On April 26, 2017, the Governor of Tennessee enacted Public Chapter 181, which provides for special apportionment rules for manufacturers for both net worth and excise (income) tax purposes. On May 22, 2017, the Tennessee Department of Revenue issued a notice discussing the legislation. The new law provides that a manufacturer may elect to apportion net earnings and net worth on a single sales factor basis for years beginning on or after January 1, 2017. The election must be made on the taxpayer’s original filing of its net worth and excise tax return.
A manufacturer is defined as a taxpayer whose revenue from its activities in Tennessee is 50% or more from fabricating or processing tangible personal property for resale and consumption off the premises. For purposes of this computation, passive income is excluded from the test. If a taxpayer chooses to elect this special apportionment formula, it will be bound by the election for a minimum of five years. If a taxpayer chooses to revoke its election after the five years has passed, it must wait an additional five years before it can make another election.
If the taxpayer is part of an affiliated group that is bound by a consolidated net worth election, the election only applies to the taxpayer making the election. It does not apply to the entire affiliated group. For those members that make the election to file on a single sales factor basis, the apportionment formula would be the taxpayer’s total sales in Tennessee over the affiliated group’s total sales everywhere. For those members that do not qualify for the election or who choose not to make the election, the apportionment formula would remain the same, total Tennessee payroll, property and sales (including the payroll and property of the manufacturer) over the total payroll, property and sales for the entire affiliated group.
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