Previously, Tennessee used a fraction-based apportionment method for its excise tax. The numerator of the fraction included the property factor, the payroll factor, and three times the receipts factor. However, with the implementation of H.B. 323, Tennessee is phasing in a single sales factor approach.
Here are the key changes:
- Starting from tax years ending on or after December 31, 2023, the numerator of the fraction will include the property factor, the payroll factor, and five times the receipts factor. The denominator will be seven.
- From tax years ending on or after December 31, 2024, the numerator will include the property factor, the payroll factor, and 11 times the receipts factor. The denominator will be 13.
- For tax years ending on or after December 31, 2025, net earnings will be apportioned solely based on the receipts factor.
Taxpayers have the option to elect the previous apportionment formula used before December 31, 2023, but only if it results in a higher apportionment factor and if they have positive net earnings for that tax year. This election can be made annually.