Does a foreign corporation that only stores inventory at a Tennessee toll manufacturer, and has no U.S. effectively connected income, owe Tennessee franchise tax?

Plain-English summary

The taxpayer is a foreign (non-U.S.) entity that is classified as a corporation for U.S. federal income tax purposes. It registered with the Tennessee Secretary of State and its only Tennessee activity is storing inventory at a toll manufacturer's facility — it keeps raw materials there, pays the Tennessee manufacturer a fee to process them into finished goods, and stores and then ships the finished goods to customers (some in Tennessee). Crucially, the company says it has no income effectively connected with a U.S. trade or business under I.R.C. § 864(c). The question: does it owe Tennessee franchise tax? This is a Revenue Ruling — advisory and not binding even on the Department.

The Department ruled no.

Two ways to be subject to franchise tax. Tennessee's franchise tax (§ 67-4-2105(a)) applies to persons who are (1) doing business in Tennessee and have substantial nexus, or (2) exercising the corporate franchise. The company doesn't owe the tax under either route.

It IS "doing business" — but that's not enough. Tennessee law suggests that merely holding title to property in the state isn't "doing business," but holding title plus business activities related to the property is (Broadmoor-Kingsport Apartments, Inc. v. State). Here the company does more than hold title — it stores raw materials and finished goods, pays a manufacturer to process them, and ships goods to customers. So it is doing business in Tennessee. But doing business alone doesn't trigger the tax; the company must also have substantial nexus.

No substantial nexus — the foreign-corporation exception. "Substantial nexus" means any direct or indirect connection sufficient under the U.S. Constitution to require the tax (§ 67-4-2004(49)(A)). But § 67-4-2004(49)(B) carves out a specific exception: a taxpayer that is treated as a foreign corporation under the Internal Revenue Code and has no income effectively connected with a U.S. trade or business is not considered to have substantial nexus in Tennessee. The company fits that exception exactly, so it lacks substantial nexus — and the "doing business + nexus" basis for the tax fails.

Not "exercising the corporate franchise" either. The phrase "exercising the corporate franchise" was added to the franchise-tax statute by the 1999 Act. The Department walked through the legislative history and concluded the General Assembly added it to capture Tennessee-chartered/organized limited-liability entities (LLCs were proliferating and weren't otherwise covered) — not foreign corporations. A foreign corporation that obtains a certificate of authority from the Tennessee Secretary of State to transact business is not thereby exercising a "corporate franchise": a corporate franchise is the government-conferred right to exercise corporate powers (and lets the chartering state regulate the entity's internal affairs), whereas a certificate of authority merely authorizes a foreign corporation to do business here. Exercising the corporate franchise in Tennessee requires a Tennessee charter or Tennessee articles of organization — which this company doesn't have. So that basis fails too.

Result. The foreign corporation is not subject to Tennessee franchise tax. (In a footnote, the Department added it also wouldn't owe Tennessee excise tax, for the same lack of substantial nexus.) Note that, for entities that are subject, the franchise-tax base can't be less than the value of real and tangible property owned or used in Tennessee (§ 67-4-2108(a)(1), (3)) — but that floor never comes into play here because the company isn't subject at all.

What this means for you

Foreign (non-U.S.) corporations with inventory or operations touching Tennessee

If you're a non-U.S. corporation with no U.S. effectively connected income, you can have real Tennessee activity — even storing inventory and using a Tennessee toll manufacturer — and still not have the "substantial nexus" needed for Tennessee franchise (or excise) tax, because of the § 67-4-2004(49)(B) exception. Your federal effectively-connected-income position is doing heavy lifting on the state side; confirm and document it.

Registering with the Secretary of State ≠ owing franchise tax

Getting a certificate of authority to transact business in Tennessee does not make you a corporate-franchise taxpayer. Only entities holding a Tennessee charter or Tennessee articles of organization "exercise the corporate franchise" here. Foreign-state and foreign-country corporations aren't taxed on that basis.

"Doing business" and "substantial nexus" are separate gates

Tennessee F&E is a two-step test: you must be doing business in Tennessee and have substantial nexus. Clearing one but not the other means no tax. Don't assume that obvious in-state activity (inventory, contract manufacturing) automatically yields a filing obligation — check nexus separately, especially for foreign corporations.

Accountants and tax professionals

Franchise tax imposition: § 67-4-2105(a) (doing business + substantial nexus, or exercising the corporate franchise). "Doing business" § 67-4-2004(14)(A); "substantial nexus" § 67-4-2004(49)(A), with the foreign-corporation/no-ECI exception at § 67-4-2004(49)(B). "Persons" include corporations, LLCs, and LPs under § 67-4-2004(38). Minimum franchise-tax property base: § 67-4-2108(a)(1), (3). Certificate of authority vs. corporate franchise: §§ 48-25-101(a), 48-25-105(a), (c). ECI: I.R.C. § 864(c); Treas. Reg. § 1.864-4. Cases/sources: Broadmoor-Kingsport Apartments, Inc. v. State, 686 S.W.2d 70 (Tenn. 1985); Beare Co. v. Tenn. Dep't of Revenue, 858 S.W.2d 906 (Tenn. 1993); Black's Law Dictionary (10th ed. 2014). Statutory history: "exercising the corporate franchise" added by 1999 Tenn. Pub. Acts 964; LLCs added 2000 Tenn. Pub. Acts 3200; substantial-nexus requirement added 2015 Tenn. Pub. Acts 635.

Common questions

Q: We're a non-U.S. corporation storing inventory in Tennessee. Do we owe Tennessee franchise tax?
A: Not if you have no U.S. effectively connected income. Under § 67-4-2004(49)(B), a foreign corporation with no ECI is not treated as having substantial nexus, so it isn't subject to the franchise tax on the doing-business basis — even with inventory and toll manufacturing here.

Q: We registered with the Tennessee Secretary of State. Doesn't that create franchise-tax liability?
A: No. A certificate of authority to transact business is not a "corporate franchise." Only entities with a Tennessee charter or Tennessee articles of organization exercise the corporate franchise in Tennessee.

Q: Aren't we "doing business" in Tennessee by storing and shipping goods here?
A: Yes — that activity is "doing business." But the franchise tax also requires substantial nexus, and the foreign-corporation/no-ECI exception means you don't have it. Both conditions must be met.

Q: Would the result change if we had U.S. effectively connected income?
A: Likely. The § 67-4-2004(49)(B) exception only applies to a foreign corporation with no effectively connected income. With ECI, you would not qualify for the exception and could have substantial nexus.

Q: Can I rely on this ruling?
A: Not as binding. This is a Revenue Ruling — advisory only and not binding even on the Department, and not on other taxpayers. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):
- § 67-4-2105(a) (franchise tax: doing business with substantial nexus, or exercising the corporate franchise); §§ 67-4-2105(a), 67-4-2106(a) (rate/net worth)
- § 67-4-2004(14)(A) ("doing business in Tennessee"); § 67-4-2004(49)(A) ("substantial nexus"); § 67-4-2004(49)(B) (foreign-corporation/no-ECI exception)
- § 67-4-2004(38) ("persons" include corporations, LLCs, limited partnerships); § 67-4-2108(a)(1), (3) (minimum franchise-tax property base; property valued at cost less depreciation per GAAP)
- §§ 48-25-101(a), 48-25-105(a), (c) (foreign-corporation certificate of authority — not a corporate franchise)

Federal law:
- I.R.C. § 864(c); Treas. Reg. § 1.864-4 (income effectively connected with a U.S. trade or business)

Case law and sources:
- Broadmoor-Kingsport Apartments, Inc. v. State, 686 S.W.2d 70 (Tenn. 1985) (title plus business activity = doing business)
- Beare Co. v. Tennessee Dep't of Revenue, 858 S.W.2d 906 (Tenn. 1993) (undefined terms given common usage); State v. Sherman, 266 S.W.3d 395 (Tenn. 2008); Mills v. Fulmarque, Inc., 360 S.W.3d 362 (Tenn. 2012); Black's Law Dictionary (10th ed. 2014)

Statutory history:
- 1999 Tenn. Pub. Acts 964 ("exercising the corporate franchise" added); 2000 Tenn. Pub. Acts 3200 (LLCs added); 2015 Tenn. Pub. Acts 635 (substantial-nexus requirement added)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/fae/20-08fe.pdf

Original ruling text

Revenue rulings are not binding on the Department. This ruling is based on the particular facts
and circumstances presented and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes and
is not intended as a statement of Departmental policy. Taxpayers should consult with a tax
professional before relying on any aspect of this ruling.

The application of the Tennessee franchise tax to a foreign corporation that does not have income
effectively connected to a U.S. trade or business.

Revenue Rulings are statements regarding the substantive application of law and statements of
procedure that affect the rights and duties of taxpayers and other members of the public. Revenue
Rulings are advisory in nature and are not binding on the Department.

The Taxpayer is a foreign entity that is classified as a corporation for federal income tax purposes.
The Taxpayer is registered with the Tennessee Secretary of State to do business in Tennessee. The
Taxpayer’s business activities in Tennessee involve storing inventory at a toll manufacturer’s facility in
the state.1 The Taxpayer’s Tennessee inventory includes the raw materials used by the toll
manufacturer, as well as finished goods. The finished goods are stored at the Tennessee
manufacturer’s facility until the Taxpayer ships the goods to its customers, some of which are in
Tennessee. The Taxpayer states it has no income that is effectively connected with the conduct of a
U.S. trade or business for purposes of Internal Revenue Code (“I.R.C.”) § 864(c).2

Is the Taxpayer subject to the Tennessee franchise tax?
Ruling: No. The Taxpayer is not subject to the Tennessee franchise tax.

Tennessee imposes a franchise tax at the rate of $0.25 per $100, or major fraction thereof, on the net
worth of “[a]ll persons doing business in this state and having a substantial nexus in this state. . . or

In toll manufacturing, the customer company provides raw materials or semi-finished good to a manufacturer, which then
completes all or a portion of the manufacturing process for the customer company in exchange for a fee.
1

This ruling does not address whether the Taxpayer has income that is effectively connected with the conduct of a U.S. trade
or business pursuant to I.R.C. § 864(c) (2018) and Treas. Reg. § 1.864-4 (2018). Rather, the Taxpayer is assumed to have no
effectively connected income, as it indicated.
2

1

any person exercising the corporate franchise.” 3 Persons subject to the Tennessee franchise tax
include, but are not limited to, corporations, limited liability companies, and limited partnerships.4
Pursuant to TENN. CODE ANN. § 67-4-2105(a) (Supp. 2019), persons doing business in Tennessee and
having substantial nexus in the state are subject to the franchise tax. “Doing business in the state” is
defined as “any activity purposefully engaged in within Tennessee, by a person with the object of gain,
benefit, or advantage, consistent with the intent of the general assembly to subject such persons to
the Tennessee franchise/excise tax to the extent permitted by the United States Constitution and the
Constitution of Tennessee.”5 While the Tennessee Supreme Court has suggested that the mere
holding of title to property in Tennessee is not necessarily an activity that rises to the level of “doing
business” in the state, the holding of title combined with engagement in business activities related to
the property does constitute “doing business” in Tennessee.6
Here, the Taxpayer’s business activities in Tennessee are not limited to merely holding title to its
inventory. Rather, the Taxpayer’s activities consist of storing raw materials and finished goods, paying
a manufacturer to process the raw materials into finished goods, and shipping finished goods to
customers both within and without Tennessee. The Taxpayer is engaged in activity in the state with
the object of gain and is therefore doing business in Tennessee.
A person has substantial nexus in Tennessee if the person has “any direct or indirect connection . . .
to this state such that the taxpayer can be required under the Constitution of the United States to
remit the tax imposed under this part.”7 Connections that establish substantial nexus include being
organized in the state or having “bright line presence,” as defined in the statute.8
However, an exception applies to a taxpayer “that is treated as a foreign corporation under the
Internal Revenue Code and that has no income effectively connected with a United States trade or
business.”9 A taxpayer that meets these criteria shall not be considered to have a “substantial nexus
in this state.” The Taxpayer falls within this exception, as it is a foreign corporation for federal income
tax purposes and has affirmed that it has no income that is effectively connected with a United States
trade or business.
TENN. CODE ANN. §§ 67-4-2105(a) and -2106(a) (2013 & Supp. 2019). Note that, under TENN. CODE ANN. § 67-4-2108(a)(1)
(Supp. 2019), the franchise tax base “shall in no case be less than the actual value of the real or tangible property owned or
used in Tennessee, excluding exempt inventory and exempt required capital investments.” According to TENN. CODE ANN. § 674-2108(a)(3), for purposes of this section, “property” is to be “valued at cost less accumulated depreciation in accordance with
generally accepted accounting principles.”
3

TENN. CODE ANN. § 67-4-2004(38) (Supp. 2019). The Taxpayer is considered a “person” because it is a corporation for federal
tax purposes.
4

5

TENN. CODE ANN. § 67-4-2004(14)(A).

See, e.g., Broadmoor-Kingsport Apartments, Inc. v. State, 686 S.W.2d 70, 73 (Tenn. 1985) (holding that corporation’s holding of
record title to real property and its activities with respect to the property indicated that corporation was “doing business” in
Tennessee).
6

7

TENN. CODE ANN. § 67-4-2004(49)(A).

8

Id.

9

TENN. CODE ANN. § 67-4-2004(49)(B).

2

Thus, the Taxpayer does not have substantial nexus with Tennessee. Although the Taxpayer is doing
business in Tennessee, it lacks substantial nexus and is therefore not subject to the franchise tax on
this basis.
The Taxpayer has asked whether persons who do not have substantial nexus with Tennessee may
nonetheless be subject to the Tennessee franchise tax by virtue of exercising the corporate franchise.
The Tennessee General Assembly added the “exercising the corporate franchise” language to the
franchise tax imposition statute in 1999 (the “1999 Act”).10 The legislature did not define what
constitutes “exercising the corporate franchise.” In the absence of a statutory definition, the term must
be given its natural and ordinary meaning.11 A common definition of the term “exercise” is to
“implement the terms of.”12 “Corporate franchise” is defined as the “government-conferred right or
privilege to engage in a specific business or to exercise corporate powers.” 13 Accordingly, the plain
language of the statute imposes the franchise tax on persons implementing the terms of their
government-conferred privilege to exercise corporate powers. However, the statute is unclear as to
whether the relevant corporate franchise must be conferred by Tennessee or whether it can be
conferred by another jurisdiction. If the meaning of a statute is unclear, Tennessee courts may look
to the legislative history to guide the statute’s construction.14
Prior to the 1999 Act, the franchise tax statute provided that “[a]ll corporations . . . organized for profit
under the laws of this state or any other state or country and doing business in Tennessee” were
subject to Tennessee franchise tax.15 Accordingly, the franchise tax was imposed on all
for-profit corporations doing business in the state, regardless of their place of incorporation.
The 1999 Act changed the franchise tax statute such that “all persons doing business in Tennessee, or
exercising the corporate franchise” became subject to Tennessee franchise tax.16 Notably, the
Tennessee General Assembly removed the language addressing the corporation’s place of
incorporation and at the same time added general language about exercising the corporate franchise.
The legislative history of the 1999 Act indicates that the General Assembly’s intent in imposing the
franchise tax on those “exercising the corporate franchise” was to broaden the franchise and excise
tax base to include limited liability companies, as they were not previously liable for these taxes and
entities of this kind were increasing in number. The bill’s sponsor explained that the bill would impose
the franchise and excise taxes on all “limited liability companies that are granted such limited liability
10

1999 Tenn. Pub. Acts 964 (codified as amended at TENN. CODE ANN. § 67-4-2105(a) (Supp. 2019)).

The Tennessee Supreme Court has stated that when a statute does not define a term, it is proper to look to common usage
to determine the term’s meaning. See, e.g., Beare Co. v. Tenn. Dep’t. of Revenue, 858 S.W.2d 906, 908 (Tenn. 1993).
11

12

Exercise, BLACK’S LAW DICTIONARY (10th ed. 2014).

13

Franchise, BLACK’S LAW DICTIONARY (10th ed. 2014).

See State v. Sherman, 266 S.W.3d 395, 401 (Tenn. 2008). However, “the text of the statute is of primary importance, and the
words must be given their natural and ordinary meaning in the context in which they appear and in light of the statute’s general
purpose.” Mills v. Fulmarque, Inc., 360 S.W.3d 362, 368 (Tenn. 2012).
14

15

Tenn. Code Ann, § 67-4-903(a) (repealed 1999) (emphasis added).

16

1999 Tenn. Pub. Acts 964 (codified as amended at TENN. CODE ANN. § 67-4-2105(a) (Supp. 2019)) (emphasis added).

3

by Tennessee.”17 The stated intent, coupled with the removal of language clearly imposing the
franchise tax on corporations regardless of place of incorporation, evidences the General Assembly’s
intent to include “exercising the corporate franchise” as a way to impose the franchise tax on
Tennessee-chartered and Tennessee-organized business entities that confer limited liability
protection on their owners.18
Furthermore, foreign corporations are permitted to transact business in Tennessee after obtaining a
certificate of authority from the Tennessee Secretary of State.19 This certificate of authority, however,
is not equivalent to a corporate franchise. Whereas a corporate franchise grants the rights and
privileges to exercise corporate powers,20 a certificate of authority merely authorizes a foreign
corporation to transact such business in the state.21 Additionally, a certificate of authority does not
permit Tennessee to regulate the foreign corporation’s organization or internal affairs as the state or
country of incorporation can.22 Thus, a certificate of authority is not a corporate franchise.
Moreover, Tennessee imposes the franchise tax on corporations exercising the corporate franchise
in Tennessee. This necessarily requires that an entity hold a Tennessee charter or Tennessee Articles
of Organization to be exercising the corporate franchise in Tennessee. Because the Taxpayer is not a
Tennessee-chartered corporation, it is not exercising the corporate franchise in Tennessee by storing
inventory in the state.
Accordingly, the Taxpayer is not subject to the Tennessee franchise tax. 23

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

10/9/2020

Deb. on H.B. 1676, 101st Gen. Assemb. 1999 Sess. (Tenn. May 24, 1999) (statement of Rep. Kisber, Chair, H. Comm. on Finance,
Ways & Means) (emphasis added).
17

TENN. CODE ANN. § 67-4-2105(a) was further amended in later years. However, these amendments only affected the portion
of the statute imposing the tax on those persons doing business in Tennessee. In 2000, the statute was amended to specifically
include limited liability companies doing business in Tennessee within the franchise tax base. 2000 Tenn. Pub. Acts 3200
(codified as amended at TENN. CODE ANN. § 67-4-2105(a) (Supp. 2019)). Additionally, in 2015, the statute was amended to require
that persons doing business in the state also have a substantial nexus in the state to be subject to the franchise tax. 2015 Tenn.
Pub. Acts. 635 (codified as amended at TENN. CODE ANN. § 67-4-2105(a) (Supp. 2019)).
18

19

TENN. CODE ANN. § 48-25-101(a) (Supp. 2019).

20

Supra note 9.

21

TENN. CODE ANN. § 48-25-105(a); Certificate, BLACK’S LAW DICTIONARY (10th ed. 2014).

22

TENN. CODE ANN. § 48-25-105(c).

The Taxpayer did not request that this ruling address the Taxpayer’s liability for excise tax. Nonetheless, the Taxpayer would
not be subject to Tennessee excise tax because it lacks a substantial nexus in the state.
23

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