Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy (IMPROVE) Act
The Tennessee General Assembly approved the IMPROVE Act on April 19th, 2017. An amendment to the House bill was approved on April 24th and Governor Haslam signed the bill into law on April 26th. The House approved the initial bill by a vote of 60-37 while the Senate approved it 25-6. The IMPROVE Act increases various vehicle registration fees, lowers and phases out the Hall Income Tax rates, increases the tax on gasoline and diesel fuel, lowers the grocery tax and adds a method of apportionment for Franchise and Excise tax purposes for manufacturers.
Vehicle Registration Fees
The IMPROVE Act increases registration fees on personal use vehicles by $5, private and commercial vehicles operating for hire and transportation by $10 and on freight motor vehicles by $20. The Act also mandates an extra $100 yearly registration fee on electric vehicles. Tennessee defines an electric vehicle as a passenger or commercial motor vehicle with an electric motor as its sole means of propulsion. Hybrid-electric cars are not subject to the increased fees. The revenue generated from the increased fees are distributed solely to the highway fund.
Hall Income Tax
In 2016, the Legislature passed a bill reducing the Hall Income Tax rate to 5% with legislative intent to reduce the tax yearly by an additional 1% until fully phased out for tax years beginning January 1, 2022.
The IMPROVE Act removes the requirement the Legislature pass a yearly bill to lower the tax and accelerates the complete phase out of the Hall Income Tax by a year to tax years beginning January 1, 2021. The tax rate by year is:
| Tax Rate | |
| 2017 | 4% |
| 2018 | 3% |
| 2019 | 2% |
| 2020 | 1% |
| 2021 | 0% |
Gasoline & Diesel Tax
Tennessee last increased the tax on gasoline and diesel fuel in 1989. The IMPROVE Act increase the tax on both fuel sources gradually over a three-year period. Currently Tennessee taxes gasoline at $0.214 per gallon and diesel at $0.184 per gallon. The fuel tax increase is:
| Gasoline | Diesel | |
| July 1, 2017 to June 30, 2018 | $ 0.24 | $ 0.21 |
| July 1, 2018 to June 30, 2019 | $ 0.25 | $ 0.24 |
| July 1, 2019 and after | $ 0.26 | $ 0.27 |
The IMPROVE Act lists over 960 road projects in all 95 Tennessee counties that are required to be funded by the increase in the fuel taxes.
Grocery Sales Tax
The IMPROVE Act lowers the tax on grocery purchases from 5% to 4% beginning July 1, 2017. Items that do not qualify for the reduced tax rate include prepared food, alcoholic beverages, candy, dietary supplements and tobacco.
Manufacturers
A taxpayer whose principal business in Tennessee is manufacturing may elect to apportion net income by a sales factor only for excise purposes. The manufacturer would take the total receipts in Tennessee divided by the total receipts of the taxpayer from any location inside or outside Tennessee. The same method is available in the net worth calculation for franchise tax purposes.
Tennessee defines a taxpayer as a manufacturer if more than 50% of the revenue derived from activities in Tennessee, excluding passive income, is from fabricating or processing tangible personal property for resale and consumption off premises. Passive income means dividends, interest, income from sale of securities and income derived from the licensing or sale of patents, trademarks, tradenames, copyrights, know-how or other intellectual property.
The taxpayer must elect the apportionment method by notifying the Department of Revenue, in writing, on its return for the taxable year in which the election applies. The election shall remain in effect for a minimum of five tax years. The taxpayer can revoke the election after the five-year period in the same manner as making the initial election. Once the election is revoked, the taxpayer cannot re-elect the method for another five-year period.
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