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June 5, 2017

Tennessee Adopts Single Sales Factor Apportionment Election for Manufacturers (article)

On April 26, 2017, Tennessee Governor Bill Haslam signed into law the Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy (IMPROVE) Act (HB 534 and SB 1221). The IMPROVE Act contains numerous provisions, most notably the adoption of a single-sales factor election for excise and franchise tax purposes applicable to Tennessee manufacturers, for tax years beginning on or after Jan. 1, 2017. According to the bill, taxpayers eligible to make the election are those whose principal business in Tennessee is manufacturing.  A company qualifies as having its principal business of manufacturing in Tennessee if more than 50 percent of the revenue derived from Tennessee activities, excluding passive income, is from fabricating or processing tangible personal property for resale and consumption off the premises.

To make the single-sales factor election, a taxpayer must notify the Tennessee Department of Revenue (Department) of the election, in writing, on its return for the taxable year to which the election applies. The election must remain in effect for a minimum of five tax years, and thereafter will continue unless it is revoked. A taxpayer may revoke the election after the minimum period by notifying the Department of the revocation, in writing, on its return for the first taxable year to which the revocation applies.

Lawmakers and other pundits have been touting this provision as a major boon to the manufacturing industry in Tennessee. However, some of these expectations should be tempered by the fact that Tennessee already requires the use of a three factor apportionment formula with a triple-weighted sales factor. As a result, the current Tennessee rules already apportion a taxpayer’s income disproportionately against the location of sales. Nevertheless, this legislation is likely to provide a significant tax benefit to Tennessee manufacturers, whose property and payroll is primarily in Tennessee while revenues are generated from a national market.

Questions

If you have any questions about the Tennessee law changes, please contact your CBIZ tax advisor or the CBIZ National Tax Office.

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