When a qualified data center makes a large new capital investment in Tennessee, what counts toward the 'required capital investment' for the enhanced industrial machinery franchise and excise tax credit, does custom software qualify, and how much of the company's F&E tax bill can the credit offset?

Plain-English summary

The Taxpayer operates a Tennessee "qualified headquarters facility" and "qualified data center" (QDC) built up over two prior investment rounds ("Investment 1" and "Investment 2"), having already qualified for a job tax credit, an industrial machinery sales/use tax exemption, and the standard 1% industrial machinery F&E credit. It's now planning a much larger expansion ("Investment 3") and asked how Tennessee's enhanced industrial machinery F&E credit (§ 67-4-2009(4)(I)) — which can reach 3% to 10% of the purchase price of qualifying industrial machinery, depending on investment size — applies to this new round.

Five rulings:

1. What counts toward "required capital investment"? Real property, all tangible personal property (anything that can be "weighed, measured, felt or touched"), and all computer software — both prewritten/canned and custom — count toward the required capital investment calculation, because Tennessee's franchise/excise statutes don't define "tangible personal property" separately and the software definition (borrowed from the criminal code, § 39-14-601(7)) makes no prewritten-vs-custom distinction.

2. What credit tier applies? Based on the facts presented, the Taxpayer qualifies for a 5% credit (the tier triggered by a required capital investment exceeding $250 million) — one of four tiers ranging from 3% (over $100M) up to 10% (over $1 billion).

3. Does custom software count as "industrial machinery"? Yes — the credit's "industrial machinery" definition for the enhanced credit incorporates the same computer-software definition used for the required-capital-investment calculation, so custom software is treated the same as prewritten software.

4. When can the credit be applied? Starting in the first year of the investment period — but if the company doesn't actually complete the required capital investment within the investment period, it owes an assessment equal to the credit taken, plus interest.

5. How much tax can the credit offset? Ordinarily, the industrial machinery credit is capped at offsetting 50% of F&E tax liability. But because the Taxpayer has established a qualifying headquarters facility eligible for the separate § 67-6-224 sales/use tax credit, a special provision (§ 67-4-2009(4)(H)) lets it offset up to 100% of its F&E liability instead — if the Commissioner of Revenue and the Commissioner of Economic and Community Development determine that the increased offset is in the state's best interest.

What this means for you

Large-scale capital investors (data centers, manufacturing, headquarters expansions) in Tennessee

The enhanced industrial machinery F&E credit scales steeply with investment size — $100 million unlocks 3%, $1 billion unlocks 10% — and reaches custom-built software, not just off-the-shelf purchases. If your company also qualifies as a headquarters facility or warehouse/distribution hub under the related credit programs, you may be able to negotiate a 100% offset cap instead of the standard 50%.

Companies tracking multiple investment rounds at the same Tennessee facility

As with the related sales/use tax and job tax credit rulings in this cluster (LR 11-06, LR 11-08), purchases and software tied to an EARLIER investment round don't carry over to satisfy a NEW round's required-capital-investment threshold — each expansion is measured on its own, with documentation required to show which spending belongs to which round.

Accountants and tax professionals

This is a companion ruling to LR 11-08 (job tax credit, same expansion) and LR 11-06 (qualified headquarters facility sales/use tax credit, same expansion) — together they cover three distinct Tennessee economic-development credit programs applying to a single large data-center investment. Note the 100% offset under § 67-4-2009(4)(H) is discretionary, requiring an affirmative "best interests of the state" determination by two Commissioners, not an automatic entitlement.

Common questions

Q: Does custom-developed software count toward the capital investment threshold for the enhanced industrial machinery credit, or only off-the-shelf software?
A: Both count equally — the statute's computer-software definition doesn't distinguish between custom and prewritten/canned software.

Q: Is the enhanced industrial machinery credit automatically capped at offsetting half of my F&E tax bill?
A: Generally yes (50% cap), but companies with a qualifying headquarters facility or warehouse/distribution hub can apply for a 100% offset if the state determines it's in Tennessee's best interest.

Q: What happens if I claim the enhanced credit early in my investment period but don't end up meeting the required capital investment?
A: You'll be assessed the amount of credit taken, plus interest.

Q: Can another data center or large investor rely on this letter ruling for its own expansion?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to. This summary is informational only, not legal or tax advice.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-4-2009(4)(A) (1% industrial machinery F&E credit)
• § 67-4-2009(4)(I)(i)-(iv) (enhanced industrial machinery credit tiers, 3%-10%)
• § 67-4-2009(4)(I)(vii)(c) (definition of "required capital investment")
• § 67-4-2009(4)(H) (100% offset for qualified headquarters/warehouse facilities, subject to "best interests of the state" determination)
• § 67-4-2009(4)(B), (C) (50% standard offset cap; 15-year carryforward)
• § 39-14-601(7) (definition of "computer software," incorporated by reference)
• § 67-6-102(47) (definition of "industrial machinery," referenced); § 67-6-224 (qualified headquarters facility sales/use tax credit, referenced); § 67-4-2109(b) (job tax credit, referenced)
• 2009 Tenn. Pub. Acts ch. 530 § 23 (amended the required-capital-investment definition to include all computer software, effective June 25, 2009, applicable to business plans filed on/after July 1, 2009)

Case law:

• Worrall v. Kroger Co., 545 S.W.2d 736 (Tenn. 1977) (statutory construction — legislative intent)
• National Gas Distributors, Inc. v. State, 804 S.W.2d 66 (Tenn. 1991) (natural and ordinary meaning of statutory language)
• State v. Givens, 1994 WL 406187 (Tenn. Crim. App. Aug. 4, 1994) (dictionary as source for ordinary meaning)

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/11-07fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 11- 07
WARNING
Letter rulings are binding on the Department only with respect to the individual
taxpayer being addressed in the ruling. This presentation of the ruling in a redacted
form is information only. Rulings are made in response to particular facts presented
and are not intended necessarily as statements of Department policy.
SUBJECT
Eligibility and creation requirements for the enhanced franchise, excise tax industrial
machinery credit provided by Tenn. Code Ann. § 67-4-2009 with regard to the expansion of a
qualified headquarters facility.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set
of existing facts furnished to the Department by the taxpayer. The rulings herein are binding
upon the Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such
revocation or modification shall be effective retroactively unless the following conditions are
met, in which case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material
facts involved in the transaction;
(B) Facts that develop later must not be materially different from
the facts upon which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a
prospective or proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith
in relying upon the ruling and a retroactive revocation of the ruling
must inure to his detriment.
FACTS
In [YEAR], the [TAXPAYER], established a Tennessee “qualified headquarters facility” (the
“Facility”), as the term is defined in Tenn. Code Ann. § 67-6-224(b)(9). The Facility consisted
of two separate locations in the [TENNESSEE CITY] Metropolitan Statistical Area. The first
location is a production facility (the “Production Facility”) that [REDACTED INFORMATION].
The second location is a back-up facility (the “Back-up Facility”), which [REDACTED
INFORMATION]. The Production Facility and the Back-up Facility are treated as a single

02021102-01

location for purposes of the “qualified headquarters facility” credit provided by Tenn. Code
Ann. § 67-6-224. This investment is hereafter referred to as “Investment 1.”
In [YEAR], [TAXPAYER] announced a plan to significantly increase capacity following a
merger with [COMPANY X]. Under the plan, the Production Facility would handle all
production for [TAXPAYER].
[REDACTED INFORMATION].
In connection with its
application as a “qualified data center” (“QDC”), as the term is defined in Tenn. Code Ann. §
67-6-102(76), [COMPANY X] announced plans to spend [DOLLAR AMOUNT – TOTAL
INVESTMENTS ARE SUFFICIENT TO QUALIFY FOR TAX INCENTIVES SOUGHT] in
capital improvements in Tennessee. The majority of this expenditure related to servers,
computer software and other hardware (“Computer Equipment”).
[TAXPAYER] also
committed to create at least [NUMBER – NUMBER OF JOBS CREATED ARE SUFFICIENT
TO QUALIFY FOR TAX INCENTIVES SOUGHT] new jobs in connection with the investment.
This investment is hereafter referred to as “Investment 2.”
[REDACTED INFORMATION]
Also in connection with Investment 2, [TAXPAYER] submitted its Business Plan for Job Tax
Credits and received a letter dated [DATE] from the Department tentatively approving its
Business Plan for the investment period starting with the fiscal year ended [DATE]. In
connection with Investment 2, [TAXPAYER] qualified for the job tax credit, the industrial
machinery exemption for sales and use tax purposes pursuant to Tenn. Code Ann. §§ 67-6206(a) and 67-6-102(42)(K)(2008 supp.), and the industrial machinery credit provided by
Tenn. Code Ann. § 67-4-2009(4)(A). [TAXPAYER], was granted an industrial machinery
exemption for sales tax purposes effective [DATE].
In [YEAR] [TAXPAYER] announced plans to increase investment in one of its U.S. facilities
[REDACTED INFORMATION]. In connection with the new investment, [TAXPAYER], plans
to invest at least [DOLLAR AMOUNT – TOTAL INVESTMENTS ARE SUFFICIENT TO
QUALIFY FOR TAX INCENTIVES SOUGHT] in [REDACTED INFORMATION] required for
the facility expansion. [TAXPAYER], also plans to create at least [NUMBER – NUMBER OF
JOBS CREATED ARE SUFFICIENT TO QUALIFY FOR TAX INCENTIVES SOUGHT] new
jobs as part of the facility expansion.
[REDACTED INFORMATION]
“Investment 3.”

The potential new investment is referred to hereafter as

If Tennessee is chosen as the site for Investment 3, [TAXPAYER] will file a Tennessee
Enhanced Industrial Machinery Credit Business Plan with a start date of [DATE].
[TAXPAYER] will also seek to be designated as a “qualified headquarters facility,” as the term
is defined in Tenn. Code Ann. § 67-6-224(b)(9).
QUESTIONS PRESENTED

1. Which purchases made by [TAXPAYER] will be included in the required capital
   investment calculation for purposes of determining the enhanced industrial machinery
   credit that can be applied against [TAXPAYER]’s franchise, excise tax liability?
   02021102-01

2

2. What is the percentage of the purchase price of industrial machinery that [TAXPAYER]
will be eligible to take as a franchise, excise tax industrial machinery credit based on the
estimated required capital investment?

3. Is custom software treated as industrial machinery for purposes of the enhanced industrial
   machinery franchise, excise tax credit?
4. When is [TAXPAYER] eligible to apply the enhanced industrial machinery credit against
   its Tennessee franchise, excise tax liability?
   5.

What percentage of its franchise, excise tax will [TAXPAYER] be permitted to offset
against its franchise, excise tax industrial machinery industrial machinery credit?
RULINGS

1. [TAXPAYER]’s purchases of real property, tangible personal property that can be
   weighed, measured, felt or touched, or is in any other way perceptible to the senses, and
   all prewritten and custom computer software will be included in calculating the “required
   capital investment” for purposes of the enhanced industrial machinery credit that can be
   applied against [TAXPAYER]’s franchise, excise tax liability.
2. Based on the Facts presented, [TAXPAYER] will be eligible for an industrial machinery
   franchise, excise tax credit of 5% of the purchase price of qualifying industrial machinery
   purchased for its facility expansion, provided that all applicable statutory requirements are
   met.
3. Yes. All software, including prewritten canned software and custom software, is treated
   as industrial machinery for purposes of the franchise, excise tax enhanced industrial
   machinery credit, provided that all applicable statutory requirements are met.
4. [TAXPAYER] will be eligible to apply the enhanced industrial machinery franchise, excise
   tax credit against its franchise, excise tax liability during the first year of the investment
   period, provided that all applicable statutory requirements are met. If the required capital
   investment is not made during the investment period, [TAXPAYER] will be required to pay
   an assessment equal to the amount of industrial machinery credit taken plus interest.
5. Assuming that [TAXPAYER] is able to meet all applicable statutory requirements,
   including the required capital investment requirement, to qualify for the enhanced
   industrial machinery franchise, excise tax credit, [TAXPAYER] will be permitted to offset
   100% of its franchise, excise tax liability by the enhanced industrial machinery franchise,
   excise tax credit earned in connection with its facility expansion in Tennessee, provided
   that the Commissioner of Revenue and the Commissioner of Economic and Community
   Development issue a written determination that it is in the best interest of the State of
   Tennessee to allow [TAXPAYER] to do so.
   ANALYSIS

02021102-01

3

1.
Assuming that [TAXPAYER] Meets all Applicable Requirements Set Forth in
Tenn. Code Ann. § 67-4-2009(4) and Other Applicable Statutes Pertaining to the Enhanced
Industrial Machinery Franchise, Excise Tax Credit, [TAXPAYER]’s Purchases of Real
Property, Tangible Personal Property, and Prewritten and Custom Computer Software Will be
Included When Calculating the Required Capital Investment for Purposes of the Credit
Tenn. Code Ann. § 67-4-2009(4)(A), set forth in pertinent part below, provides a credit
against the Tennessee franchise, excise tax for the purchase price of “industrial machinery,”
as defined by Tenn. Code Ann. § 67-6-102(47) and 67-4-2009(4)(A):
There shall be allowed against the sum total of the taxes imposed by the franchise tax
law, compiled in part 21 of this chapter, and by the excise tax law, compiled in this part, a
credit equal to one percent (1%) of the purchase price of industrial machinery purchased
during the tax period covered by the return and located in Tennessee.
In addition to other applicable provisions and requirements set forth in Tenn. Code Ann. § 674-2009(4) with regard to the industrial machinery franchise, excise tax credit, Tenn. Code
Ann. § 67-4-2009(4)(I)(i)-(iv), set forth below, provides for an enhanced industrial machinery
credit that is available to taxpayers that meet certain investment requirements:
(i) If the taxpayer makes a required capital investment in excess of one billion dollars
($1,000,000,000) during the investment period, the credit allowed in subdivision (4)(A)
shall be equal to ten percent (10%) of the purchase price of industrial machinery
located in this state and purchased in the process of making the required capital
investment. The credit shall be subject to subdivisions (4)(A)-(H), except that a
taxpayer making the required capital investment for purposes of this subdivision (4)(I)
shall be entitled to the credit for the items listed in subdivision (4)(A)(ii) regardless of
whether the taxpayer meets any of the requirements of, or qualifies for, the job tax
credit provided in § 67-4-2109(b);
(ii) If the taxpayer makes a required capital investment in excess of five hundred million
dollars ($500,000,000) during the investment period, the credit allowed in subdivision
(4)(A) shall be equal to seven percent (7%) of the purchase price of industrial
machinery located in this state and purchased in the process of making the required
capital investment. The credit shall be subject to subdivisions (4)(A)-(H), except that a
taxpayer making the required capital investment for purposes of this subdivision (4)(I)
shall be entitled to the credit for the items listed in subdivision (4)(A)(ii) regardless of
whether the taxpayer meets any of the requirements of, or qualifies for, the job tax
credit provided in § 67-4-2109(b);
(iii) If the taxpayer makes a required capital investment in excess of two hundred fifty
million dollars ($250,000,000) during the investment period, the credit allowed in
subdivision (4)(A) shall be equal to five percent (5%) of the purchase price of industrial
machinery located in this state and purchased in the process of making the required
capital investment. The credit shall be subject to subdivisions (4)(A)-(H), except that a
taxpayer making the required capital investment for purposes of this subdivision (4)(I)

02021102-01

4

shall be entitled to the credit for the items listed in subdivision (4)(A)(ii) regardless of
whether the taxpayer meets any of the requirements of, or qualifies for, the job tax
credit provided in § 67-4-2109(b);
(iv) If the taxpayer makes a capital investment in excess of one hundred million dollars
($100,000,000) during the investment period, the credit allowed in subdivision (4)(A)
shall be equal to three percent (3%) of the purchase price of industrial machinery
located in this state and purchased in the process of making the required capital
investment. The credit shall be subject to subdivisions (4)(A)-(H), except that a
taxpayer making the required capital investment for purposes of this subdivision (4)(I)
shall be entitled to the credit for the items listed in subdivision (4)(A)(ii) regardless of
whether the taxpayer meets any of the requirements of, or qualifies for, the job tax
credit provided in § 67-4-2109(b)[.]
Unlike the 1% industrial machinery franchise, excise tax credit provided by Tenn. Code Ann. §
67-4-2009(4)(A), the enhanced industrial machinery credit provided by Tenn. Code Ann. § 674-2009(4)(I)(i)-(iv) is contingent on the taxpayer making a sizable “required capital
investment,” which is defined by Tenn. Code Ann. § 67-4-2009(4)(I)(vii)(c) set forth below1:
“Required capital investment” means an increase of a business investment in real
property, tangible personal property or computer software owned or leased in this state
valued in accordance with generally accepted accounting principles. A capital investment
shall be deemed to have been made as of the date of payment or the date the taxpayer
enters into a legally binding commitment or contract for purchase or construction.
The required capital investment to qualify for the enhanced industrial machinery credit ranges
from $100 million to $1 billion and results in credits ranging from 3% to 10%, depending on
the level of the investment. Unlike Tennessee’s sales and use tax statutes, Tennessee’s
franchise, excise tax statutes do not define the term “tangible personal property.”
The most basic rule of statutory construction is to ascertain and give effect to the intention
and purpose of the legislature. Worrall v. Kroger Co., 545 S.W.2d 736 (Tenn. 1977).
Legislative intent or purpose is to be ascertained primarily from the natural and ordinary
meaning of the language used, without forced or subtle construction that would limit or extend
the meaning of the language. National Gas Distributors, Inc. v. State, 804 S.W.2d 66 (Tenn.
1991). In seeking to determine the “natural and ordinary meaning” of statutory language, the
usual and accepted source for such information is a dictionary. State v. Givens, Slip op.
1994 WL406187 (Tenn.Crim.App. Aug. 4, 1994).
BLACK’S LAW DICTIONARY 1494 (8th ed. 2004) defines the word “tangible” as “. . . having
or possessing physical form; capable of being touched and seen; perceptible to touch;
capable of being possessed . . . .” “Tangible property” is defined by BLACK’S LAW
DICTIONARY 1254 (8th ed. 2004) as “. . . property that has physical form and characteristics”

1

Tenn. Code Ann. § 67-4-2009(4)(I)(vii)(c) was amended by Section 23 of Chapter 530 of the Public Acts of
2009 to include all computer software. The amendment was effective June 25, 2009 but is applicable to all
business plans filed on or after July 1, 2009.

02021102-01

5

and “tangible personal property” is defined as “. . . property that can be weighed, measured,
felt or touch, or is in any other way perceptible to the senses.”
Because computer hardware is in a physical form that is capable of being seen and touched,
it is tangible personal property. Thus, [TAXPAYER]’s investment in computer hardware for its
facility expansion will be included in the calculation of the total required capital investment for
purposes of the enhanced industrial machinery credit. Likewise, furniture, fixtures, equipment
and any other property that is capable of being seen and touched will be included in the
calculation of [TAXPAYER]’s “required capital investment,” as defined by Tenn. Code Ann. §
67-4-2009(4)(I)(vii)(c) for purposes of the Tennessee franchise, excise tax industrial
machinery credit.
Computer software is not defined for purposes of the “required capital investment” definition
contained in Tenn. Code Ann. § 67-4-2009(4)(I)(vii)(c). However, Tenn. Code Ann. § 67-42009(4)(A)(ii) references Tenn. Code Ann. § 39-14-601 to define “computer software” and
other related terms for purposes of the industrial machinery franchise, excise tax credit.
Tenn. Code Ann. § 39-14-601(7) defines “computer software” as follows:
“Computer software” means a set of computer programs, procedures, and associated
documentation concerned with the operation of a computer, computer system, or
computer network whether imprinted or embodied in the computer in any manner or
separate from it, including the supporting materials for the software and accompanying
documentation.
Since this definition is used to define “computer software” for purposes of “industrial
machinery” that qualifies for the Tennessee franchise, excise tax industrial machinery credit, it
appears reasonable to conclude that the intent of the Tennessee General Assembly when
enacting the enhanced industrial machinery credit that is available to certain taxpayers under
the provisions Tenn. Code Ann. § 67-4-2009(4)(I)(i)-(iv) was that the term “computer software”
would have the same meaning set forth in Tenn. Code Ann. § 39-14-601(7). It does not make
logical sense that the term “computer software” would somehow have a different definition
when purchased for purposes of the required capital investment necessary to qualify for the
enhanced industrial machinery credit. This is especially true since no other definition of
“computer equipment” is specified when the industrial machinery franchise, excise tax credit is
enhanced due to a taxpayer’s increased required capital investment level.
The definition of “computer software” contained in Tenn. Code Ann. § 39-14-601(7) makes no
distinction between prewritten software, and custom software.
Thus, [TAXPAYER]’s
investment in computer software, regardless of the type of software, will be included in the
calculation of [TAXPAYER]’s total “required capital investment” for purposes of the enhanced
industrial machinery franchise, excise tax credit, provided that the software otherwise falls
within the “required capital investment” definition contained in Tenn. Code Ann. § 67-42009(4)(I)(vii)(c).

2. [TAXPAYER] will be Eligible for an Industrial Machinery Franchise, Excise Tax Credit of
   5% of the Purchase Price of Qualifying Industrial Machinery Purchased for its Facility
   Expansion, Provided that All Applicable Statutory Requirements are Met
   02021102-01

6

In [YEAR] [TAXPAYER] announced plans to increase investment in one of its U.S. facilities.
In connection with the new investment announced in [YEAR], the Facts presented state that
[TAXPAYER], plans to invest at least [DOLLAR AMOUNT – TOTAL INVESTMENTS ARE
SUFFICIENT TO QUALIFY FOR TAX INCENTIVES SOUGHT] in [REDACTED
INFORMATION]. in connection with the facility expansion. In addition, at least [NUMBER –
NUMBER OF JOBS CREATED ARE SUFFICIENT TO QUALIFY FOR TAX INCENTIVES
SOUGHT] new jobs will be created as part of the facility expansion.
Such an investment will qualify for the enhanced industrial machinery franchise, excise tax
credit provided by Tenn. Code Ann. § 67-4-2009(4)(I)(iii), set forth below, provided that all
applicable statutory requirements are met:
If the taxpayer makes a required capital investment in excess of two hundred fifty million
dollars ($250,000,000) during the investment period, the credit allowed in subdivision
(4)(A) shall be equal to five percent (5%) of the purchase price of industrial machinery
located in this state and purchased in the process of making the required capital
investment. The credit shall be subject to subdivisions (4)(A)-(H), except that a taxpayer
making the required capital investment for purposes of this subdivision (4)(I) shall be
entitled to the credit for the items listed in subdivision (4)(A)(ii) regardless of whether the
taxpayer meets any of the requirements of, or qualifies for, the job tax credit provided in §
67-4-2109(b)[.]
For this purpose, Tenn. Code Ann. § 67-4-2009(4)(I)(vii)(c) defines a “required capital
investment” as follows:
“Required capital investment” means an increase of a business investment in real
property, tangible personal property or computer software owned or leased in this state
valued in accordance with generally accepted accounting principles. A capital investment
shall be deemed to have been made as of the date of payment or the date the taxpayer
enters into a legally binding commitment or contract for purchase or construction.
Assuming that [TAXPAYER]’s planned facility expansion meets all applicable statutory
requirements, its new investment of [DOLLAR AMOUNT – TOTAL INVESTMENTS ARE
SUFFICIENT TO QUALIFY FOR TAX INCENTIVES SOUGHT] in [REDACTED
INFORMATION] purchases in Tennessee will be eligible for an enhanced industrial
machinery franchise, excise tax credit of 5% of the purchase price of qualifying industrial
machinery.
3.

All Software, Including Prewritten and Custom Software, will be Treated as
Industrial Machinery for Purposes of the Franchise, Excise Tax Enhanced Industrial
Machinery Credit, Provided that all Applicable Statutory Requirements are Met.

As discussed in the Analysis for question one above, Tenn. Code Ann. § 67-4-2009(4)(A), set
forth in pertinent part below, provides a credit against the Tennessee franchise, excise tax for
the purchase price of “industrial machinery,” as defined by Tenn. Code Ann. § 67-6-102(47)
and 67-4-2009(4)(A):

02021102-01

7

There shall be allowed against the sum total of the taxes imposed by the franchise tax
law, compiled in part 21 of this chapter, and by the excise tax law, compiled in this part, a
credit equal to one percent (1%) of the purchase price of industrial machinery purchased
during the tax period covered by the return and located in Tennessee. For purposes of
this section, “industrial machinery” means:
(i) “Industrial Machinery” as defined by § 67-6-102; or
(ii) “Computer,” “computer network,” “computer software,” or “computer system” as
defined by § 39-14-601, and any peripheral devices, including, but not limited to,
hardware, such as printers, plotters, external disc drives, modems, and telephone
units, purchased by a taxpayer in the process of making the required capital
investment in Tennessee described in § 67-4-2109(a), if as a result of making such
purchase and meeting the other requirements set forth in § 67-4-2109(b), the
taxpayer qualifies for the job tax credit provided therein[.]
Tenn. Code Ann. § 39-14-601(7) defines “computer software” as follows:
“Computer software” means a set of computer programs, procedures, and associated
documentation concerned with the operation of a computer, computer system, or
computer network whether imprinted or embodied in the computer in any manner or
separate from it, including the supporting materials for the software and accompanying
documentation.
The above definition of “computer software” makes no distinction between prewritten canned
computer software and custom computer software. Tenn. Code Ann. § 67-4-2009(4)(I)(iii)
states that a taxpayer who is eligible for the enhanced industrial machinery franchise, excise
tax credit “shall be entitled to the credit for the items listed in subdivision (4)(A)(ii) regardless
of whether the taxpayer meets any of the requirements of, or qualifies for, the job tax credit
provided in § 67-4-2109(b)[.]”
Accordingly, all of [TAXPAYER]’s purchases of “computer software,” which includes
prewritten canned and custom software, purchased by [TAXPAYER] in connection with its
planned facility expansion will be treated as industrial machinery for purposes of the
franchise, excise tax enhanced industrial machinery credit, provided that all applicable
statutory requirements are met.
4.

[TAXPAYER] Will be Eligible to Apply the Enhanced Industrial Machinery
Franchise, Excise Tax Credit Against its Franchise, Excise Tax Liability During the First
Year of the Investment Period, Provided that all Applicable Statutory Requirements are Met

Tenn. Code Ann. § 67-4-2009(4)(I)(vi) makes the following provisions with regard to the time
period in which a taxpayer qualifying for the enhanced industrial machinery franchise, excise
tax credit may apply the credit:

02021102-01

8

The credit in this subdivision (4)(I) shall begin to apply in the first year of the investment
period; however, if the required capital investment is not met during the investment period,
the taxpayer shall be subject to an assessment equal to the amount of any credit taken
under this subdivision (4)(I) for which the taxpayer failed to qualify, plus interest[.]
For this purpose, Tenn. Code Ann. § 67-4-2009(4)(I)(vii)(b) defines the “investment period” as
follows:
“Investment period” means a period not to exceed three (3) years from the filing of the
business plan related to the required capital investment, during which the required capital
investment must be made. The three-year period for making the required capital
investment may, for good cause shown, be extended by the commissioner of economic
and community development for a reasonable period not to exceed four (4) years for a
taxpayer that meets the requirements of this subdivision (4)(I)(i) and not to exceed two (2)
years for any other taxpayer[.]
[REDACTED INFORMATION].
[TAXPAYER] may apply the enhanced industrial machinery franchise, excise tax credit during
the first year of the investment period for the proposed facility expansion, provided that all
statutory requirements are met.
For example, if [TAXPAYER]’s investment period began [DATE], [TAXPAYER] may apply
against its Tennessee franchise, excise tax liability a credit amounting to 5% of the purchase
price of qualifying industrial machinery purchased in the process of making the statutory
“required capital investment” in connection with its proposed facility expansion.
If the entire credit is not used during the [DATE] tax period, the remaining credit may be
carried forward for up to fifteen years pursuant to the provisions of Tenn. Code Ann. § 67-42009(4)(C). If the required capital investment is not made during the investment period,
[TAXPAYER] will be required to pay an assessment equal to the amount of the industrial
machinery credit taken plus interest.

5. [TAXPAYER] May Offset 100% of its Franchise, Excise Tax Liability by the Enhanced
   Industrial Machinery Credit Related to its Tennessee Facility Expansion, Provided the
   Commissioner of Revenue and the Commissioner of Economic and Community Development
   Issue a Written Determination that it is in the Best Interest of the State of Tennessee to Allow
   [TAXPAYER] to Do So, and Provided that All Applicable Statutory Requirements are Met.
   Although Tenn. Code Ann. § 67-4-2009(4)(B) states that the franchise, excise tax industrial
   machinery credit is limited to “. . . fifty percent (50%) of the combined franchise and excise
   tax liability shown by the return before the credit is taken[,]” under certain circumstances,
   Tenn. Code Ann. § 67-4-2009(4)(H), set forth below, permits an offset of up to 100% of the
   tax under certain circumstances:
   Notwithstanding any provision to the contrary, a taxpayer that has established its
   international, national, or regional headquarters in this state and has met the requirements
   02021102-01

9

to qualify for the credit provided in § 67-6-224, or a taxpayer that has established an
international, national, or regional warehousing or distribution hub in this state and has
met the requirements to be a qualified new or expanded warehouse or distribution facility,
shall be allowed to offset up to one hundred percent (100%) of its franchise and/or excise
tax liability by the industrial machinery credit provided in this subdivision (4), or any
carryforward of the industrial machinery credit, if the commissioner of revenue and the
commissioner of economic and community development determine that increasing the
percentage of offset above that allowed by subdivision (4)(B) is in the best interests of the
state. For purposes of this subdivision (4)(H), “best interests of the state” includes, but is
not limited to, a determination that the taxpayer established its headquarters or a
warehousing or distribution hub in this state, or converted a regional headquarters or
regional warehousing or distribution hub in this state into its national or international
headquarters or a national or international warehousing or distribution hub, as a result of
such action. The commissioner of revenue and the commissioner of economic and
community development shall determine the percentage of franchise and/or excise tax
liability allowed to be offset, above that otherwise allowed by subdivision (4)(B), and the
period during which the increased offset shall continue[.]
The Facts presented state that [TAXPAYER] has established a regional headquarters in
Tennessee and has previously met the requirements to qualify for the qualified headquarters
facility sales and use tax credit provided by Tenn. Code Ann. § 67-6-224. In addition,
[TAXPAYER]’s proposed facility expansion will qualify for the headquarters facility credit
provided in Tenn. Code Ann. § 67-6-224.
Assuming that [TAXPAYER] is able to meet all applicable statutory requirements, including
the required capital investment requirement, to qualify for the enhanced industrial machinery
franchise, excise tax credit, [TAXPAYER] will be entitled to offset 100% of its franchise,
excise tax liability by the enhanced industrial machinery franchise, excise tax credit earned in
connection with its facility expansion in Tennessee if the Commissioner of Revenue and the
Commissioner of Economic and Community Development issue a written determination that it
is in the best interest of the State of Tennessee to allow [TAXPAYER] to do so.

Arnold B. Clapp
Special Counsel to the Commissioner

APPROVED:

02021102-01

Richard H. Roberts, Commissioner

10

DATE:

02021102-01

__3-15-11______

11