Business Climate

Taxes

• Excise Tax
• Franchise Tax
• Sales and Use Tax
• Personal Income Tax
• Unemployment Compensation Taxes
• Property Tax

Excise Tax

Tennessee levies an excise tax of 6.5 percent on net earnings of corporations, foreign and domestic, arising from business done within the state, or on state apportionment of total earnings of interstate corporations.

All taxes are deductible in determining the state excise tax base, except the Tennessee excise tax and income taxes paid to the federal government or foreign governments.

Special features of the excise tax include:

• Receive excise tax credit equal to one percent of:
  • Purchase, installation and/or repair of qualified industrial machinery
  • Purchase of telephone equipment and telephone units, computers, software and any peripheral devices purchased to reach the required capital investment to qualify for the Jobs Tax Credit
  • Warehouse and distribution
• Total tax credit for one year cannot exceed 50 percent of the company’s tax liability. Companies can carry over excess credit for 15 years.
• Net operative loss may carry forward 15 years.
• All capital losses may be claimed the year they are incurred.
• All taxes are deductible in determining the state excise tax base.
• Insurance companies may deduct gross premium taxes from the sum of franchise and excise taxes.

Franchise Tax

The Tennessee franchise tax is an asset-based tax applying to foreign and domestic corporations doing business in the state (including business trusts, regulated investment companies, limited liability companies and limited partnerships).

Exempt organizations include nonprofit, welfare and “industrial development” corporations, building and loan associations, production credit associations, credit unions and investment companies.

Tax basis is outstanding stock, surplus and undivided profits, apportioned to the state at the close of the last fiscal year.

The franchise tax is computed in one of two ways, whichever results in a higher tax:

1. The equity method, which includes the taxpayer’s net worth
2. The book value method, which includes the book value of all real and tangible property owned or used in Tennessee

Special features of the franchise tax include:

• Property erected in Tennessee by the corporation in compliance with air, water, or hazardous waste pollution regulations is exempt.
• Goodwill carried as an asset may be written off completely for tax purposes due to change of business or utility of the goodwill.
• While Tennessee treats S corporations as regular C-type corporations for tax purposes; a small issue of common stock can preserve a low base for calculating the franchise tax
• A jobs tax credits $2,000 for each new full-time job created during a fiscal year. Additional details are listed in the “Incentives” section.
• Purchases of industrial machinery allow corporations a 1 percent credit against the tax.
• Up to $25,000 in credit against the tax for development of childcare facilities for employees of a business.
• Insurance companies may deduct gross premium taxes from the sum of franchise and excise taxes.
• The sales factor is double-weighted for the excise apportionment formula (property, payroll and sales).

No franchise tax on:

• Finished goods inventory more than $30 million
• Property under construction, not being utilized by the company
• Pollution control equipment
• Property rented from an industrial development board may be capitalized on the company books

Sales and Use Tax

The sales tax applies to any person or company that manufactures, distributes or retails tangible personal property within the state. Many services are also taxable.

Specific areas include:

• Creation of custom computer software for business
• Leases or rentals of tangible personal property unless the owner provides a crew to operate the leased item
• Fabrication of items for consumers who furnish raw materials
• Mail order sales
• Self produced property (raw materials) severed, manufactured or compounded from the earth

The basis used to determine the tax rate is the price of the tangible property sold at retail. Any business liable for collection and payment of the sales and use tax is required to register with the Tennessee Department of Revenue. The sales and use tax rate for Rutherford County is a total of 9.75 percent (7.00 percent state plus 2.75 percent local option).

No sales tax is paid on the following:

• Purchases, installation and repairs of qualified industrial machinery
• Raw materials for processing
• Air and water pollution equipment
• Any materials that become a component part of the finished product
• Containers, labels and packaging materials if they are sold with or accompany the product at no additional charge
• Reduced sales tax rate (1.5%) for manufacturers’ use of energy fuel and water. Tax exempt if used directly in the manufacturing.
• A 6.5% credit for state sales and use taxes paid on building materials, machinery and equipment for new or expanded international, national, or regional corporate headquarters making a minimum $50 million investment in Tennessee.
• Refund on taxes paid on goods and services by motion picture production companies filming or producing in Tennessee. Requires expenditures of $500,000.
• Purchases of material handling and racking equipment by a distribution or warehouse facility is exempt. To qualify, the taxpayer must invest in building and equipment in excess of $10 million over a period of 3 years or less.

Many 501(c) organizations are exempted from the sales tax.

Sales tax items with discounted rates for manufacturers:

Personal Income Tax

Tennessee does not tax earned income. Rutherford County also benefits from one of the lowest average household tax burdens in the country. A 6 percent tax is levied on dividends and interest received by individuals or other entities, including partnerships and trusts. The first $1,250 on an individual tax return and $2,500 on a joint return are exempt from the tax.

Unemployment Compensation Taxes

Unemployment insurance provides benefits to unemployed workers who have lost their jobs through no fault of their own. The Tennessee Department of Employment Security administers the state insurance program.

All employers are subject to the tax except self-employed persons who are also a sole employee, sole proprietorships without employees or general partners who are not liable for the premiums.

Tax is paid by employers only and cannot be deducted from employee’s wages. The Tennessee tax portion serves as a credit against a portion of any federal taxes owed for unemployment insurance.

Tax Rates:

• State tax rate is 2.7 percent for most new employers to Tennessee.
• After three full calendar years, the employer is evaluated and a tax rate is assigned. Employer’s history of taxes and benefits paid to lay-off determines the tax rate.
  • Minimum rate: 0%
  • Maximum rate: 10%
• Minimum Tax Rate 0.15 percent – 0 percent with a reserved ratio of 20 percent or more
• Estimated average tax rate is 1.7 percent of total wages
• Tax paid is based on first $7,000 of wages of each employee. Taxable wages include: salaries, commissions, bonuses, tips, vacation and severance pay. Non-taxable payments include: payments made by employer for insurance, retirement, or annuities.
• Unemployment compensation taxes are paid on a calendar-year basis regardless of the employer’s fiscal year. Reporting - New employers must file an initial report to determine their taxpaying status and receive their Tennessee account number.

Property Tax

• Rutherford County property tax rate is $2.44 per $100 assessment.
• The City of Murfreesboro tax rate is $1.41 per $100 assessment.
• The Town of Smyrna is $.72 per $100 assessment.
• The City of La Vergne is $.50 per $100 assessment.
• The City of Eagleville is $.72 per $100 assessment.
• County personal property tax is 30 percent of appraised value.
• Commercial taxes are 40 percent of appraised value.
• Residential taxes are 25 percent of appraised value.
• Local sales tax is 2.75 percent