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Tennessee Legislature begins discussion of $1.2B business tax refund, repeal

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(The Center Square) – An estimated $1.2 billion franchise tax refund to businesses is scheduled to be voted on for the first time in the Tennessee Legislature next week after the Senate Finance Ways and Means Subcommittee heard details of the proposal.

The refund could cost the state up to $1.5 billion. The repeal will lead to $410 million less in annual franchise taxes.

The total cost of Senate Bill 2103 would depend on how many businesses apply for the refund after the state would repeal the property portion of the franchise tax and then refund the amount paid by businesses from 2020-2023.

Tennessee Department of Revenue Commissioner David Gerregano said that Tennessee is the only state that he could find that taxes business property in the state and the fund was setup to help avoid litigation if the businesses challenged the constitutionality of the tax.

The businesses would have to have reported the property by Jan. 1, 2021 and file for a refund between May 1 and Feb. 3, 2025, according to a future amendment described by Sen. Jack Johnson, R-Franklin.

“It ensures that tax policy is established through the legislative process rather than the judicial process,” Gerregano said.

Gerregano said the current tax discourages businesses that operate in multiple states from holding property in Tennessee.

A report last year from Beacon Center’s Entrepreneurship & Innovation Council said that Tennessee was one of 16 states with a franchise tax and had the fourth highest rate in the nation for a tax that is levied whether or not a company makes a profit.

Tennessee does not cap its franchise tax and Beacon said the tax is figured by the “greater of the company’s net worth or the book value of real or tangible personal property owned or used in the state.”

“This bill would be the legislature making a tax policy change by removing the property measure,” Gerregano said.

Sen. Jeff Yarbro, D-Nashville, said that Tennessee has likely never refunded a franchise tax before and he is unaware of any court in any state forcing a state to pay a refund to businesses if a tax rule is later identified as unconstitutional.

“I think everyone understands the need to reasonably cut off any risk here,” Yarbro said. “… but the practice in this, sort of historically, has been to afford states very wide flexibility in how they shape these remedies.”