During the recently concluded 2021 legislative session, the Tennessee General Assembly enacted two state tax benefits for the creators of films, television episodes, and esports events (2021 Acts, Public Chapter 70), and one is a new sales tax exemption. The other is a credit that can be applied against a taxpayer’s combined excise (income) and franchise (net worth) tax liability, which are reported on a single tax return. Both the exemption and the credit hinge on the creation of a qualified production as determined by the Tennessee Film, Entertainment and Music Commission. Specifically, a “qualified production” means any of the following activities:  

  • (a) the production of a film, pilot episode, series, esports* event, or other episodic content in this state;
  • (b) the creation of computer-generated imagery, video games, or interactive digital media in this state; or
  • (c) stand-alone audio or visual post-production scoring and editing occurring in this state.

*The term “esports” means leagues, competitive circuits, tournaments, or similar competitions where individuals or teams play video games for spectators, either in-person or online, for the purpose of ranking, prizes, money or entertainment.

A summary of each benefit and the process for obtaining them are listed below.

Sales and Use Tax Exemption

The sales tax exemption will apply to the sale, use, storage or consumption of tangible personal property, computer software, or services that are necessary to and primarily used for a qualified production.

In order to obtain the exemption, a taxpayer must first apply to the Tennessee Film, Entertainment and Music Commission (“Commission”), describing the basis for seeking the exemption and the nature of the production activities involved. If the Commission determines that the applicant is indeed engaged in a qualified production as defined above, 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 shall be granted only upon a determination by both the TDOR and by the Department of Economic and Community Development (“ECD”) that the approval of the exemption is in the “best interests of the state.” In making this determination, 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 TDOR and ECD.

If 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 2 years from the issue date, after which taxpayers must reapply using the steps outlined above.

The exemption takes effect on July 1, 2021. It is anticipated that the Commission and TDOR will be issuing guidance and drafting the appropriate applications, certificates, etc., which will likely be made available sometime during the summer of 2021.

Franchise & Excise Tax Credits

The new law also provides for a Franchise and Excise (“F&E”) tax credit for “qualified payroll expenses incurred in qualified productions” as defined above. The term “qualified payroll expenses” means compensation paid in the state of Tennessee as determined under the F&E apportionment provisions for “qualified positions,” subject to a cap to be established by the Commission. A qualified position means services performed by an employee or independent contractor determined by the Commission to be necessary to and primarily for a qualified production. The amount of the credit is 40% of the qualified payroll expenses. (Note that for qualified payroll expenses paid to individuals whose primary residence is in Tier 2, 3, or 4 enhancement county, the credit is 50% of the qualified payroll expenses.)

The total credit for qualified payroll expenses may be used to offset up to 50% of a taxpayer’s combined F&E liability shown on the return any credits are taken. Any unused qualified payroll credits have a 15 year carry forward.

The application process for obtaining the credit is similar to that for obtaining the sales tax exemption. The taxpayer must first apply to the Commission, 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. Similar to the sale tax exemption process, if the Commission 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.

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). However, in a somewhat novel approach, the new law also allows for 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 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 credit and the potential for seeking permission to file a combined return are effective for tax years beginning on or after July 1, 2021.

Conclusion

These new incentives should provide a boost to Tennessee’s efforts to attract and retain these types of projects and investments. The sales tax exemption is new but uses similar language found in existing exemptions for entities engaged in manufacturing, research and development, etc. The credit replaces a prior, more complex version that was in effect for several years, but effectively sunset as of July 1, 2012.