League of Women Voters of Tennessee

FONCE Legislation

The League of Women Voters of Tennessee supports SB 2290 Kyle/ HB 2264 Turner which revises the excise tax exemption for certain family owned non-corporate entities (FONCEs). This bill would close the tax loophole that allows exemption for family-owned businesses from taxes that are paid by comparable non-family owned businesses.

Problem: The current FONCE exemption benefits families, but contains a loophole that allows some of the wealthiest families in our state, and many outside of the state, to avoid paying business franchise or excise taxes on commercial real estate investments. Small and medium-sized businesses that operate only in Tennessee (and perhaps a few multi-state businesses that voluntarily pay their full Tennessee taxes) are subsidizing those multi-state businesses that avoid Tennessee taxes. Such businesses minimize their Tennessee taxes through elaborate restructuring of their subsidiary businesses to take advantage of loopholes in Tennessee’s tax code.

In 2008 the Tennessee Department of Revenue mailed 8,797 forms to FONCEs in and outside Tennessee. In the process of completing the report, the Department learned that:

• Current FONCE provisions allow more than 3,200 entities to shield more than $5 billion in commercial real estate properties from franchise and excise tax.

• On average, each of these entities controls more than $1.6 million worth of commercial property.

• This loophole results in estimated lost revenue of $25 million. (This estimate accounts for the anticipated restructuring of some entities to avoid franchise and excise tax.)

• Approximately 20% of these FONCEs are owned by out-of-state investors controlling over $1 billion worth of commercial property, making Tennessee a tax haven for out-of state, wealthy investors wanting a tax shield for their commercial property investments.

If all multi-state corporations paid their full tax obligations, Tennesseans could all pay less tax on food, and future tax increases could be delayed or avoided altogether. Also, businesses that compete directly with large multi-state corporations might be able to compete more effectively when their competitors have the same tax obligations.

It is time for the General Assembly to eliminate this tax inequity.