United States: Tennessee Increases Competitiveness With New And Expanded Tax Credits

Effective July 1, 2015, Tennessee has enacted several significant changes to available credit programs while adding a new tax credit. H.B. 291 eliminates existing, underutilized tax credits and expands the scope of the job creation tax credit, and the sales and use tax exemption for industrial machinery.1 H.B. 1026 enacts a new community resurgence job tax credit for businesses located in high-poverty areas.2 Further, H.B. 291 adds periodic oversight of the state tax credit programs.3

Elimination of Underutilized Credits

To increase Tennessee's economic competitiveness, the legislation eliminates the following tax credits that were considered too narrow or underutilized:

1. Call centers owned by partnerships;4

2. Mercury elimination efforts by manufacturers;5

3. Airline headquarters;6

4. Qualified headquarters relocation expenses;7

5. Establishing international, national, or regional headquarters in Tennessee;8

6. Green energy suppliers;9

7. Medical trade center relocation expenses;10

8. Advertising center expenses;11 and

9. Emerging industries or cultural attractions.12

Past applicants for these specific credits are still eligible for consideration if the business timely filed a business plan with the state Department of Economic and Community Development prior to the expiration of the credits on July 1, 2015.13

Expansion of Existing Incentives

Under existing law, Tennessee provides a job creation tax credit that may be taken against the franchise and excise taxes equal to $4,500 for each qualified job created during an investment period.14 The project must include a capital investment of $500,000 or more as well as the creation of 25 jobs to qualify.15 H.B. 291 expands eligibility for the job creation tax credit to cover the creation or expansion of back office jobs.16 The job creation tax credit previously only covered companies that made the required capital investment necessary to create or expand manufacturing, warehousing, distribution, processing tangible personal property, research and development, computer services, call centers, headquarter facilities, or convention or trade show facilities.17

H.B. 291 also broadens the sales and use tax exemption for industrial machinery, which now includes machinery and associated materials used for the purposes of research and development.18 The sales and use tax exemption previously covered industrial machinery equipment only for companies engaged in manufacturing, warehousing, distribution, and data centers.19 Companies purchasing industrial machinery equipment to be used in research and development will now be eligible for the sales and use tax exemption.

Community Resurgence Job Tax Credit Enacted

H.B. 1026 enacts the community resurgence job tax credit (CRJTC), which offers companies a $2,500 credit against franchise and excise tax liability for each job created in high-poverty areas.20 To be eligible for the credit, a company must create at least 10 fulltime qualifying jobs within a three-year period from the effective date of the job creation plan.21 Also, the company must be a new or existing business located in a high-poverty area.22 No capital investment is required.

For purposes of the CRJTC, a "full-time job" is a permanent employment position for at least 12 consecutive months where the employee worked at least 37.5 hours per week.23 Further, a "qualifying job" is one with wages equal to, or greater than, the state's average.24 The job must be newly created in the state for at least 90 days prior to being filled by the taxpayer and must not previously exist in Tennessee as a job of the taxpayer or of another business entity.25 A "high-poverty area" is a census tract with a poverty level in excess of 30 percent, according to the American Community Survey three-year estimates in 2013.26

Qualified companies must file a business plan with the Tennessee Department of Revenue describing all of the following:

  • The type of business;
  • Number of jobs to be created;
  • Expected dates the jobs will be filled; and
  • The effective date of the plan.27

After review and approval of the business plan by the Department of Revenue, the business may claim the awarded credits on its franchise and excise tax return. The credit is limited to 50 percent of the combined franchise and excise tax liability before any credit is taken.28 Any unused credit may be carried forward for 15 years.29 The program credit is limited to $12.5 million annually for all taxpayers.30

The Department of Revenue has not yet released guidance with specific details on how taxpayers should apply for the CRJTC.

Periodic Oversight of Credit Programs

H.B. 291 includes a new requirement for the regular review of Tennessee's various business incentive credits that may be taken against excise and franchise taxes as well as the qualified headquarters facility tax credit that may be taken against sales and use taxes.31 The Department of Economic and Community Development and the Department of Revenue will collaborate in routine evaluation of the tax credit programs for the previous four fiscal years. The two departments will prepare a report evaluating the following:

  • The purpose of each credit;
  • Forgone revenue to the state as a result of the credit;
  • Benefits provided to the state as a result of the credit; and
  • The estimated indirect economic impact of the credit.

The report must be submitted to the governor and legislature and include a recommendation to modify, discontinue or take no action with respect to each credit. The first report is due by January 15, 2017. After the first report, the review process will then be required every four years thereafter.32

Commentary

Like many states realizing the need to improve the attractiveness of their tax incentive programs, Tennessee has attempted to improve the state's economic competitiveness. This legislation is intended to encourage the creation of jobs and the investment of capital in Tennessee. Through the elimination of underutilized tax credits and the creation of new and expansion of existing tax incentives, Tennessee's tax credits will benefit more businesses that were previously excluded. It is important to note that the benefits associated with H.B. 291 are available for all businesses within the state of Tennessee and are available "as of right." However, due to the fact that the CRJTC requires filing a business plan for review and a state limit is imposed on all taxpayers, the CRJTC created under H.B. 1026 is expected to be awarded like a discretionary incentive.

Footnotes

1 Ch. 504 (H.B. 291), Laws 2015.

2 Ch. 521 (H.B. 1026), Laws 2015. Both laws were approved by the governor on May 20, 2015.

3 Ch. 504 (H.B. 291), Laws 2015.

4 TENN. CODE ANN. §§ 67-4-2009(3)(G); 67-4-2109(b)(3)(H).

5 TENN. CODE ANN. § 67-4-2009(3)(J).

6 TENN. CODE ANN. § 67-4-2109(b)(3)(J).

7 TENN. CODE ANN. §§ 67-4-2109(g); 67-6-224(b)(10).

8 TENN. CODE ANN. § 67-4-2109(i).

9 TENN. CODE ANN. § 67-4-2109(m).

10 TENN. CODE ANN. § 67-4-2109(n).

11 TENN. CODE ANN. § 67-4-2109(o).

12 TENN. CODE ANN. § 67-6-232.

13 H.B. 291, §§ 4, 5, 9-16, 21.

14 TENN. CODE ANN. § 67-4-2109(b).

15 TENN. CODE ANN. § 67-4-2109(a)(7), (b)(1)(C).

16 TENN. CODE ANN. § 67-4-2109(a)(5)(A).

17 Id.

18 H.B. 291, § 17, indicates that this new subsection will be codified as TENN. CODE ANN. § 67-6- 102(44)(N), but there are different versions of this statute. This new subsection eventually may be codified as a different statutory subsection.

19 TENN. CODE ANN. § 67-6-102(44).

20 TENN. CODE ANN. § 67-4-2109(q).

21 TENN. CODE ANN. § 67-4-2109(q)(1)(F), (4).

22 TENN. CODE ANN. § 67-4-2109(q)(1)(E).

23 TENN. CODE ANN. § 67-4-2109(q)(1)(C).

24 TENN. CODE ANN. § 67-4-2109(q)(1)(F).

25 TENN. CODE ANN. § 67-4-2109(q)(1)(F).

26 TENN. CODE ANN. § 67-4-2109(q)(1)(D). In the future, this determination must be made every 10 years.

27 TENN. CODE ANN. § 67-4-2109(q)(3).

28 TENN. CODE ANN. § 67-4-2109(q)(5).

29 Id.

30 TENN. CODE ANN. § 67-4-2109(q)(7).

31 H.B. 291, § 1. This provision applies to credits under TENN. CODE ANN. §§ 67-4-2009; 67-4-2109; 67-6-224.

32 Id.

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