Tennessee State Sales Tax Guide
If you run a business in Tennessee, you must understand the state's sales tax rules. The state relies on sales tax to fund public service and infrastructure, and the TN Department of Revenue is very serious about collecting these taxes on time and in full.
However, the rules and be overwhelming, especially if you're just starting your business. To help you out, this guide covers the following:
- Tennesse sales tax rates
- Who needs to collect TN sales tax?
- TN nexus and rules for online sellers
- How to file and pay sales tax
- Due dates for sales tax returns and payments
- Late payment penalties
- How to avoid penalties and stay compliant
- What to expect during a sales tax audit
- How to get help with TN sales tax issues
How Much Is Sales Tax in Tennessee?
As of May 2023, the state sales tax rate in Tennessee is 7%. In addition to the state sales tax, local governments can impose their own sales tax rates. The rates vary in different counties and municipalities, but local sales tax rates typically range from 1.5% to 2.75%.
For example, in a county with a 2.5% local sales tax rate, the total sales tax rate is 9.5%. This is the 7% state sales tax + 2.5% local sales tax. Note that some localities may have additional special taxing districts or special taxes, which can increase the total sales tax rate.
Who Needs to Collect Sales Tax?
Businesses that sell taxable goods or services in Tennessee must collect and pay sales tax. This applies to both brick-and-mortar establishments and online businesses that have a significant presence or nexus in the state.
The following products and services are subject to sales tax in Tennessee:
- Tangible Personal Property unless it falls under a specific exemption. For instance, if a buyer has a resale certificate, they don't have to pay sales tax on the item they buy.
- Prepared food sold in restaurants, cafeterias, etc. Note that non-prepared food such as groceries are only taxed at 4% on the state level.
- Alcohol — If sold in a store to be taken home, it's taxed at 7%, but if sold to be consumed on-site, the rate jumps to 15%. Additionally, there is a federal excise tax on alcohol, but manufacturers and wholesalers take care of that, not retailers.
- Motor Vehicles — The sale or lease of motor vehicles, including cars, trucks, motorcycles, and recreational vehicles, is subject to sales tax.
- Digital Goods and Services such as e-books, software downloads, and online subscriptions.
Most services are not subject to sales tax in Tennessee, but a few services, such as repair services, lodging services, short-term rentals, cleaning, and parking, are taxable.
Nexus and Online Sales Tax Rules
If you sell goods online to people in Tennessee, you need to figure out if you have nexus in the state. If so, you need to collect sales tax from your customers and remit it to the state.
As of 2023, your business has nexus if you have more than $100,000 in sales or more than 200 separate transactions in Tennessee for the previous 12 months. For instance, if you sell one item worth $120,000 from your website to a customer in Tennessee, you have nexus. If you sell 201 items for $1 each in 201 separate transactions, you also have nexus even though your total sales were only $201. Again, you have to figure out both the value of the sales and the number of transactions.
Keep in mind that if your online business has nexus, you must use the location of the buyer when calculating the sales tax. This is called destination-based sales tax. If you're using an online marketplace such as Amazon, eBay, or Etsy, you should check their rules to figure out if they take care of the sales tax or if you have to do it yourself.
How to File and Pay Sales Tax
First, you must register for a sales tax account with the Tennessee Department of Revenue. You can do this online through the Tennessee Taxpayer Access Point (TNTAP) portal.
Once registered, you can file sales tax returns and make payments through the TNTAP portal. According to the DOR's website, you must file and pay online. If that's not possible, contact the state directly to see if you can get an exception. The sales tax return is SLS 450.
Sales Tax Due Dates
The due date to file sales tax returns in Tennessee depends on your business's average monthly tax liability. If the due date falls on a weekend or holiday, it is extended until the next business day.
If you have an average monthly tax liability of $2,500 or more, you should file monthly by the 20th day of the following month. For example, your January sales tax return and payment are due on February 20th.
If you have an average monthly tax liability between $100 and $2,499, you can file quarterly. Your payments are due by the 20th of the month following the quarter in which you collected the tax. For example, the return and payment for the first quarter (January to March) are due by April 20th.
If your average monthly sales tax liability is $100 or less, you can file annually. Your return is due on January 20th if you use the calendar year. If your business uses a different fiscal year, your return is due on the 20th of the month following the last month of your fiscal year.
Penalties for Paying Late
If you pay late, you will incur a penalty of 5% of the tax due for each month or portion of a month that the payment is late. This penalty applies monthly until you file, and it can get up to 25% of your tax bill. For instance, if you owe $10,000 in sales tax, your failure-to-file penalty will be $500. If you pay part of the bill upfront, your penalty is based on the unpaid portion of the tax.
Even if you don't have any sales during the period, you still must file your return. Failure to file a return with $0 tax due leads to a penalty of $15.
The Tennessee Department of Revenue also assesses interest charges on unpaid sales tax. The interest rate is determined by the state and is compounded monthly. As of May 2023, the interest rate is 8%.
If the DOR determines that you committed fraud or negligence, the penalties will be even higher. Additionally, failure to comply with the rules can lead to the loss of your business license. To put it simply, if you don't pay sales tax, the DOR can shut down your business.
The DOR is much more strict about sales tax than some other types of taxes. That's because you collect sales tax from your customers, and then you're supposed to send it to the state. If you don't, the state essentially sees the situation as if you have stolen from your customers and the state.
How to Avoid Penalties and Stay Compliant
To avoid penalties, keep these tips in mind:
- Know the rules: When you start your business, familiarize yourself with Tennessee sales tax. Consult a tax pro as needed, and remember the rules change so make sure to stay up to date. Once you register, the DOR will usually send you relevant updates.
- Maintain accurate records: Keep detailed records of all sales transactions. This includes POS reports, invoices, receipts, and documents related to sales tax exemptions. Accurate records help you file your return correctly, and they are invaluable if the state audits you.
- File and pay on time: Note the filing deadlines on your calendar and make sure that you don't miss them.
- Consider putting sales tax in a separate account: If you're having trouble paying your sales tax bill, you may want to consider routing the funds to a different bank account than the rest of your business revenue.
- Use software: Use point-of-sale or other software to ensure that you are calculating the sales tax rates correctly.
When in doubt, consult with a tax professional. A local TN tax pro can help you understand your sales tax obligations, apply for payment plans, request penalty abatement, and deal with other sales tax-related issues.
Sales Tax Audits
The DOR routinely audits sales tax returns. It selects some returns randomly, while it chooses others based on statistical anomalies or discrepancies with other information submitted to the DOR.
If you are selected for an audit, the auditor will let you know the scope and timeline of the audit. For instance, they will tell you which periods they are auditing, and they will let you know what kind of supporting documents they want to see. Then, they will schedule a meeting with you in person or over the phone. Often, the auditor will come to your place of business.
During the audit, the auditor will examine the business's sales and financial records to make sure that they support the information claimed on your return. They may just look at monthly sales reports, or they may request to see detailed transaction records. If you claimed exemptions, they will want to see information about that as well.
If they agree with your claims, they won't make any changes to your tax return. This is called a no-change audit. If they disagree, they will adjust your return, and generally, that means that you will owe additional tax. If you don't agree, you can appeal through the Department of Revenue's Administrative Hearing Office or by requesting alternative dispute resolution methods.
What If You Can't Afford to Pay Sales Tax?
Again, because this is a tax that you collect from your customers, the state is very serious about collecting it. However, if you get behind, you may be able to get a payment plan. The state reviews payment plans on a case-by-case basis, and to get approved, you generally need to be compliant with all future filing and payment obligations.
Get Help With Tennesse Sales Tax
The sales tax rules vary from state to state, and if you're having trouble with TN sales tax, you need to contact a local pro who has experience with the DOR. They will understand the unique rules and processes of sales tax cases in TN. In contrast, big tax relief firms tend to lack state-specific experience.
To get help now, use TaxCure to search for a local tax pro. Then, narrow down your results to see someone with experience with sales tax, penalties, audits, or whatever issue you are facing. Taxes can be stressful, but with the right help, you can get relief. Don't wait. Find a tax pro today and call for a free consultation.