Key Takeaways

  • Tennessee does not require franchise registration but enforces franchise relationship laws that affect franchisors operating in the state.
  • Franchisors must comply with the Federal Trade Commission’s Franchise Rule, including pre-sale disclosure via a Franchise Disclosure Document (FDD).
  • Tennessee recognizes claims under the Tennessee Consumer Protection Act (TCPA) for deceptive practices by franchisors.
  • The state’s taxation system imposes excise and franchise taxes on most business entities, not just corporations.
  • Substantial nexus is required to trigger tax obligations, including physical presence or income generation in Tennessee.
  • Lease capitalization significantly affects franchise tax liability, especially for businesses with high rental costs.

Tennessee franchise tax is an annual tax paid upon the value of an entity's assets. Many states place a separate tax, known as a privilege or franchise tax, on certain types of businesses. This is usually a tax imposed for the right to do business in a given state.

Excise and franchise taxes apply to most businesses in Tennessee, excluding sole proprietorships and general partnerships.

Calculating Franchise Tax

Franchise tax values are usually based on book value. Therefore, depreciation reduces the tax. The rate of franchise tax is 25 cents per $100 of value, so a business pays about $25 for every $10,000 worth of value.

Due to this rather low rate, the total tax for an average company that doesn't own much expensive equipment isn't high, considering that the assets are valued at cost minus depreciation. However, business owners are often surprised by the valuation of leases.

Real property and improvements are valued at book value when calculating the franchise tax, but lease value is capitalized when computing the tax. This is achieved by multiplying yearly rent by a factor of eight for real property. Other properties use other factors. Therefore, a business that pays $100,000 annually in rent has an asset that's valued at $800,000, resulting in an annual tax of $2,000. 

Understanding Lease Capitalization and Tax Impact

Franchise tax liability in Tennessee can be unexpectedly high for businesses with significant lease obligations. Unlike physical assets, leased properties are not recorded at depreciated book value. Instead, the state applies a capitalization formula that inflates the asset value used in franchise tax calculations. For example:

  • Real property leases: Multiply annual rent by 8.
  • Personal property leases: Multiply annual rent by 3.

This method can significantly increase tax liability. A business paying $100,000 in annual rent for real estate would be treated as holding an $800,000 asset, resulting in a $2,000 annual franchise tax, even if the business owns no other assets.

Franchise and Excise Taxes

Business owners who have important limited liability protection are usually subject to excise and franchise taxes. In the past, only corporations had paid these taxes. In 1999, however, tax rules changed to extend these taxes to other entities, such as limited partnerships and limited liability companies.

Previously, taxpayers who did business in Tennessee were subject to excise and franchise taxes. The definition of “doing business” was any purposeful activity that one engaged in within the state for the object of advantage, benefit, or gain.   

However, Tennessee adopted an amendment that placed an additional threshold before average taxpayers are subject to these taxes. Under the amendment, an entity had to both do business in the state and have substantial nexus in Tennessee.

Substantial nexus includes a direct or indirect connection between the taxpayer and the state, with the taxpayer being required to pay these taxes. Examples of what counts as substantial nexus are:

  • A taxpayer who uses or owns capital in Tennessee
  • A taxpayer who's organized or commercially active in Tennessee
  • A taxpayer with ongoing business activity in the state and who has gross receipts that are attributable to customers
  • A taxpayer who licenses intangible property to another party in Tennessee and who gets income from that use
  • A taxpayer with a bright-line presence in the state

Tennessee Franchise Law Overview

Although Tennessee is not a franchise registration state, it still regulates franchise activity under Tennessee franchise law, particularly through franchise relationship statutes and general business laws. Tennessee does not require franchisors to register with a state agency, but:

  • Franchisors must still provide a compliant Franchise Disclosure Document (FDD) under federal law.
  • Franchisors may still be subject to civil liability for misrepresentation or omission, enforced under the Tennessee Consumer Protection Act (TCPA).
  • Tennessee courts recognize implied covenant claims and permit franchisees to assert common law fraud or breach of contract under certain conditions.

While Tennessee’s franchise laws are less burdensome administratively compared to registration states, franchisors must still ensure legal compliance to avoid lawsuits or penalties.

How Business Owners Approach Franchise Taxes

While franchise taxes may not be high from year to year — particularly if you compare them with the cost of federal income tax — over time, these taxes do add up. This can be a concern for businesses that have large, valuable real estate holdings. The franchise tax is an additional yearly tax levied on the value of that real property on top of the real property taxes the entities already pay.

Most business owners have their own attitudes on how they approach franchise and excise taxes, except perhaps for those businesses with significant hard assets that are unduly impacted or the few businesses with significant retained earnings year to year.

Many business owners look at excise and franchise taxes as the cost of doing business. They generally don't feel the expense is big enough to take efforts to avoid or minimize the cost of the tax. However, others use whatever means they can to minimize their tax.

Whichever approach owners take, they should avoid inadvertent actions that increase the tax, such as a failure to consider special rules.

Running your own business can be profitable and satisfying as long as you understand the various taxes and fees you'll be responsible for. While a franchise tax is often low, it can be more substantial depending on the type of business you're in. Consulting with financial and tax experts is a good way to ensure you're paying your fair share while maximizing your benefits whenever possible.

Common Franchise Law Violations in Tennessee

Under Tennessee franchise law, common violations include:

  • Failure to disclose material risks or obligations in the FDD.
  • Misrepresentation of franchise earnings or business performance.
  • Unfair termination or non-renewal of franchise agreements.
  • Failure to act in good faith or breach of the implied covenant of fair dealing.

Violations may lead to enforcement under the TCPA or civil lawsuits. Franchisees in Tennessee can sue for damages, and courts may award attorney’s fees or punitive damages in egregious cases.

Federal Compliance Still Required

Although Tennessee does not mandate state-level franchise registration, franchisors must still comply with the Federal Trade Commission’s Franchise Rule. This rule requires:

  • Delivery of the Franchise Disclosure Document (FDD) to potential franchisees at least 14 days before signing or payment.
  • Disclosure of financial performance representations only if substantiated.
  • Accurate and complete presentation of fees, obligations, territory rights, and litigation history.

Non-compliance with federal franchise rules can lead to enforcement actions by the FTC or private legal claims.

Frequently Asked Questions

  • Is Tennessee a franchise registration state?
    No. Tennessee does not require franchise registration but enforces franchise relationship laws and general business statutes that impact franchising.
  • What is the franchise tax rate in Tennessee?
    The rate is 0.25% (25 cents per $100) of the greater of net worth or the book value of assets in Tennessee, including capitalized lease values.
  • Do franchisors need to file anything in Tennessee?
    There is no registration requirement, but franchisors must comply with federal FDD rules and may be subject to Tennessee’s consumer protection laws.
  • What counts as “substantial nexus” for tax purposes?
    Substantial nexus includes having physical presence, capital, income-producing activities, or licensing intellectual property in Tennessee.
  • Can franchisees sue franchisors under Tennessee law?
    Yes. Franchisees may pursue claims under the Tennessee Consumer Protection Act or for breach of contract, fraud, or unfair practices.

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