The ImpACT of the IMPROVE Act

table of contents

Introduction ...... 1 Decreases ...... 2 Single Sales Factor Apportionment for Manufacturers ...... 2 Consolidated Net Worth Calculations ...... 3 Hall ...... 3 Sales Tax on Food ...... 4 Relief ...... 4 Tax Increases ...... 5 Vehicle Registration Fees ...... 5 Electric Vehicle Registration Fee ...... 5 Gas and Fuel ...... 6 Gas Tax ...... 6 Diesel Tax ...... 7 Liquified Gas and Compressed Natural Gas ...... 7 Floorstock Tax – Due August 25th ...... 8 Intent of General Assembly as it Relates to Gas Tax Increases ...... 9 Local Option Transit Surcharges ...... 10 Special Provisions for Local Option Sales Tax ...... 11 Revenue from the Local Option Transit Surcharge ...... 12 Conclusion ...... 13 Tax Services ...... 14

Introduction introduction

On April 26, 2017, Governor Haslem signed the IMPROVE Act (House Bill 534) into law.1 The Act’s official name is "Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy (IMPROVE) Act" or the "2017 Tax Cut Act.” The Act or legislation is also known as Public Chapter 181 in the Tennessee 110Th General Assembly.2

The Act is publicized as the largest tax cut in Tennessee history, but it’s purpose is to raise taxes to fund transportation and road projects. The Act increases gas taxes and vehicle registration fees while simultaneously provides tax relief to Tennessee manufacturers, phases-out the Hall Income Tax, decreases the sales tax on food, and provides property tax relief to the elderly and disabled veterans.

The following summary divides the changes into tax decreases and tax increases.

1 http://wapp.capitol.tn.gov/apps/BillInfo/default.aspx?BillNumber=HB0534&ga=110. 2 http://publications.tnsosfiles.com/acts/110/pub/pc0181.pdf.

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tax decreases

Tax Decreases

Single Sales Factor Apportionment for Manufacturers3 For tax years beginning on or after January 1, 2017, businesses who are conducting manufacturing operations in Tennessee and doing business in other states may elect to apportion their net earnings and net worth to Tennessee based on a single sales factor instead of the standard three factor (property, payroll and triple-weighted sales) apportionment factor.

To qualify for the single sales factor option, 50% of a company’s revenue from its activities in Tennessee must be from fabricating or processing tangible personal property for resale and consumption off the premises.

INSIGHT: Passive income is not included in the determination of the 50% test. Passive income includes income, interest income, income from the sale of securities, and income from the licensing or sale of patents or other intellectual property.

The election to apportion income using a single sales factor must be made on an original franchise and excise tax return for the tax year the election first applies. Once made, the election will remain in effect for a minimum of five years. After five years, a taxpayer may revoke the election. Once revoked, the taxpayer may not make a new election until five years have passed since revocation.

INSIGHT: The single sales factor apportionment election is intended to encourage companies to base manufacturing operations in Tennessee through the investment of property and employees. When making these investments, manufacturers able to make the single sales factor election will not face higher Tennessee income tax bills because property and payroll will not be included in the apportionment factor. Current Tennessee manufacturers with large amounts of property and payroll in Tennessee who sell their products in multiple states should pay less Tennessee income tax starting in 2017 by simply making the election.

3 TN Sales and Use Tax Notice #17‐11, April 2017.

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tax decreases cont.

Consolidated Net Worth Calculations4 If a manufacturer is part of an affiliated group filing a consolidated net worth calculation, the manufacturer will be required to apportion the consolidated net worth by multiplying the group’s consolidated net worth by a ratio of the taxpayer’s total sales in Tennessee divided by the affiliated group’s total sales everywhere.

INSIGHT: The single sales factor election only applies to the manufacturer making the election, and not the entire affiliated group. Affiliates that are not manufacturers, or affiliates that are manufacturers but have not made a single sales factor election, will continue to use the same apportionment method they have historically used.

Manufacturers who qualify to make the single sales factor apportionment election, should pay less Tennessee net worth tax. Hall Income Tax5 The Act includes a plan to phase out the Hall income tax over the next five years by reducing the 5 percent tax by 1 percent each year until the tax is eliminated. The applicable tax rate for each year is as follows:

 4% for tax years beginning January 1, 2017  3% for tax years beginning January 1, 2018  2% for tax years beginning January 1, 2019  1% for tax years beginning January 1, 2020  Repealed for tax years beginning January 1, 2021

INSIGHT: The Hall income tax is imposed only on individuals and other entities receiving interest from bonds and notes and from stock. It was enacted in 1929 and was originally called the Hall income tax for the senator who sponsored the legislation. There is no on earned income. The phase-out of the Hall income tax will officially make Tennessee a ‘no individual income tax state.’

4 TN Sales and Use Tax Notice #17‐11, April 2017. 5 TN Sales and Use Tax Notice #17‐09, April 2017.

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tax decreases cont.

Sales Tax on Food6 The Act reduces the state sales tax rate for food and food ingredients sold at retail from 5 percent to 4 percent beginning July 1, 2017. The applicable local sales and use tax rate (up to 2.75%, depending on the locality).

Food and food ingredients means substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value.

Food and food ingredients does not include alcoholic beverages, tobacco, candy, dietary supplements or prepared food.

INSIGHT: Prepared food, dietary supplements, candy, alcoholic beverages and tobacco continue to be subject to the general state sales and use tax rate of 7%, plus the applicable local tax rate. Property Tax Relief The Act increases the amount of the reimbursement for property tax relief for elderly low- income homeowners and disabled homeowners. Under present law, the reimbursement is paid on the first $23,500 of the full market value. The Act increases the reimbursement to be on the first $27,000 of the full market value. The Act also provides for this amount to be increased annually to reflect inflation beginning in tax year 2018. The annual percentage changes must be no less than zero percent and no more than three percent.

The Act also increases the amount of the reimbursement for property tax relief for disabled veteran homeowners. Under present law, the reimbursement is paid on the first $100,000 of the full market value of the home. The Act changes this reimbursement amount to be on the first $175,000 of the full market value.

6 TN Sales and Use Tax Notice #17‐07, April 2017.

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tax increases

Tax Increases

Vehicle Registration Fees7 The Act increases motor vehicle registrations fees for a vehicle in Tennessee beginning July 1, 2017 as follows:

 The registration fee for passenger motor vehicles increases by $5  The registration fee for commercial motor vehicles operating for hire (buses, taxis) and transporting passengers increases by $10  The registration fee for commercial and freight motor vehicles (semis, tractor trailers) increases by $20

Electric Vehicle Registration Fee The Act creates a new registration fee of $100 for electric vehicles beginning July 1, 2017. This fee is in addition to the standard registration fee.

INSIGHT: "Electric vehicle" means a passenger or commercial motor vehicle with an electric motor as its sole means of propulsion; provided, however, that "electric vehicle" does not include a "low speed vehicle" or a "medium speed vehicle."

7 TN Sales and Use Tax Notice #17‐10, April 2017.

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tax increases cont.

Gas and Fuel Taxes8 Gas Tax The Act increases the state’s tax on gasoline by six cents over the next three years.

 From $0.20 to $0.24 from July 1, 2017 to June 30, 2018  From $0.24 to $0.25 from July 1, 2018 to June 30, 2019  From $0.25 to $0.26 from July 1, 2019 and after

The revenue from the gas tax increase is allocated as follows:

 25.4% to counties  12.7% to municipalities  61.9% to the state highway fund

A county will be eligible to receive revenue only if it appropriates and allocates funds for road purposes from local revenue sources in an amount not less than the average of the five preceding fiscal years. issues and federal revenue sharing proceeds are excluded from the five-year average computation. If a county fails after July 1, 2017 to do so, then the amount of revenues that would otherwise be allocated to the county will be reduced by the amount of the decrease below the average amount. The amount of funds not allocated to the county because of the decrease will be allocated to the state highway fund.

8 TN Sales and Use Tax Notice #17‐08, April 2017.

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tax increases cont.

Diesel Tax The Act increases the state’s tax on diesel fuel by 10 cents over the next three years.

 From $0.17 to $0.21 from July 1, 2017 to June 30, 2018  From $0.21 to $0.24 from July 1, 2018 to June 30, 2019  From $0.24 to $0.27 from July 1, 2019 and after

INSIGHT: The rate of tax for indelibly dyed diesel fuel used by a commercial carrier to produce power for a means of transportation will remain at 17 cents per gallon.

The revenue from the increase in the diesel tax is allocated as follows:

 17.5% to counties  8.8% to municipalities  73.7% to the state highway fund

Liquified Gas and Compressed Natural Gas The Act increases the tax on liquified gas by 8 cents over the next three years.

 From $0.14 to $0.17 from July 1, 2017 to June 30, 2018  From $0.17 to $0.19 from July 1, 2018 to June 30, 2019  From $0.19 to $0.22 from July 1, 2019 and after

The Act increases the tax on compressed natural gas by 8 cents over the next three years.

 From $0.13 to $0.16 from July 1, 2017 to June 30, 2018  From $0.16 to $0.18 from July 1, 2018 to June 30, 2019  From $0.18 to $0.21 from July 1, 2019 and after

The revenue from the increases in the liquified gas tax and compressed natural gas tax are allocated to the state highway fund.

INSIGHT: The Act deletes the present law provisions which allow local governments to place an additional 1 cent tax on gasoline.

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tax increases cont.

Floorstock Tax – Due August 25th Under existing law, a floorstock tax is due when there is an increase in the gasoline and diesel tax. The floorstock tax for gasoline is due on all gasoline held in storage, both inside and outside the terminal system. The floorstock tax for undyed diesel is due on inventory held in storage outside of the bulk terminal system. The floorstock tax does not include gasoline or undyed diesel held in inventory at a retail station.

INSIGHT: The Department is supposed to provide a floorstock tax return to taxpayers to report the tax due as a result of the tax increases. The floorstock tax return will be due on August 25th of 2017, 2018, and 2019.

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tax increases cont.

Intent of General Assembly as it Relates to Gas Tax Increases The Act specifies the intent of the general assembly is that all revenues derived from the increases in gas taxes and motor vehicle registration fees are to be used to:

 maintain roads and bridges on the state highway system, including the interstate highway system;  support economic development through the construction of transportation facilities in accordance with the State Industrial Access Act and the Local Interstate and Fully Controlled Access Highway Connector Act;  maintain public roads and bridges within the boundaries of the state parks administered by the department of environment and conservation;  support local government investment in transit programs to improve regional transit services across the state and help manage congestion along major highways;  assist rural transit providers in improving the efficiency of demand response services;  support projects and programs identified in the department of transportation's annual transportation improvement program submitted to the general assembly in support of the department's annual budget and as approved in the annual appropriations acts; and  fund the development and construction of the projects listed in the Act.

INSIGHT: The Act lists 962 specific projects to be developed and constructed, identified by county, route number, project description, and project location, including beginning log mile (LM) where applicable. The Act authorizes the department of transportation to make recommendations in its annual transportation improvement program that projects be deleted, added, or modified. The Act also requires the department to annually report to the general assembly regarding the status of the projects listed in the Act.

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tax increases cont.

Local Option Transit Surcharges The Act authorizes local governments to levy a surcharge on the following local privilege taxes:

 local option sales tax, business tax, motor vehicle tax, local rental car tax, tourist accommodation/hotel occupancy tax, and residential development tax.

The surcharge may be levied only if the underlying local tax on such privileges is being collected at the time a transit improvement program is adopted, and if approved by a majority of the number of registered voters of the local government voting in an election on the question. If approved, the surcharge will remain in effect until the occurrence of a specific date or condition of termination in the ordinance or resolution adopting the surcharge, or until the surcharge is repealed in the same manner as adopted.

INSIGHT: The surcharge will be subject to the same conditions, limitations, exemptions, credits, returns, and other requirements as are applicable to the underlying local tax. If the surcharge is rejected by the voters, a subsequent election regarding a surcharge may not be held for at least 12 months from the date of the election.

A "local government" for purposes of the surcharge is any county in Tennessee, including a county with a metropolitan or consolidated form of government, with a population in excess of 112,000 (which is currently Wilson, Washington, Blount, Sullivan, Sumner, Montgomery, Williamson, Rutherford, Hamilton, Knox, Davidson, and Shelby counties); and any city in this state with a population in excess of 165,000 (which is currently Chattanooga, Knoxville, Nashville, and Memphis).

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tax increases cont.

Special Provisions for Local Option Sales Tax The Act exempts the following from the above-described surcharge in regard to the local options sales and use tax:

 water sold to or used by manufacturers that is taxed at 1 percent under present law;  sales of tangible personal property to a common carrier for use outside Tennessee;  video programming services;  telecommunication services;  specified digital products; and  sales of tangible personal property when obtained from any vending machine or device and taxed at the local rate of 2.25 percent.

INSIGHT: Any surcharge on the local option sales and use tax will apply only to the first $1,600 on the sale or use of any single article of personal property. The surcharge on the local option sales and use tax will not apply to sales made by dealers with no location in Tennessee who choose to pay local tax pursuant to present law.

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tax increases cont.

Revenue from the Local Option Transit Surcharge The Act specifies that revenue from a surcharge must be used for costs associated with the planning, engineering, development, construction, implementation, administration, management, operation, and maintenance of public transit system projects that are part of a transit improvement program.

INSIGHT: The Act requires a local government to adopt, by ordinance or resolution passed by a majority vote, a transit improvement program to levy the surcharge. The program must describe in reasonable detail the public transit system projects and services to be implemented under the program.

The Act specifies that it does not require that revenue from a surcharge be expended or distributed for school purposes.

"Public transit system" means any mass transit system intended for shared passenger transport services to the general public, together with any building, structure, appurtenance, utility, transport support facility, transport vehicles, service vehicles, parking facility, or any other facility, structure, vehicle, or property needed to operate the transportation facility or provide connectivity for the transportation facility to any other non-mass transit system transportation infrastructure, including, but not limited to, interstates, highways, roads, streets, alleys, and sidewalks.

"Transit improvement program" means a program consisting of specified public transit system projects and services.

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conclusion

Conclusion

The Act provides tax decreases that benefit select eligible taxpayers, but the tax increases will be felt by a large majority of taxpayers. Hopefully the pain of the tax increases will be overcome by the future benefit of improved transportation infrastructure in Tennessee.

KNOW YOUR IMPACT: Tennessee isn’t the only state making significant law changes this year. Contact us to help you apply the Tennessee law changes or to learn what other states are doing.

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tax services

Tax Services

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