State and Local Tax Alert - May 2017

May 2017

Tennessee Enacts the "IMPROVE Act," Including Single Sales Factor Apportionment Election for Manufacturers and Other Tax Changes


On April 27, 2017, Tennessee enacted H.B. 534, the “Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy Act,” known as the “IMPROVE Act.”  Although the bulk of the legislation addresses fuels taxes and provides funding for 962 road and other highway infrastructure projects in all of Tennessee’s 95 counties, the IMPROVE Act also provides a single sales factor apportionment election for taxpayers engaged in manufacturing in Tennessee.  In addition, among other changes, the IMPROVE Act reduces the sales tax on food (from five percent to 4.5 percent) and accelerates the phase-out of the Tennessee “Hall income tax.” 


Single Sales Factor Apportionment Election for Manufacturers
During Tennessee’s 2015 Legislative session and as part of the Revenue Modernization Act (“RMA”), the general apportionment formula for franchise and excise tax purposes was amended to triple-weight the sales factor for all taxpayers not subject to special apportionment formulas (such as financial institutions and transportation companies).  Now with H.B. 534, taxpayers whose “principal business in Tennessee is manufacturing” are allowed to elect to apportion their net earnings (for excise tax purposes) and net worth (for franchise tax purposes) using a single sales factor formula.  The election is effective for taxable years beginning on or after January 1, 2017.
A taxpayer whose principal business in Tennessee is manufacturing qualifies to make the election if more than 50 percent of its revenue derived from activities in Tennessee is fabricating or processing tangible personal property for resale and consumption off the premises.  The election is made on the Tennessee franchise and excise tax return (Form FAE 170), and is binding for a period of five taxable years.  The election renews automatically unless the taxpayer revokes the election in writing on its FAE 170 filed for the taxable year that the revocation is to be effective.  If the election is revoked, the taxpayer cannot re-elect the single sales factor apportionment formula for a period of five taxable years.   
Other Tennessee Tax Changes
The IMPROVE Act also adopts the following Tennessee tax changes:
  • Motor fuel tax rates are increased effective July 1, 2017.  In addition, counties with populations over 112,000 and cities with populations over 165,000 (currently Chattanooga, Knoxville, Memphis, and Nashville) are authorized to impose a tax surcharge on local option sales tax, business tax, hotel occupancy tax, and certain other local taxes at the time a transit improvement plan is adopted. 
  • Effective July 1, 2017, the sales tax on food is reduced from 5 percent to 4.5 percent.
  • The IMPROVE Act accelerates the phase-out of Tennessee’s “Hall income tax” (an income tax on interest and dividend income).  The RMA enacted in 2015 stated an intent to phase-out the Hall income tax; the IMPROVE Act places the phase-out into effect.  For 2017, the Hall income tax rate will be reduced to four percent, to three percent for 2018, to two percent for 2019, to one percent for 2020, and completely phased out for the 2021 taxable year.

BDO Insights

  • With the single sales factor election for Tennessee manufacturers, the state becomes the latest of the now-majority of states that require or provide an election to use the single sales factor apportionment formula. 
  • Taxpayers affected by Tennessee’s provision of a single sales factor apportionment formula election for manufacturers should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.

For more information, please contact one of the following regional practice leaders:

West:   Atlantic:
Rocky Cummings
Tax Partner

  Jeremy Migliara
Tax Managing Director

Paul McGovern
Tax Managing Director
  Jonathan Liss
Tax Managing Director

Northeast:   Central:
Janet Bernier 
Tax Partner

  Angela Acosta
Tax Managing Director

Matthew Dyment
Tax Principal

  Nick Boegel
Tax Managing Director


  Joe Carr
Tax Principal

Scott Smith
Tax Managing Director
  Mariano Sori
Tax Partner

Tony Manners
Tax Managing Director
  Richard Spengler
Tax Managing Director



Gene Heatly
Tax Managing Director

Tom Smith
Tax Partner