Does building a Tennessee facility through contractors create franchise and excise tax nexus before revenue?

Doing business and substantial nexus during a build

Tennessee applies two tests, and both must be met. The first is "doing business," which the Department's Franchise and Excise Tax Manual (June 2026) quotes from section 67-4-2004(14) as "any activity purposefully engaged in within Tennessee, by a person with the object of gain, benefit, or advantage," read to reach as far as the United States and Tennessee Constitutions allow. Building a facility the owner intends to operate is purposeful activity with an object of gain; the gain is deferred, not absent. The statute lists four exceptions (trade show presence of not more than twenty days a year, certain magazine and book publishers using Tennessee printers, the temporary presence of an out-of-state person's equipment, tooling, inventory and employees, and short buying trips by employees), and none describes a business erecting its own building. The equipment-and-tooling exception, the closest in shape, requires that the activity not be the pursuit, creation or maintenance of a Tennessee market, that the items not be held by an affiliate, and that the extent and value of the presence be "qualitatively and quantitatively de minimis." A permanent facility on owned land fails the last condition on its face.

The second test is "substantial nexus in this state," defined in section 67-4-2004(47) since the Revenue Modernization Act of 2015 for tax years beginning on or after January 1, 2016. The manual describes it as "any direct or indirect connection of the taxpayer to this state such that the taxpayer can be required under the U.S. Constitution to remit franchise and excise tax," including, among the listed connections, that "[t]he taxpayer owns or uses its capital in this state." A business that buys or leases a Tennessee site and pays for a building on it is using its capital in Tennessee in the most literal sense. The list also includes bright-line presence, but the bright lines are one route to substantial nexus, not the only one; the manual states that physical presence "will often create nexus," and gives the example of an out-of-state business that contracts with full-time agents in Tennessee for less than $50,000 a year as having nexus "under traditional nexus principles, as published in court cases, even though the bright-line test was not met."

No Tennessee ruling or case located for this article addresses a pre-operational construction project specifically. The conclusion rests on the statutory text and the Department's published reading of it, and the Department's manual leaves little room for a contrary reading where the taxpayer owns the site or the facility.

Why the bright-line tests do not settle the question

The bright-line tests are the first place many reviews look, and during construction they can point the wrong way. A taxpayer has bright-line presence if its Tennessee receipts exceed the lesser of $500,000 or 25 percent of its total receipts; if the average value of its real and tangible property owned or rented and used in Tennessee exceeds the lesser of $50,000 or 25 percent of its total property; or if its Tennessee compensation exceeds the lesser of $50,000 or 25 percent of its total compensation, each as determined under section 67-4-2012 (manual, Chapter 3). A building project can fall short of all three.

Receipts are zero by hypothesis. Compensation, as determined under section 67-4-2012(e), is compensation the taxpayer pays; the manual states that "[e]xpenses for independent contractors or any other labor not properly classified as an employee are excluded from the payroll factor." A general contractor's crews, however large, are not the owner's payroll. The property test is measured by the property factor rules, and Rule 1320-06-01-.27(2) provides that "[p]roperty or equipment under construction during the tax period (except inventoriable goods in process) shall be excluded from the factor until such property is actually used to produce business earnings," with partial inclusion to the extent the property is partly used while still under construction. A building that is not yet in service is therefore outside the measure the bright-line property test uses. The land beneath it is a closer question: the rule excludes property "under construction," and whether land held for a facility not yet operating is property "actually used or . . . available for use or capable of being used" in producing business earnings is not settled by its text. The Department has not addressed that point in the material reviewed.

The practical consequence is that a taxpayer can fail every bright-line test while plainly having nexus through its owned or leased site and its capital. An analysis that stops at the thresholds, or that treats contractor payments as the only Tennessee contact, can reach a "no nexus" answer the statute does not support.

The contractors themselves are not the strongest nexus fact, and the attribution cases explain why. In Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, 483 U.S. 232 (1987), the Supreme Court accepted the rule that "the crucial factor governing nexus" is whether in-state activity performed on the taxpayer's behalf is "significantly associated with the taxpayer's ability to establish and maintain a market" in the state. A construction crew building the owner's own facility is not making a market for anything. The owner's nexus comes from its own property and capital in Tennessee, which needs no attribution doctrine, and from its own purposeful activity in directing the build. Where the owner's employees supervise the project on site, that presence adds to the same conclusion.

Who files: the corporate owner or the project entity

Tennessee taxes limited liability companies and limited partnerships at the entity level, and it disregards a single-member LLC only when the single member is a corporation (sections 67-4-2007(d) and 67-4-2106(c)). The manual states the result for a corporate owner directly: "If either entity has nexus with the state, the activities of both the corporation and the SMLLC are included in one franchise and excise tax return filed under the corporation," and "the activities of the SMLLC operating in the state will subject the corporate owner to franchise and excise tax." A corporation that holds its Tennessee site in a single-member LLC files one Tennessee return reporting its own net worth and earnings, apportioned.

Where the site entity's owner is a partnership, a fund, an individual or another noncorporate entity, the site entity files on its own, and it is usually a single-purpose company whose only activity anywhere is the Tennessee project. The same is true of a multi-member LLC formed as a joint venture to develop the site. That structural fact decides the cost of the construction years.

Two filing rules apply regardless of structure. An entity formed in or qualified with the Tennessee Secretary of State must file a franchise and excise tax return and pay at least the minimum tax, and an entity that has not registered there is liable from the time it begins operating with substantial nexus in Tennessee (manual, Chapter 5, citing sections 67-4-2007 and 67-4-2103). A taxpayer must apply for registration with the Department within 15 days of becoming subject to the taxes (section 67-4-2003(c), as described in the manual).

What the construction years cost: two different answers

An apportioning taxpayer with no Tennessee receipts. A taxpayer with business activity taxable both inside and outside Tennessee apportions its net worth and net earnings (sections 67-4-2111 and 67-4-2012). For tax years ending on or after December 31, 2025, "net earnings must be apportioned to this state by multiplying the earnings by the receipts factor only" (section 67-4-2012(a)(5)), and the manual applies the same single sales factor to net worth. The receipts factor is Tennessee receipts over receipts everywhere (section 67-4-2012(g)). A corporation with customers elsewhere and none in Tennessee has a Tennessee ratio of zero. Apportioned net worth is then zero, and the franchise tax is the $100 annual minimum (section 67-4-2119; Form FAE170 instructions, 2025). Apportioned net earnings are zero, so no excise tax is due.

The zero ratio has a cost on the excise side. Tennessee's net operating loss is measured after apportionment: the manual states that the current-year loss "is after apportionment" and carries forward 15 years, with no carryback (section 67-4-2006(c)). Construction-period start-up losses apportioned at zero percent create no Tennessee carryforward to shelter the facility's first profitable years.

A project entity with no right to apportion. The right to apportion requires activity in another state that, if conducted in Tennessee, would be doing business with substantial nexus. The manual states that "[t]axpayers without the right to apportion should enter 100% on the apportionment ratio lines," and the Form FAE170 instructions repeat it. A single-purpose site company whose only activity is the Tennessee build, whose owners are not corporations, apportions nothing: its whole net worth is Tennessee net worth.

Net worth is total assets less total liabilities computed under generally accepted accounting principles (section 67-4-2106(b)), and the rate is 0.25 percent (section 67-4-2106(a)). During construction the balance sheet is mostly construction in progress and cash, and net worth is largely the owners' contributed equity less expensed start-up costs. How the build is financed therefore drives the tax. Third-party construction debt reduces net worth. Debt from an affiliate can be added back for a corporate taxpayer: where a corporation's capital is inadequate and it is funded by loans from, or guaranteed by, a parent or affiliated corporation, section 67-4-2107(b) and Rule 1320-06-01-.15 add back all or part of that debt, measured as the lesser of the Rule 15 method and a 4:1 debt-to-equity method. One of the Rule 15 subtests is the excess of the book value of capital assets over net worth, the profile of a corporation in the middle of a debt-funded build. The manual notes that the add-back applies only between affiliated corporations, so it does not reach an LLC taxed as a partnership or debt from noncorporate owners.

An invented example shows the spread. Noncorporate investors form a multi-member LLC to build a facility in Tennessee. At the end of its first year the LLC holds $60 million of construction in progress and cash, owes $40 million on a bank construction loan, and has no revenue and no activity outside Tennessee. Its net worth is $20 million, and its franchise tax is $50,000 for a year in which it earned nothing. Its start-up loss carries forward in full, because there is no apportionment to reduce it. If the same site were held in a single-member LLC of an operating corporation with customers in other states and none in Tennessee, the corporation's Tennessee franchise tax for the year would be the $100 minimum and its Tennessee loss carryforward would be zero.

The single sales factor carries both patterns past opening day. Once the facility operates, the apportioning taxpayer's Tennessee ratio follows where its receipts are sourced (section 67-4-2012(h) and (i)), not where its building sits, so a Tennessee facility serving out-of-state customers can keep the ratio low. A single-purpose Tennessee entity remains at 100 percent until it has activity elsewhere.

Earlier years, and the cost of not filing

For a construction phase that began before 2025, the formula was different. Tax years ending on or after December 31, 2023 and before December 31, 2024 weighted the receipts factor five times over seven, and tax years ending in the following twelve months weighted it eleven times over thirteen (section 67-4-2012(a)(3) and (4), enacted by Public Chapter 377 (2023)). In those years the property and payroll factors still counted, but construction in progress stayed out of the property factor until used and contractor payments stayed out of the payroll factor, so a construction phase added little to either. Compensation of the owner's own employees working on a Tennessee project was a different matter: the manual treats capitalized in-house construction labor as payroll.

For tax years ending on or before December 31, 2023, the franchise tax base was the greater of apportioned net worth or the book value of real and tangible property owned or used in Tennessee; Public Chapter 950 (2024) repealed that property measure for tax years ending on or after January 1, 2024 (manual, Chapter 10). The Department's rule on the former measure excluded construction in progress unless the taxpayer was using it, giving as examples a manufacturer expanding its plant and a motel operator with a facility under construction, neither of whose construction counts until put in service (Rule 1320-06-01-.18(4)). The 2023 return instructions for Schedule G, however, called for "[a]ll tangible assets . . . regardless of how the assets are classified." Land the taxpayer owned in Tennessee was real property within the measure in any event. For an unfiled pre-2024 construction year, the minimum floor therefore reached at least the land and could reach more, depending on how the rule and the instructions are reconciled.

Unfiled years are the reason the question matters. The statute of limitations for a franchise and excise tax assessment is three years from December 31 of the year in which the return was filed, and "[a]ssessments may be made at any time if a return is not filed" (manual, citing section 67-1-1501(b)). A construction phase with no returns leaves every one of those years open indefinitely, under whatever measure applied to each. The delinquency penalty runs at 5 percent per month or part of a month, up to 25 percent of the tax, with a $15 minimum (manual, Penalties). On a $100 minimum tax those amounts are small; on a single-purpose entity's full net worth they are not. A return filed for each construction year also fixes the loss carryover record, because the manual states that "Schedules J and K of the loss year establish the loss carryover amount for that year."

Practice notes

The first question for any Tennessee build is who will be the Tennessee taxpayer: a corporation reporting through a disregarded LLC, or a site entity that files on its own. The answer predicts the construction-year bill more reliably than any nexus threshold. For a corporate owner with customers elsewhere, the construction years typically cost the $100 minimum and produce no Tennessee loss carryforward. For a single-purpose site entity, the franchise tax runs on full net worth from the first year-end, and the choice between equity, third-party debt and affiliate debt changes the base, with the affiliated-indebtedness add-back in view whenever a corporate project company is funded by its parent. Nexus does not wait for the bright lines: a review that relies on zero receipts, zero payroll and an excluded construction-in-progress balance can miss nexus that the owned site and committed capital supply on their own. Registration with the Department is due within 15 days of becoming subject to the taxes, and a return for each construction year starts the limitations period and fixes the loss record. G&G State Tax Group provides Tennessee franchise and excise tax nexus and structuring analysis for facility development projects alongside its state and local tax practice.