Tennessee sales tax guide

Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. Tennessee first adopted a general state sales tax in 1947, and since that time, the rate has risen to 7 percent. On top of the state sales tax, there may be one or more local sales taxes, as well as one or more special district taxes, each of which can range between 0 percent and 3 percent. Currently, combined sales tax rates in Tennessee range from 7 percent to 10 percent, depending on the location of the sale.

As a business owner selling taxable goods or services, you act as an agent of the state of Tennessee by collecting tax from purchasers and passing it along to the appropriate tax authority. Sales and use tax in Tennessee is administered by the Tennessee Department of Revenue (TNDOR).

Any sales tax collected from customers belongs to the state of Tennessee, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.

In Tennessee, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto collector.

To help you determine whether you need to collect sales tax in Tennessee, start by answering these three questions:

1. Do you have nexus in Tennessee?
2. Are you selling taxable goods or services to Tennessee residents?
3. Are your buyers required to pay sales tax?

If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.

If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.

It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.

The need to collect sales tax in Tennessee is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.

Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.

In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.

While physical presence still triggers a sales tax collection obligation in Tennessee, it’s now possible for out-of-state sellers to have sales tax nexus with Tennessee.

Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:

Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise, and:

• The cumulative gross receipts from retail sales by the dealer to customers in Tennessee as a result of referrals to the dealer by all of the dealer’s resident representatives under the type of agreement or contract described above total more than $10,000 during the preceding 12 months

Economic nexus: Having a certain amount of economic activity in the state. Under Department of Revenue Rule 129, a remote seller must register, collect, and remit Tennessee sales tax if the remote seller had more than $500,000 in Tennessee sales during the previous 12-month period.

However, the Tennessee Legislature has prohibited enforcement of the economic nexus rule until further notice.

Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Tennessee in a warehouse owned or operated by Amazon.

If you have sales tax nexus in Tennessee, you’re required to register with the TNDOR and to charge, collect, and remit the appropriate tax to the state.

For more information, see the Tennessee Sales and Use Tax Guide and Out-of-State Dealer Registration Enforcement Delayed.

Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. As of May 2019, Tennessee does not have an explicitly defined trailing nexus policy.

If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Tennessee.

If you sell taxable goods to Tennessee residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.

In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing).

As of May 2019, Tennessee is an origin-based state. This means you’re responsible for applying the sales tax rate determined by the ship-from address on all taxable sales. However, the state is scheduled to switch to destination sourcing on July 1, 2019.

For more information, see Tennessee delays sales and use tax changes.

After determining you have sales tax nexus in Tennessee, you need to register with the proper state authority and collect, file, and remit sales tax to the state. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome. Avalara Licensing can help you obtain your Tennessee business license and sales tax registration.

You can register your business online through the Tennessee Taxpayer Access Point (TNTAP). To apply, you’ll need to provide certain information about your business, including but not limited to:

• Business name, address, and contact information
• Federal EIN number
• Date business activities began or will begin
• Projected monthly sales
• Projected monthly taxable sales
• Products to be sold

There is currently no cost to register for a seller’s permit in Tennessee.

You must register with the Tennessee Department of Revenue if you acquire an existing business in Tennessee. The state requires all registered businesses to have the current business owner’s name and contact information on file.

The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).

Tennessee became an associate member of the SST on October 1, 2005.

Once you've successfully registered to collect Tennessee sales tax, you'll need to apply the correct rate to all taxable sales, remit sales tax, file timely returns with the TNDOR, and keep excellent records. Here’s what you need to know to keep everything organized and in check.

How you collect Tennessee sales tax is influenced by how you sell your goods:

Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the sales tax rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.

Hosted store: Hosted store solutions like Shopify and Squarespace offer integrated sales tax rate determination and collection. Hosted stores offer sellers a dashboard environment where Tennessee sales tax collection can be managed.

Marketplace: Marketplaces like Amazon and Etsy offer integrated sales tax rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.

Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.

Tennessee sales tax collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver sales and use tax calculations in real time.

Some goods are exempt from sales tax under Tennessee law. Examples include some industrial machinery, agricultural equipment, fuel, and medical supplies.

We recommend businesses review the Tennessee Sales and Use Tax Guide (beginning on page 56) to see which goods are taxable and which are exempt, and under what conditions.

Some customers are exempt from paying sales tax under Tennessee law. Examples include government agencies, some nonprofit organizations, and merchants purchasing goods for resale.

Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction.

Tennessee sales tax exemption and resale certificates are worth far more than the paper they’re written on. If you’re audited and cannot validate an exempt transaction, the TNDOR may hold you responsible for the uncollected sales tax. In some cases, late fees and interest will be applied and can result in large, unexpected bills.

Sales tax holidays exempt specific products from sales and use tax for a limited period, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year.

As of May 2019, Tennessee has an annual tax holiday scheduled for July 26–28, 2019. State and local taxes will not be assessed on:

• Clothing priced at $100 or less per item
• School and school art supplies priced at $100 or less per item
• Computers priced at $1,500 or less per item (excludes software)

You're registered with the Tennessee Department of Revenue and you've begun collecting sales tax. Remember, those tax dollars don't belong to you. As an agent of the state of Tennessee, your role is that of intermediary to transfer tax dollars from consumers to the tax authorities.

Once you’ve collected sales tax, you’re required to remit it to the TNDOR by a certain date. The TNDOR will then distribute it appropriately.

Filing a Tennessee sales tax return is a two-step process comprised of submitting the required sales data (filing a return) and remitting the collected tax dollars (if any) to the TNDOR. The filing process forces you to detail your total sales in the state, the amount of sales tax collected, and the location of each sale.

Tennessee sales tax filing form SLS-450 is available for download. However, online filing via the TNTAP access point is required in Tennessee unless it creates a hardship for the filer.

The TNDOR will assign you a filing frequency. Typically, this is determined by the size or sales volume of your business. State governments generally ask larger businesses to file more frequently. See the filing due dates section for more information.

Tennessee sales tax returns and payments must be remitted at the same time; both have the same due date.

You may filing directly through the Tennessee Taxpayer Access Point by visiting their site and entering your transaction data manually. This is a free service, but preparing Tennessee sales tax returns can be time-consuming — especially for larger sellers.

To save time and avoid costly errors, many businesses outsource their sales and use tax filing to an accountant, bookkeeper, or sales tax automation company like Avalara. This is a normal business practice that can save business owners time and help them steer clear of costly mistakes due to inexperience and a lack of deep knowledge about Missouri sales tax code.

Once you have a Tennessee seller's permit, you’re required to file returns at the completion of each assigned collection period regardless of whether any sales tax was collected. When no sales tax was collected, you must file a "zero return.”

Failure to submit a zero return can result in penalties and interest charges.

The TNDOR requires all businesses to "close their books" by filing a final sales tax return. This also holds true for business owners selling or otherwise transferring ownership of their business.

Many states encourage the timely or early filing of sales and use tax returns with a timely filing discount.

As of May 2019, the TNDOR does not offer sales tax filers a discount.

It's important to know the due dates associated with the filing frequency assigned to your business by the Tennessee Department of Revenue. This way you'll be prepared and can plan accordingly. Failure to file by the assigned date can lead to late fines and interest charges.

The TNDOR requires all sales tax filing to be completed by the 20th day of the month following the end of the filing period. Below, we've grouped Tennessee sales tax filing due dates by filing frequency for your convenience. Due dates falling on a weekend or holiday are adjusted to the following business day.

Filing a Tennessee sales tax return late may result in a late filing penalty as well as interest on any outstanding tax due. For more information, refer to our section on penalties and interest.

In the event a Tennessee sales tax filing deadline was missed due to circumstances beyond your control (e.g., weather, accident), the TNDOR may grant you an extension. However, you may be asked to provide evidence supporting your claim.

Hopefully you don't need to worry about this section because you're filing and remitting Tennessee sales tax on time and without incident. However, in the real world, mistakes happen.

If you miss a sales tax filing deadline, follow the saying, “better late than never,” and file your return as soon as possible. Failure to file returns and remit collected tax on time may result in penalties and interest charges, and the longer you wait to file, the greater the penalty and the greater the interest.

If you’re in the process of acquiring a business, it’s strongly recommended that you contact the TNDOR and inquire about the current status of the potential acquisition. Once you've purchased the business, you’ll be held responsible for all outstanding Tennessee sales and use tax liability.

If you’re collecting sales tax from Tennessee residents, you’ll need to consider how to handle taxes on shipping and handling charges.

Tennessee sales tax usually applies to charges for shipping, handling, delivery, freight, and postage. The general rule of thumb is: If the sale is taxable, delivery-related charges are taxable; if a sale is fully exempt, delivery-related charges are as well.

However, if both exempt and taxable items are shipped together, the portion of the shipping cost allocated to the taxable items (by sales price or weight) is taxable, while the portion allocated to the exempt items is exempt.

There are exceptions to almost every rule with sales tax, and the same is true for shipping and handling charges. Specific questions on shipping in Tennessee and sales tax should be taken directly to a tax professional familiar with Tennessee tax laws.  

For additional information, see the Tennessee Sales and Use Tax Guide and Tennessee Department of Revenue Letter Ruling #97-22.