5647 | jonathon.walker@dhg.com


1 2017 Tenn. Laws Pub. Ch. 181 (H.B. 534) (IMPROVE Act).
2 This is known as the “51 percent rule” as defined by the Tennessee Supreme Court in Alley-Cassetty Coal Co. v. Johnson, No. M2003-02327-COAR3-CV, 2005 WL 729180, at *4 (Tenn.Ct.App. Mar. 29, 2005)(no perm. app. filed)(citing Tenn. Farmers’ Coop. v. State, 736 S.W.2d 87, 89 (Tenn.1987)).
3 2017 Tenn. Laws Pub. Ch. 181 (H.B. 534) (IMPROVE Act) § 28 amending TN ST § 67–4–2012 and § 29 amending TN ST § 67–4–2111.
4 Id.
5 Id.
6 2017 Tenn. Laws Pub. Ch. 181 (H.B. 534) (IMPROVE Act) § 28 amending TN St. § 67-4-2012(4).
7 Id.
8 T.C.A. § 67-4-2109(b)(1)(A).
9 2017 Tenn. Laws Pub. Ch. 181 (H.B. 534) (IMPROVE Act) § 13 amending TN St. § 67-2-102.
10 TN St. § 67-2-102.
11 TN Dept. of Rev. Notice # 17-09 “Phasing Out of Tax” http://www.tn.gov/assets/entities/revenue/attachments/income17-09.pdf.
12 2017 Tenn. Laws Pub. Ch. 181 (H.B. 534) (IMPROVE Act) § 30 amending TN St. § 67-6-228.
13 Gail Cole, “Tennessee Cuts Sales Tax on Groceries, Raises Tax on Gas” (May 3, 2017) at http://www.taxrates.com/blog/2017/05/03/tennesseecuts-sales-tax-groceries-raises-tax-gas/.
14 2017 Tenn. Laws Pub. Ch. 181 (H.B. 534) (IMPROVE Act) § 16 amending TN St. § 67-3-201.
15 2017 Tenn. Laws Pub. Ch. 181 (H.B. 534) (IMPROVE Act) § 16 amending TN St. § 67-3-201.
16 Id. § 17 amending TN St. § 67-3-202.
17 Id. § 25 amending TN St. § 67-3-1102.
18 Id. § 26 amending TN St. § 67-3-1113.
19 Id. § 27 amending Title 67, Chapter 4, by adding TN St. § 67-4-3202(a)(1)-(6).
20 Id. adding TN St. § 67-4-3202(b).
21 Id. adding TN St. § 67-4-3204.
22 Id.
23 Id. § 31 amending TN St. § 67-5-702(3)(A).
24 Id. amending TN St. § 67-5-703(B).
25 Id. § 37 amending TN St. § 67-5-704.