Tax refund process and related points arising from a constitutional question with the franchise tax

Both legislative houses passed a compromise version of Senate Bill 1893/2103 on April 25, 2024 (the bill). Provided Governor Lee signs the bill into law (which is expected to happen), the following is our understanding of the reimbursement process and some related points based on the provisions of the bill and comments made by the commissioner of income in previous interviews:

  • Possibility of return โ€“ According to the bill, taxpayers will be able to get a franchise tax refund if the tax was reported to the Department on a franchise and excise tax return filed on or after January 1, 2021 , covering a tax period that ended on or after March 31. , 2020, covering essentially fiscal years 2020, 2021, 2022 and 2023, where the franchise tax was calculated based on Schedule G (the alternative minimum measure that uses the values โ€‹โ€‹of the real and tangible property of taxpayer) and this calculation exceeds the franchise tax that would otherwise have been paid if the taxpayer had used Schedule F (which calculates the tax using the taxpayer’s net worth).
  • Fiscal year 2023 โ€“ For 2023, the Commissioner has stated that taxpayers must continue to file their F&E tax returns for that year using the higher tax base between Schedule F and G, and pay the resulting tax to the Department for the year. This applies to returns that have been extended as well as returns that were submitted before the due date. Then, assuming that Schedule G is the highest taxable basis in the 2023 return filed, the taxpayer must file an amended return using only Schedule F and then submit the application form to the Department of special return, as explained in more detail below.
  • Amended returns are required โ€“ Before a taxpayer can submit the special refund request form to the Department, the commissioner has previously noted that the taxpayer will have to amend the F&E tax return for each of the four years in which the taxpayer will request the refund of franchise tax. The amended return will calculate the franchise tax using Schedule F only.
  • Chronological presentation of amended statements โ€“ According to the Commissioner, the Department wants amended F&E returns filed in chronological order with the earliest year’s amended return filed first.
  • Amend returns for affected years only – In the event that a taxpayer paid franchise tax based on Schedule G for only a few of those four years, the taxpayer would amend the F&E tax returns for those specific years only using Schedule F.
  • Waiting period after amending a statement โ€“ Once the taxpayer has submitted the amended Declaration, the Commissioner has indicated that the taxpayer must wait at least one night before submitting the corresponding special refund request so that the Department’s computer system can process the amended Declaration.
  • Special return request form โ€“ A refund request must be submitted on a special refund request form prescribed by the Department exclusively for franchise tax refund requests under the Bill and must not include a refund claim on any other basis. The bill provides that this special refund request form must include a waiver by the taxpayer of any claim or right to file a lawsuit alleging that the franchise tax is unconstitutional upon failure of the test of internal consistency.
  • Attachment required for special return request โ€“ The special refund request form must be submitted to the Department together with the debt report. Additionally, and at the option of the taxpayer, a balance sheet can be attached to the Special Refund Claim in which the net assets of that year are calculated. The Commissioner has acknowledged that although the Department already has Schedule F that was submitted with the return, a separate balance sheet will be useful with the Special Reimbursement Application form to reconfirm the calculation of the net value of the Schedule F on which franchise tax applies. is being computed in support of the requested refund. If a balance sheet is not attached to the special refund request form, the Department may request it as part of the refund review process. In addition, if a balance sheet is not provided with the special refund request, the review of this claim could be slowed down.
  • Notices from the Department โ€“ The Department has a list of all taxpayers who filed F&E tax returns for the years in which the franchise tax was based on Schedule G, and the Department intends to send an electronic notice and perhaps also a paper notice to taxpayers alerting them to the fact that amended returns must be filed first and then the special refund application as referenced above must be filed. The Commissioner has also indicated that a notice may also be included in the taxpayer’s online account setting out this information.
  • Limited period to file a special return claim โ€“ The general return procedures according to Tenn. Code Ann. Section 67-1-1802 would not apply to this franchise tax refund initiative, including the normal time periods for filing refund requests would not apply. As proposed for this franchise tax refund initiative, taxpayers would have from May 15, 2024 through November 30, 2024 to file a special refund request. We understand that the purpose of this relatively short period of time is for the State to quickly know the external dollar amount that it is exposed to being reimbursed.
  • When a “Claim” is filed. โ€“ Once an amended return has been filed for a given year and, subsequently, the corresponding special return application form has also been timely filed for that year, the commissioner has declared that the taxpayer has complied the requirements for filing a refund claim although the special Refund claim has some minor deficiencies, such as not including the debt report. The Commissioner has noted that the Department intends to contact taxpayers in these situations to obtain the necessary information that was omitted from the special refund request form, but that the Department does not intend to in these situations to challenge the timely presentation of the claim. .
  • Tax Credits โ€“ Where the taxpayer used tax credits to pay part of the tax liability on the F&E return, the Commissioner noted that unused credits on the amended return as a result of the overall decrease in tax liability will be reinstated and will be available for future use. subject to standard credit transfer provisions.
  • Taxpayer disclosure โ€“ As a condition for the issuance of the franchise tax refund, the name of each taxpayer who has issued the refund and the “applicable range” corresponding to the total amount refunded will be published on the Department’s website to the taxpayer, “only during the period of May”. 31, 2025 through June 30, 2025″. The applicable ranges are: (i) $750 or less; (ii) more than $750 but less than or equal to $10,000; and (iii) more than $10,000. A further, if the taxpayer has filed for a refund but has not been issued a refund by May 31, 2025, the taxpayer’s name will be published with the interval being omitted and designated as “pending “.
  • No legal fees โ€“ Attorney fees cannot be added to the refund amount due.
  • interest โ€“ No interest will be added to any refund paid within 90 days of submitting a special refund request with proper proof. Any interest payable will be calculated based on the short-term federal rate plus 0.5 percent (currently 5.5 percent).
  • Choice to continue using Annex G โ€“ Separately, the bill also provides that if the application of the provisions of the bill results in a taxable base lower than the minimum tax measure in accordance with Code Ann. ยง 67-4-2108, as this section existed before the effective date of the provisions of the bill, and as it applied to taxpayers ending before December 31, 2023, then a taxpayer may elect annually to use the minimum taxable amount in ยง 67-4-2108. 67-4-2108 as applied to taxable periods ending before December 31, 2023; provided, however, that the election must result in a higher tax for the taxable period under ยง 67-4-2106, and the taxpayer waives any claim that the minimum tax base under ยง 67-4-2108 is unconstitutional in breach the internal regulations. consistency test.
  • litigation โ€“ A taxpayer desiring to file suit challenging the denial or consideration of denial of a claim for refund pursuant to the provisions of this bill shall file such suit in the Court of Chancery of Sumner County; and the complaint must be signed by the taxpayer under penalty of perjury, stating that the taxpayer or the filer believes that the Department’s denial of the refund being challenged is unjust, illegal, or incorrect and that the claim is brought good faith In addition, and notwithstanding any other law to the contrary, a suit containing a claim or allegation that the franchise tax under chapter 4, part 21 of title 67, or any provision of that part, including ยง 67-4-2108 as this section. existed before the effective date of the provisions of this bill, is unconstitutional by not having to present the internal consistency test on or before November 30, 2024.
  • Fiscal year 2024 and later โ€“ The bill removes the alternative minimum measure for the franchise tax that will take effect once the bill becomes law, “and applies to fiscal years ending on or after January 1, 2024.”

Again, some of the above is based on the commissioner’s comments. The actual interpretation and administration of the bill, once enacted into law, could differ in certain respects from this commentary.. Also, this alert does not cover every provision of the bill, so be aware that other provisions of the bill may also affect you.. We will endeavor to keep you informed as material developments occur.

Our attorneys and our dedicated state public policy advocacy group will monitor developments and can provide assistance to clients who wish to participate or be heard as part of the legislative process.

In addition, please feel free to contact Carl E. Hartley, Lang Wiseman, William HD Fones, Jr., Steven K. Wood, Jacob D. Baggett, or your Baker Donelson attorney, to address particular issues of your facts and circumstances.

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