Tennessee, often celebrated as the Volunteer State for its rich history of civic involvement, stands as a musical heritage and economic vitality. Known for its vibrant culture, this state offers a unique landscape for businesses. However, mastering the nuances of Tennessee sales tax exemptions is crucial for entrepreneurs looking to thrive in Tennessee’s distinct business milieu.
This guide breaks down everything you need to know about Tennessee’s sales tax, from determining the right sales tax rates to understanding exemptions and filing processes. By the end of this comprehensive guide, you’ll be equipped to handle Tennessee’s sales tax with confidence and ease.
Sales Tax Nexus in Tennessee
When a business creates either a physical or economic nexus, it is required to collect sales tax in Tennessee.
Physical Nexus
A physical nexus means having a significant physical presence or engaging in enough activities within a state to require the collection and payment of sales tax. The factors that determine a physical nexus in Tennessee include:
- Physical Location: This includes having an office, a place for distribution, sales, or showcasing products, a warehouse or storage facility, or any other place where you conduct business.
- Inventory in the State: This covers situations where you store your products within the state, even if it’s done through a third-party fulfillment center or 3PL (like Amazon FBA) or an online marketplace.
- Employees, independent contractors, agents, or other representatives operating on your behalf.
- Click-through Nexus: You could trigger a physical nexus if you have affiliates, whether they operate online or in-person, who have collectively sold more than $10,000 worth of products for delivery in Tennessee within the 12-month period.
- Presence at Tradeshows: Company staff engaging in promotional activities within Tennessee, like attending trade shows, establishes nexus with the state.
Economic Nexus
States have established regulations to collect sales tax from out-of-state sellers who meet certain revenue and/or transaction thresholds. This rule is known as economic nexus.
Tennessee enacted a new law that reduces the threshold for sales tax collection from $500,000 to $100,000, effective October 1, 2020.
While the nexus criteria mentioned above generally apply to most businesses, additional methods exist for establishing sales tax nexus. To access a comprehensive list of these rules, please refer to the
governing laws for sales tax nexus requirements in Tennessee.
Tennessee Sales Tax on Goods and Services
One of the first things you need to know is whether the goods you’re selling or services you’re offering are taxable in Tennessee.
Tangible Products
Almost all goods are taxable in Tennessee, including:
- Cosmetics
- Electronics
- Clothing – Clothing items are generally taxable in Tennessee. However, clothes sold by no-profit organizations may be exempt.
- Furniture
- Jewelry
- Home Goods
- Groceries – The sale of food and grocery items are taxable in Tennessee at a reduced rate of 4%.
- Feminine Hygiene Products – Products such as pads, tampons, and menstrual cups are still taxable in Tennessee.
Tennesse sales tax exemptions include the following:
- Coins, currency, and bullion
- Textbooks and Workbooks
- Newspapers and Periodicals
- Healthcare Products – particularly prescription drugs, prescribed durable medical equipment for home use (e.g., humidifiers, blood pressure equipment), mobility enhancing equipment (e.g., wheelchairs, canes), prosthetic devices (e.g., artificial arms/legs, hearing aids), and other medical devices like enteral feeding systems and diabetic testing supplies.
- Gasoline
- Liquified gas and compressed natural gas
- Film, including negatives, used in the business of printing or typesetting
- Home communication terminals, remote control devices, and similar equipment
- purchased by a video programming service provider for sale/lease to its subscribers
- Air and water pollution control chemicals
- United States and Tennessee flags sold by nonprofit organizations
- Packaging
- Utility poles, anchors, guys, and conduits
- School meals
- Coin-operated telephone services
Services
In Tennessee, the majority of service-based transactions, such as professional services and advertising, are not subject to sales tax.
However, there are specific situations where certain services are taxable:
- Repair and installation services of tangible personal property or computer software
- Lodging services and rooms and short-term space rentals
- Cleaning of tangible personal property services
- Animal bathing
- Telecommunication services
- Parking and storing of motor vehicles
- Television programming services
- Ancillary services
- Enriching of uranium materials
Software-As-A-Service (SaaS)/Digital Products
SaaS is
taxable in the state of Tennessee.
Digital products (i.e., downloaded video games, digital audio works, digital audio-visual works, digital books, and streaming videos) are
also taxable. However, products such as digital newspapers or magazines, digital photographs or images, digital artwork, and digital greeting cards are not taxable.
Shipping/Handling
Shipping and handling charges in the state of Tennessee are
taxable if the item is taxable.
Sales Tax Permits and Licenses in Tennessee
Now that you’ve got a handle on when sales tax nexus applies and which products are taxable in Tennessee, the next important step is getting your Tennessee Seller’s Permit, also known as a sales tax permit.
Seller’s Permit
You can register for a Tennessee sales tax permit online at the Tennessee Taxpayer Access Point (TNTAP).
Ensure you have specific information on hand when registering for a seller’s permit, including, but not limited to:
- Business Identification Information (name, address, phone number, email address)
- Business Entity Structure (sole proprietorship, partnership, corporation, LLC, etc.)
- Federal Employer Identification Number (EIN or FEIN)
- Owner/Partner/Officer Information
- Business Activity Details (description of products or services sold, sales volume, date of the first sale or the expected date to start dates)
Registration fee
There is no fee to register for a sales tax permit.
Renewal
In Tennessee, you don’t have to renew your sales tax permit.
Resale Certificate
A resale certificate is a document that allows businesses to buy products without paying sales tax on them, as long as they plan to resell those items to customers, who will then pay the tax. As a seller, you can also accept resale certificates from others looking to buy for resale.
In Tennessee, sellers use resale certificates to buy goods from their suppliers that they intend to resell. The issuance of the certificates is always done in good faith that the seller would report tax on the final sale of the items.
You can fill out the
Streamlined Sales and Use Tax Certificate of Exemption if you would like to get
sales tax exemption for multiple states simultaneously or access the resale certificate provided by the Tennessee Department of Revenue after you receive your sales tax permit at TNTAP. If you don’t want the hassle of registering, sign up for our all-inclusive service that includes sales tax registration.
Streamlined Sales Tax (SST)
The
Streamlined Sales Tax (SST) is an initiative to simplify and standardize sales tax regulations across multiple states. Tennessee
has been a party to this program since October 1, 2005, meaning it follows the uniform rules and definitions established by SST.
Check with the
Tennessee Department of Revenue for the most current information on Tennessee’s participation in the Streamlined Sales Tax initiative.
Calculating and Collecting Sales Tax in Tennessee
Sales Tax Computation
In Tennessee, sales tax isn’t just one simple rate; it’s a combination of state and local taxes. To figure out the total sales tax for your calculation, you’ll need to add up the rates for the state, county, and city (if applicable) where your transaction occurs. Use TaxHero’s Tennessee Sales Tax Calculator to compute for sales tax.
Here’s an example. Suppose an out-of-state seller satisfies the economic nexus criteria in Tennessee and sells to a customer in Nashville, TN, with a ZIP code of 37013. In that case, the seller has to charge the customer a total sales tax, which can be broken down as follows:
 |
SALES TAX FORMULA |
RATE |
| State: |
Tennessee |
7.000% |
| County: |
Davidson |
2.250% |
| District: |
Fifth District |
0.000% |
| City: |
Nashville |
0.000% |
| Combined Sales Tax Rate = |
9.250% |
|
Origin-based vs. Destination-based
When making in-state sales, it is important to determine if you are located in an origin-based or destination-based state to figure out what rate to charge for sales tax.
Tennessee is an origin-based state, meaning sales tax is determined based on the seller’s location. That means for a Tennessee-based seller, sales tax is generally based on the location of the seller when selling within the state.
For out-of-state or remote sellers, the sales tax rate is always determined by the buyer’s location. For instance, if you’re selling a product from New York to a customer in Nashville, Tennessee, where you have nexus, you’d apply Nashville’s sales tax rate to that sale.
To make life easier, consider using sales tax software or consulting a tax professional, like TaxHero, to ensure accurate tax calculations and collections. Understanding these tax rules helps you stay compliant, whether you’re in-state or out-of-state.
Filing and Remitting Sales Tax Returns in Tennessee
The next step after collection is filing and remitting your Tennessee sales tax returns. Filing and remittance can vary in frequency, typically monthly, quarterly, or annually. Taxpayers with an average monthly sales and use tax liability of $1,000 or less for 12 consecutive months are authorized to file either monthly or quarterly.
It’s crucial to keep accurate records of your sales and tax collections and adhere to the filing schedule set by the state to remain compliant with Tennessee sales tax regulations.
Due Dates
In Tennessee, the due date falls on the 20th day of the following month. For instance, sales tax collected in January is due by February 21st for monthly filers.
However, if this day is a holiday, weekend, or in the rare occurrence of a natural disaster, the deadline is typically extended to the next business day. For instance, if you’re a monthly filer and filing sales tax for the month of April, and the May 20th deadline falls on a holiday or weekend, you’ll have until May 21st, the following business day, to submit.
Filing Sales Tax Returns
To file your sales tax return for Tennessee, a few options are available:
- File online through the TNTAP.
- File with TaxHero – Let TaxHero take care of it so you don’t have to worry about missing a payment or return.
Timely Filing Discount
Some states offer a discount to businesses for collecting, filing, and remitting sales taxes on time as an incentive to process them promptly. However, Tennessee does not offer a discount.
Sales Tax Holiday
Currently, for 2024, the planned sales tax holiday in Tennessee is:
- Back to School Sales Tax Holiday (July 26-28, 2024) – School supplies and school art supplies for $100 and less, clothing apparel for $100 and less, and computers and laptops priced at $1,500 and less.
Tennessee Sales Tax Penalties
Like in most states, sales tax is a big part of how Tennessee generates revenue. Thus, maintaining compliance with sales tax regulations is of utmost importance. Failure to do so can lead to consequences and sales tax penalties. Therefore, it is crucial always to ensure you are up-to-date in filing, collecting, and remitting sales tax to the state.
Here are the specific penalties for non-compliance with sales tax regulations in Tennessee:
- Civil penalties for late filing or payment amounting to a minimum of $15 regardless of the amount of tax due, and a maximum penalty of 25% of the total sales tax due; Whereas civil penalties for negligence carry a penalty of at least 10% of the underpayment
- On the criminal side, offenses can be classified as a felony, depending on the severity and specific circumstances.
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