Small business owners in Tennessee may be liable for a variety of state taxes. Here are some of the most common FAQs for entities considering doing business in the state.
How does Tennessee tax businesses?
Tennessee doesn’t have a corporate income tax. Companies that conduct business in Tennessee generally pay three main types of taxes: franchise and excise, business, and sales and use. You can register for all three on a single application through the Tennessee Taxpayer Access Point (TNTAP).
How is Tennessee’s franchise tax computed?
The franchise tax is based on the greater of: 1) net worth or the book value of real property or 2) tangible personal property owned or used in Tennessee. The rate is 0.25 percent of the greater figure, and the minimum tax is $100, regardless of whether the business is active or inactive.
How is Tennessee’s excise tax computed?
The excise tax is based on net earnings or income for the tax year. The rate is 6.5 percent of Tennessee taxable income.
Which businesses are subject to the franchise and excise taxes?
The taxes apply to corporations, limited partnerships, limited liability companies (LLCs), and business trusts that are chartered, qualified, or registered in Tennessee or are doing business in the state. Sole proprietors and general partnerships aren’t subject to either tax.
Are there any tax exemptions or credits in Tennessee?
Seventeen exemptions are available, including for family-owned non-corporate entities. Some require an application, evaluation, and renewal.
In addition, franchise and excise tax liability can be offset by credits, including the job tax credit and qualified production tax credit.
How do I pay the franchise and excise taxes in Tennessee?
The taxes are paid on Form FAE 170, “Franchise and Excise Tax Return.” It must be filed electronically through TNTAP or an approved software vendor. The form is due on the 15th day of the fourth month after the close of your books and records. For calendar year filers, that’s April 15 in the following year.
Do I need to make estimated payments?
You might. Estimated payments of franchise and excise taxes are required if you have a combined tax liability of $5,000 or more in both the prior and current years. In that case, estimated payments are due on the 15th day of the fourth, sixth, and ninth months of the current tax year and the 15th day of the first month of the next succeeding tax year.
What is Tennessee’s business tax?
Tennessee’s business tax is a “privilege tax” imposed on a business’s gross sales of tangible personal property and services, for the privilege of doing business in the state. It consists of the state business tax and the city business tax. (When you register for the business tax, you’ll also need to obtain a business license from the appropriate county clerk or city official.)
How is Tennessee’s state business tax computed?
The state business tax is based on gross receipts. The rate varies based on 1) your business classification and 2) whether you’re considered a retailer or a wholesaler.
Tennessee has five classifications based on a taxpayer’s dominant business activities (the activity that produces the largest portion of taxable sales), plus a separate category for antique malls, flea markets, gun shows, and the like. You must choose one classification for each of your locations.
Most of the classifications include a rate for retailers and another for wholesalers. You’re considered a retailer if more than half of your taxable gross sales are retail sales; you’re deemed a wholesaler if more than half of your taxable gross sales are wholesale sales. Wholesale sales include, but aren’t limited to:
- Sales to a retailer for resale
- Sales of materials that become part of a product for resale
- Sales of goods to the government, a governmental agency, or a nonprofit
You determine whether you’re a retailer or a wholesaler at a particular location and then apply that rate to all of your taxable gross sales at the location.
Are there any deductions, exemptions, or credits?
Tennessee allows taxpayers to reduce their total gross sales by a number of deductions. It also permits several types of tax credits against business liability. The credits, however, can only offset up to 50 percent of the total tax bill.
The state also recognizes several exemptions from the tax. For example, while most sales of services are subject to the business tax, 16 types are exempt, including:
- Medical, dental, and health services
- Legal services
- Educational services
- Accounting, auditing, and bookkeeping
- Banking
- Insurance
- Landlords
- Veterinary services
- Architecture, engineering, and land surveying
Certain persons and entities are also exempt, including manufacturers, qualified blind persons, disabled veterans, and taxpayers required to pay other privilege taxes (for example, the gross receipts tax).
Which businesses are subject to the business tax?
Generally, any entity that conducts business within any county or incorporated municipality in Tennessee should register for and remit the business tax.
Does that include out-of-state businesses?
Some. Out-of-state businesses must pay the state business tax if they have “substantial nexus” with the state—basically, a sufficient direct or indirect connection with the state to impose taxes.
You probably have such a connection if you:
- Sell a service delivered to a location in Tennessee,
- Lease items in Tennessee,
- Sell items that are shipped or delivered to a location in Tennessee, or
- Make sales as a natural gas marketer to customers located in Tennessee through the presence of your property in Tennessee, through the holding of pipeline capacity on pipelines located in Tennessee, or by using someone located in Tennessee acting on your behalf.
If your business has a location in a city with a business tax, you’ll also need to pay that. It’s worth noting that you could be subject to a city business tax even if your location isn’t included in the list of cities with business tax because many areas of Tennessee are governed by or part of an adjoining incorporated city.
How do I pay Tennessee’s business tax?
By filing Form BUS 428, “Business Tax Return,” annually. It’s due on the 15th day of the fourth month after your fiscal year ends. If you have an open business tax account with the Department of Revenue, you must file a return even if you have no gross receipts for the period.
Out-of-state businesses (other than contractors) with substantial nexus must register with the Tennessee Department of Revenue and remit business tax on any gross receipts from sales of $10,000 or more annually in any county in the state (that threshold will increase to $100,000 in 2023).
Do I need to pay estimated business tax payments?
No, they’re not required for business taxes in Tennessee.
What is Tennessee’s sales and use tax rate?
The sales tax has two parts—the state portion and the local portion. The state rate is 7.0 percent of the purchase price, and the local rate varies by county and city but can’t exceed 2.75 percent. The state also has special tax rates for certain products and services. An additional state single article tax at a rate of 2.75 percent is applied to any single item of tangible personal property sold with a sales price exceeding $1,600 but less than $3,200.
The use tax is paid when the sales tax wasn’t collected by the seller on otherwise taxable products brought or shipped into Tennessee. The rate is the same as the sales tax rate.
What is Tennessee’s single article local tax base limitation?
Under Tennessee law, the local tax is applied only to the first $1,600 (for most counties) of the purchase price of any single article of tangible personal property sold.
The term “single article” means any item commonly understood to be a separate unit, apart from any accessories, extra parts, etc., and capable of being sold as an independent item or as a common unit of measure. Independent units sold in sets, lots, suites, or other groupings aren’t treated as single articles.
The single article local tax limitation doesn’t apply to a single invoice total when the invoice includes multiple items of tangible personal property. It also doesn’t apply to the sale of taxable services, amusements, custom computer software, and warranty or maintenance contracts.
Are there any exemptions or credits?
Generally, the sale of all tangible personal property and specifically enumerated services are
subject to sales tax unless a statutory exemption applies. Sales and use tax exemptions usually fall into three categories:
- Entity-based exemptions (e.g., qualified farmers and manufacturers)
- Product-based exemptions (e.g., gasoline, textbooks, school meals, and several healthcare products)
- Use-based exemptions (available when certain types of tangible personal property or services are put to a specific exempt use)
Most product-based exemptions don’t require a special exemption certificate, but most entity-based and use-based exemptions do.
Tennessee also offers:
- A headquarters tax credit for taxpayers establishing a qualified headquarters facility in the state
- A qualified production exemption for the sale, use, storage, or consumption of tangible personal property, computer software, or services that are necessary to and primarily used for a “qualified production” in the state
Additional credits may also be available.
What if I already paid sales or use tax to another state?
You can apply a credit for sales and use tax legally paid in another state against your use tax owed in Tennessee. The credit may not exceed the amount of use tax due in Tennessee.
Do marketplace sellers need to pay sales and use taxes?
A marketplace seller is a person who makes sales through any marketplace operated, owned, or controlled by a marketplace facilitator. A marketplace facilitator generally facilitates sales through a physical or electronic marketplace they own and collects payment from the purchaser of a marketplace seller’s items or services.
Marketplace sellers who make sales outside of a marketplace facilitator’s platform (for example, through their own websites) may need to register for sales and use tax if 1) they have a physical presence in Tennessee, or 2) have made $100,000 or more in sales in the state in the previous 12 months (outside of the facilitator’s platform). The threshold includes all retail sales, including exempt sales but not sales for resale.
Out-of-state marketplace sellers don’t need to register if all their taxable sales are made through a marketplace facilitator collecting and remitting sales tax on their behalf. If all sales are made through marketplace facilitators that collect and remit, the marketplace seller can request annual tax return filing status and report $0 sales on the return.
More information is available on the Tennessee Department of Revenue website.
How do I pay Tennesse’s sales and use tax?
You file Form SLS 450, “State and Local Sales and Use Tax Return.” The return generally is filed monthly, on the 20th day of the month following the end of the reporting period.
Taxpayers whose sales and use tax liability for 12 consecutive months has averaged $1,000
or less per month can file monthly or quarterly (January 20, April 20, July 20, October 20).
Annual returns and payments are due on January 20. This filing period usually only applies to manufacturers, wholesalers, and marketplace sellers that only make sales through a marketplace facilitator that’s collecting Tennessee sales and use tax.
Returns must be filed through TNTAP or an approved software vendor. If you have no locations in Tennessee and are registered through the Streamlined Central Registration System, you may file using the Streamlined Simplified Electronic Return.
Do I need to pay estimated sales and use taxes?
No, Tennessee doesn’t require estimated payments for sales and use taxes.
Does Tennessee have a withholding tax for employees?
Tennessee doesn’t have an individual income tax, so you needn’t withhold state income tax from employee paychecks.
What about unemployment taxes?
Every employer in Tennessee must complete Form LB-0441, “Report to Determine Status, Application for Employer Number.” Submitting this form will determine the status of your liability for unemployment taxes.
Liability depends on the type and nature of the business, the number of workers employed, and the amount of wages paid. Generally, you’ll be liable if you:
- Pay the federal unemployment tax and have at least one employee in Tennessee, regardless of the number of weeks employed or amount of payroll, or
- Pay $1,500 or more in total gross wages in a calendar quarter or have at least one employee during 20 different weeks in the current or prior calendar year, regardless of wages. The employee doesn’t have to be the same person and can be full-time or part-time.
The tax is applied to the first $7,000 of wages. The rate is adjusted semi-annually. The balance in the unemployment insurance Trust Fund on June 30 and December 31 of each year determines which of the six premium rate tables will apply for the following six-month period.
For the first half of 2023, Table 6 applied, so the rate ranged from 0.01 to 10.0, depending on the employer’s reserve ratio. The reserve ratio equals:
The balance in the employer’s unemployment insurance account / The employer’s average taxable payroll for the three most recent years = the reserve ratio
And, that’s what you need to know about small business taxes in the great state of Tennessee. Now, get to work!
