Tennessee, nestled in the southeastern United States, stands out among states for its unique approach to taxation. Often hailed as a state without a traditional income tax, Tennessee has positioned itself as an attractive destination for businesses and individuals alike. However, its tax structure is far from simplistic, featuring distinct elements that warrant a closer examination.

One of the defining aspects is the business excise tax, which, at first glance, resembles an income tax. This tax, along with the franchise tax, intricately weaves into the fabric of the state’s revenue generation. The landscape becomes even more nuanced with the imposition of sales tax, both at the state and local levels, influencing how commerce and consumer transactions unfold within its borders.

Navigating Tennessee’s tax regulations involves understanding the nexus requirements, income tax credits, and the evolving landscape for remote sellers. This blog post serves as a gateway to explore the multifaceted Tennessee tax system, shedding light on the intricacies that shape financial responsibilities for businesses and individuals operating within its jurisdiction.

What is the Tennessee Corporate Income Tax Rate?

Tennessee advertises themselves as a state without income tax, however there is a business excise tax with a rate of 6.5 percent that is essentially an income tax. Additionally the state has a franchise tax.  If your entity takes the form of a corporation, limited partnership, limited liability company, or business trust, and is either chartered, qualified, or registered in Tennessee, or engages in business activities within the state, it is mandatory to register and fulfill obligations related to franchise and excise taxes. 

The franchise tax calculation is determined by the higher value between net worth and the book value of real and tangible personal property utilized or owned in Tennessee. The franchise tax is calculated at 0.25% of the higher value between the net worth and the book value of real tangible property located in Tennessee. On the other hand, the excise tax is assessed based on the net earnings or income during the tax year. 

Is There a Corporate Minimum Tax?

In Tennessee, irrespective of the entity’s activity status, a minimum franchise tax of $100 must be remitted if the entity is incorporated, domesticated, qualified, or holds registration through the Secretary of State for conducting business in Tennessee. This requirement stands irrespective of the company’s active or inactive status.

When is the Tennessee Corporate Income Tax Return Due?

Tennessee tax payments are required annually on the 15th day of the fourth month following the conclusion of your financial records. For businesses operating on a calendar year from January 1 to December 31, this tax is due by April 15 of the subsequent year. Extensions are available for seven months of additional time to file. 

How is Tennessee Income Tax Nexus Triggered?

In Tennessee, the franchise and excise taxes apply to entities “doing business” with a “substantial nexus” in the state. Doing business is defined as purposeful engagement within Tennessee for gain, benefit, or advantage. Four exceptions, including product samples at trade shows and temporary employee presence, are provided for certain activities not considered as doing business. 

Substantial nexus requires a direct or indirect connection to Tennessee, including organizational or commercial domicile, capital ownership or use, systematic business activity with gross receipts in the state, and licensing intangible property for use in the state. The law also introduced bright-line presence tests for total receipts, property value, and compensation paid. 

The Revenue Modernization Act of 2015 expanded nexus, subjecting out-of-state businesses to franchise and excise tax, and specific nexus rules apply to trucking companies, foreign corporations, and financial institutions. Constitutional constraints, such as the Due Process Clause and Commerce Clause, must be considered before asserting nexus.

Does Having an Employee or Contractor Trigger Nexus?

The engagement of any employee or independent contractor providing taxable services within the state can establish a significant nexus for your business in Tennessee.

Are There Tennessee Income Tax Credits Available?

Tennessee offers income tax credits for eligible businesses. These credits are designed to encourage specific activities, investments, or contributions that contribute to the state’s economic growth. Some common business income tax credits available in Tennessee include:

Job Tax Credit: 

This credit is available to businesses that create new jobs in Tennessee. The credit amount is based on the number of qualified jobs created and the wages paid.

Investment Tax Credit: 

Businesses making qualified investments in the state, such as machinery, equipment, or real property, may be eligible for this credit. The credit is a percentage of the investment cost.

Research and Development (R&D) Credit: 

Companies engaging in qualified research and development activities may qualify for this credit. It encourages innovation and technological advancement.

Film Production Credit: 

Tennessee provides incentives for film and television production companies operating in the state. This credit aims to boost the local entertainment industry.

Headquarters Credit: 

Businesses establishing or relocating their headquarters to Tennessee may be eligible for this credit, promoting corporate presence and economic development.

Renewable Energy Credit: 

Companies investing in renewable energy projects, such as solar or wind, may qualify for this credit, supporting sustainable practices.

Brownfield Credit: 

This credit encourages the redevelopment of contaminated or underutilized properties, promoting environmental remediation and economic revitalization.

Agricultural Credit: 

Businesses involved in qualifying agricultural activities may be eligible for this credit, supporting the state’s agricultural sector.

Film and Video Game Job Credit: 

This credit incentivizes the creation of jobs in the film and video game industries, contributing to the growth of these sectors.

Health Care Services Credit: 

Businesses providing health care services in certain underserved areas may qualify for this credit, addressing healthcare needs in specific communities.

What is the Tennessee Sales Tax Rate?

The standard statewide tax rate is 7%, while the local tax rate is contingent on the county or city and may not exceed 2.75%, maintaining increments of .25. All jurisdictions within Tennessee impose a local sales and use tax rate.

How is Sales Tax Nexus Triggered?

Remote sellers lacking a physical presence in Tennessee must responsibly collect and remit sales tax on items delivered into the state. Economic nexus, with a sales threshold of $100,000 within a 12-month period after July 31, 2020, mandates registration and sales and use tax remittance for qualifying remote sellers. Local tax is applied at the jurisdictional rate of the shipment or delivery destination.

Out-of-state businesses engaging in specific activities necessitate registration and sales tax collection in Tennessee. These activities include selling taxable services, telecommunication services, or engaging in leasing, renting, repairing, installing, or assembling tangible personal property (TPP) within the state. Utilizing employees, agents, or independent contractors for sales solicitation, significant business activities, or routing customers to an out-of-state dealer (known as “click-through nexus”) also triggers the registration requirement.

Additionally, maintaining a physical presence, such as a store, office, warehouse, or inventory in Tennessee, or conducting promotional activities within the state, may necessitate registration. Marketplace facilitators, operating platforms where sales occur on behalf of third-party sellers, must collect and remit Tennessee sales tax if their facilitated sales to TN customers surpass $100,000 in the previous 12 months.

Marketplace sellers, individuals selling through a facilitator’s platform, may be obligated to register for sales and use tax if they make any sales outside of the facilitator’s platform. However, if all taxable sales are conducted through a facilitator collecting Tennessee sales tax, out-of-state marketplace sellers are exempt from registration. Detailed information on reporting sales, registration processes, and additional tax guidance for marketplace facilitators and sellers is available for reference.

What Transactions are Included or Excluded from Sales Tax in TN?

In Tennessee, sales tax applies to various transactions, but there are also exemptions. Here’s a general overview of transactions that are included (taxable) and excluded (non-taxable) from sales tax:

Included (Taxable):

• Sale of Tangible Personal Property: Generally, sales tax is levied on tangible items such as electronics, clothing, furniture, and other physical goods.
• Products Transferred Electronically: Tax applies to products transferred electronically, reflecting the modern digital economy.
• Services: Specific services are subject to sales tax.

Excluded (Non-taxable):

• Food Sales: Unprepared food for home consumption is often exempt from sales tax.
• Prescription Drugs: Sales of prescription drugs for human use are typically exempt.
• Sales to Government Entities: Sales to federal, state, and local government entities are often exempt.
• Sales for Resale: Items sold for resale are generally exempt from sales tax.
• Medical Equipment: Some medical equipment and supplies may be exempt.

Are Services Taxed for Sales Tax?

Most services are not taxable in Tennessee, including professional services. Taxable services include the following:

• Repair or installation of tangible personal property (including computer software)
• Lodging services and rooms
• Short-term space rental for sales purposes
• Cleaning of tangible personal property (including animal bathing)
• Parking and storing of motor vehicles
• Telecommunication services, including ancillary telecommunication services
• Enriching of uranium materials

Is SaaS Taxable for Sales Tax?

Yes, Tennessee taxes Software-as-a-Service (SaaS). Tennessee has implemented sales and use tax on fees incurred by a buyer for the remote access and utilization of software, when accessed within the state. This taxation is applicable to any software access and usage transpiring in Tennessee, irrespective of the method of delivery—whether electronically, through tangible storage media, installation into a computer, creation on the consumer’s premises, or any other means. Moreover, the tax is levied regardless of the pricing structure, encompassing per use, per user, per license, subscription, or any other arrangement. When a customer accesses software from a location indicated by a residential street address or primary business address in Tennessee, it is considered tantamount to the sale or licensing of the software, with electronic delivery for use within the state.

Frequently Asked Questions (FAQs) – Tennessee Business Taxes

How is the Tennessee business excise tax calculated?

The business excise tax rate in Tennessee is 6.5%, and it functions similarly to an income tax. The franchise tax is also applied based on the higher value between net worth and the book value of real and tangible personal property in the state.

Do all types of businesses in Tennessee need to register and pay franchise and excise taxes?

Yes, if your entity takes the form of a corporation, limited partnership, limited liability company, or business trust and is either chartered, qualified, or registered in Tennessee, or engages in business activities within the state, it is mandatory to register and fulfill obligations related to franchise and excise taxes.

When is the deadline for filing corporate income tax returns in Tennessee?

Corporate income tax returns in Tennessee are due annually on the 15th day of the fourth month following the conclusion of your financial records. For businesses operating on a calendar year (January 1 to December 31), the tax is due by April 15 of the subsequent year. Extensions are available for seven additional months.

What triggers the Tennessee income tax nexus for businesses?

In Tennessee, the franchise and excise taxes apply to entities “doing business” with a “substantial nexus” in the state. Activities that trigger nexus include physical presence, systematic business activity, and meeting specific tests for total receipts, property value, and compensation paid.

Are there any income tax credits available for businesses in Tennessee?

Yes, Tennessee offers various income tax credits to encourage economic growth. Some common credits include the Job Tax Credit, Investment Tax Credit, Research and Development (R&D) Credit, Film Production Credit, and others.

What is the statewide sales tax rate in Tennessee?

The standard statewide sales tax rate in Tennessee is 7%. However, local tax rates vary by county or city and may not exceed 2.75%, maintaining increments of .25. All jurisdictions within Tennessee impose a local sales and use tax rate.

Do remote sellers need to collect and remit sales tax in Tennessee?

Yes, remote sellers lacking a physical presence in Tennessee must collect and remit sales tax on items delivered into the state. Economic nexus, with a $100,000 sales threshold within a 12-month period after July 31, 2020, mandates registration for qualifying remote sellers.