On March 29, 2021, Tennessee Governor Bill Lee signed legislation creating a new sales and use tax exemption and a new franchise and excise tax (F&E) credit for “qualified productions.” H.B. 141, 112th Gen. Assemb., ch. 70 (Tenn. 2021). The new legislation is expected to attract greater production activity, especially smaller-scale productions, to the state and put Tennessee on a competitive footing with other states that offer tax incentives to the industry.
Tennessee law defines “qualified production” for purposes of the sales and use tax exemption and the F&E credit as any of the following:
(1) the production of a film, pilot episode, series, esports event, or other episodic content in Tennessee;
(2) the creation of computer-generated imagery, video games, or interactive digital media in Tennessee; or
(3) stand-alone audio or visual post-production scoring and editing in Tennessee.
For purposes of the F&E credit, “qualified production” also includes activities of third parties that are necessary to and performed on behalf of a person engaging in any of the aforementioned activities.
The Sales and Use Tax Exemption
The new sales and use tax exemption, which is available beginning July 1, 2021, applies 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. The exemption is also available to third parties that purchase or use tangible personal property, computer software, or services that are necessary to and primarily used for a qualified production.
To obtain the exemption, an applicant must first apply to the Tennessee Film, Entertainment and Music Commission (Commission). Once the Commission determines that the applicant is engaging in a qualified production, it will notify the applicant and the Tennessee Department of Revenue (DOR) of its determination. The applicant must then apply to DOR for the exemption.
Notably, the Commission and DOR must separately determine that approving the exemption is in the “best interests of the state” before an exemption certificate will be issued to the applicant. “Bests interests of the state” means the qualified production is a result of the sales and use tax exemption and the benefits to Tennessee resulting from the production outweigh the anticipated costs. In making that determination, the Commission and DOR may consider the investment made, jobs created, impact to the community, and any other matters deemed appropriate.
Once approved, the exemption certificate is valid for two (2) years but may be renewed for additional 2-year periods.
The Franchise and Excise Tax Credit
The new F&E credit, which is available for tax years beginning on or after July 1, 2021, is generally equal to 40% of “qualified payroll expenses,” which means compensation paid in Tennessee for “qualified positions” during the applicable tax period, subject to programmatic caps established by the Commission. Tennessee tax law defines “qualified positions” as services performed by an employee or independent contractor determined by the Commission to be necessary to and primarily for a qualified production. The credit increases to 50% for qualified payroll expenses paid to individuals who reside in specific counties (i.e., tier 2, tier 3, or tier 4 enhancement counties).
The F&E credit is allowed against an applicant’s combined F&E liability; however, the credit taken on any return cannot exceed 50% of the combined F&E liability before credits. Any unused credit may be carried forward 15 years. Subject to DOR’s approval and certain procedural requirements, an applicant may file a combined F&E return with one or more of its affiliates for purposes of fully utilizing the credit.
The process for obtaining the F&E credit is similar to the process for obtaining the sales and use tax exemption. The applicant must first apply to the Commission. Once the Commission determines that the applicant is engaging in a qualified production, it will notify the applicant and DOR. The applicant must then apply to DOR for the credit. The Commission and DOR must each determine that approving the credit is in the “best interests of the state” (applying the same standard as for the sales and use tax exemption) before the applicant will be approved for the credit.