Tennessee Film Incentive Snapshot
- Sales and use tax exemption for qualifying production purchases
- F&E tax credit equal to 40% of qualified payroll expenses
- Enhanced 50% payroll credit for eligible Tier 2, 3, and 4 enhancement counties
- Credit utilization up to 50% of F&E tax liability
- Carryforward period of up to 25 years
- Additional Tennessee Entertainment Commission production grant opportunities
Tennessee’s production incentives extend beyond traditional film and television to qualifying esports, video game development, interactive digital media, CGI, and post-production activities.
Through a combination of sales and use tax exemptions and franchise and excise tax credits, the state seeks to attract production spending, investment, and entertainment industry jobs. Both incentives depend on the creation of a qualified production as determined by the Tennessee Entertainment Commission (TEC). Historically, this agency was called the Tennessee Film, Entertainment and Music Commission in the tax credit statutes and Department of Revenue guidance.
A summary of each benefit and the process for obtaining them is provided below.
Sales and Use Tax Exemption
The sales and use tax exemption applies to the sale, use, storage, or consumption of tangible personal property, computer software, or services that are necessary for and primarily used in a qualified production.
Qualifying productions can extend beyond traditional film and television projects to include esports events, video game development, interactive digital media, CGI production, and certain stand-alone audio or visual post-production activities.
To obtain the exemption, a taxpayer must first apply to the TEC, describing the basis for seeking the exemption and the nature of the production activities involved. If the TEC determines that the applicant is indeed engaged in a qualified production, it will notify the applicant and the Tennessee Department of Revenue (TDOR), after which the applicant may apply to the TDOR for the exemption.
The exemption request is not automatic and is granted only upon a determination by both the TDOR and the Tennessee Department of Economic and Community Development (ECD) that approval of the exemption is in the “best interests of the state.”
In making this determination, the TDOR and ECD must find that the benefits to the state outweigh the anticipated tax cost of granting the exemption. The factors to be considered in making this best interest of the state determination include the investment being made, the number of jobs being created, the impact on the community, and any other matters deemed appropriate by the TDOR and ECD.
For businesses considering other Tennessee-based incentives, LBMC’s overview of Tennessee’s Job Tax Credit and FastTrack Grant programs provides additional insight into available economic development opportunities.
If the TDOR and ECD determine that granting the exemption is in the best interest of the state, the TDOR will then issue a sales and use tax exemption certificate to the applicant identifying the qualified production. The applicant may then purchase qualifying items without paying sales tax by presenting the exemption certificate to its vendors.
In addition to the taxpayer making the application, third parties that are making purchases of qualifying equipment for a qualified production may also apply to the TDOR to obtain their own exemption certificate.
The exemption certificates will be good for two years from the issue date, after which taxpayers must reapply.
Franchise & Excise Tax Credits
Tennessee’s incentive framework provides a qualified production franchise and excise tax credit for “qualified payroll expenses incurred in qualified productions.”
The term “qualified payroll expenses” means compensation paid in the State of Tennessee, as determined under the Franchise & Excise (F&E) apportionment provisions, for “qualified positions,” subject to a cap to be established by the TEC. A qualified position means services performed by an employee or independent contractor determined by the TEC to be necessary to and primarily for a qualified production.
The amount of the credit is generally 40% of the qualified payroll expenses. Note that for qualified payroll expenses paid to individuals whose primary residence is in Tier 2, Tier 3, or Tier 4 enhancement county, the credit increases to 50% of the qualified payroll expenses.
The total credit for qualified production credit may be used to offset up to 50% of a taxpayer’s combined F&E tax liability shown on the return on which any credits are taken. Any unused credit may generally be carried forward up to 25 years, subject to applicable statutory requirements and Tennessee Department of Revenue guidance.
The application process for obtaining the credit is similar to that for obtaining the sales and use tax exemption. The taxpayer must first apply through TEC, describing the basis for seeking the credit and the nature of the production activities involved. In addition, the application must set forth the estimated number of qualified positions.
If the TEC agrees that the applicant is engaging in a qualified production, it will notify the applicant and the TDOR. The applicant will apply for the credit with the TDOR, which will be allowed only upon an independent finding by both the TDOR and ECD that the credit is in the “best interests of the state,” as determined by the same factors as outlined above for the sales tax exemption.
If the credit is approved, the taxpayer will claim the credit on its F&E tax return in a manner to be prescribed by the TDOR.
Because qualification, timing, and documentation can affect the availability and value of the credit, production companies should evaluate potential eligibility early in the planning process.
Potential Combined F&E Tax Returns
Tennessee has historically been a separate return state, requiring legal entities to file their own separate tax returns (generally only unitary groups of financial institutions and Captive REIT Affiliated Groups are allowed to file combined returns).
Tennessee law also allows an applicant to seek permission from the TDOR to file a combined F&E return for purposes of fully utilizing the credit with one or more of its “affiliates” or “affiliated group members” (essentially a greater than 50% ownership connection as defined in Tenn. Code Ann. Sec. 67-4-2004).
The request to file such a combined return must be included in the taxpayer’s application for the credit. Permission to file a combined return shall not be granted unless it is determined independently by ECD and TDOR to be in the best interest of the state based on the same factors as outlined above.
If permission is granted, the applicant may later seek permission to add or change members of the filing group, subject to additional restrictions and the permission of the TDOR and ECD.
The F&E tax credit applies to qualified payroll expenses incurred in eligible productions and remains available for qualifying taxpayers.
Companies with multiple affiliated entities participating in a Tennessee production should therefore evaluate their entity and filing structure early in the incentive planning process, particularly in light of broader changes to Tennessee’s franchise tax and excise tax laws.
Tennessee Production Incentive Grants
Separate from Tennessee’s qualified production tax credit, the Tennessee Entertainment Commission production incentive program provides discretionary grant opportunities for eligible productions.
TEC currently advertises a grant rebate of up to 25% of Qualified Tennessee Expenditures for productions that generally meet the program’s minimum $500,000 Qualified Tennessee Spend requirement and other eligibility criteria. The grant is discretionary and subject to available state funding and approval.
Grant availability, qualification requirements, funding, and approval are subject to the applicable program rules and state discretion. Production companies should engage TEC early in the planning process to determine potential eligibility and understand current requirements before incurring significant production costs.
Production companies should also evaluate the relationship between the production grant and the F&E qualified production credit when determining which incentive structure may provide the greatest economic benefit. Eligibility for one incentive should not be assumed to mean that all available production incentives can be combined for the same project.
What Types of Productions May Qualify?
Tennessee’s production incentive framework extends beyond traditional film and television production. Depending on the specific incentive and applicable requirements, qualifying activities may include:
- Film productions
- Television series and pilot episodes
- Other episodic content
- Esports events
- Video game development
- Interactive digital media
- Computer-generated imagery (CGI)
- Certain audio and visual post-production activities
This broader definition makes Tennessee’s incentive programs potentially relevant to companies throughout the entertainment, gaming, digital media, and production-services industries.
Businesses considering a project should confirm that the specific activities and expenditures qualify before relying on an incentive as part of the project’s financial model.
Additional Tennessee Production Incentives
Productions may also benefit from other Tennessee tax and economic development provisions depending on the project, expenditures, location, and workforce involved.
Because production incentive programs and available funding can change, companies should evaluate the full range of potential Tennessee incentives early in the site-selection and production-planning process rather than waiting until expenditures have already been incurred.
Conclusion
Tennessee’s film and entertainment incentive framework continues to be a valuable tool for attracting production activity, digital media development, esports events, video game creation, and post-production work.
Organizations evaluating projects in Tennessee should assess available sales tax exemptions, franchise and excise tax credits, and discretionary production grants early in the planning process to maximize available incentives and improve project economics.
LBMC’s State and Local Tax team can help businesses evaluate available Tennessee tax credits and incentives, assess qualification requirements, and navigate applicable application and compliance processes.
Jay Hancock is the LBMC State and Local Tax Practice Leader. He can be reached at 615-690-1982 or jay.hancock@lbmc.com.
Content provided by LBMC State and Local Tax professional, Jay Hancock.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.
