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Tennessee Free Printable Business Tax Manual - December 2023 for 2024 Tennessee Tennessee Business Tax Manual

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Tennessee Business Tax Manual
Business Tax Manual - December 2023

December 2023 Chapter 1: Introduction ......................................................................................................... 10 History .............................................................................................................................................. 10 Tennessee Works Tax Reform Act of 2023 ................................................................................. 11 1. Filing and Licensing Thresholds ....................................................................................... 11 2. Deemed Location for Contractors ................................................................................... 11 3. Classification 5A Tax Rate ................................................................................................. 12 4. Manufacturing Exemption ................................................................................................ 12 Brief Business Tax Overview ......................................................................................................... 12 Nature of the Business Tax ........................................................................................................... 13 1. State-Level and Municipal-Level Taxes ........................................................................... 13 Application ...................................................................................................................................... 15 1. Doing Business ................................................................................................................... 15 2. Imposition ........................................................................................................................... 15 3. Business Tax Classifications ............................................................................................. 15 4. Retailer vs. Wholesaler ...................................................................................................... 16 Chapter 2: Who is Subject to Tennessee Business Tax? ..................................................... 17 Historical Context ........................................................................................................................... 17 1. Pre-2014 Tax Periods ........................................................................................................ 17 2. Periods Beginning on or after January 1, 2014 .............................................................. 18 Present Law ..................................................................................................................................... 19 1. Substantial Nexus .............................................................................................................. 20 2. Activities Engaged in this State ........................................................................................ 22 3. Nexus in Tennessee – Other Tennessee Taxes ............................................................. 23 4. Establishing a Location, Outlet, or Other Place of Business ........................................ 25 Chapter 3: Registration and Licensing ................................................................................. 28 Registration ..................................................................................................................................... 28 1. In-State Businesses ............................................................................................................ 28 2. Out-of-State Businesses .................................................................................................... 29 2|Page Business License............................................................................................................................. 29 1. Standard Business License ............................................................................................... 30 2. Minimal Activity License .................................................................................................... 31 3. Transferring Licenses ........................................................................................................ 31 4. Contractors ......................................................................................................................... 31 Closing a Business .......................................................................................................................... 32 1. Successor Liability .............................................................................................................. 33 Chapter 4: Determining Gross Sales .................................................................................... 35 Gross Sales ...................................................................................................................................... 35 Taxable Sales .................................................................................................................................. 35 1. Casual and Isolated Sales ................................................................................................. 36 2. Sales of Services ................................................................................................................. 37 3. Sales of Intangible Personal Property ............................................................................. 40 4. Installation Sales ................................................................................................................ 41 5. Sales to Employees ............................................................................................................ 42 6. Installment and Credit Sales ............................................................................................ 42 7. Lay-Away Sales ................................................................................................................... 42 8. Sales of Electricity by Electric Vehicle Charging Stations .............................................. 43 Sales Price ....................................................................................................................................... 43 1. Exclusions ........................................................................................................................... 43 2. Expenses Passed Through to the Customer .................................................................. 44 Reporting Methods ........................................................................................................................ 45 Chapter 5: Classifications ...................................................................................................... 46 Classifications Generally ................................................................................................................ 46 1. Classification 1.................................................................................................................... 46 2. Classification 2.................................................................................................................... 47 3. Classification 3.................................................................................................................... 47 4. Classification 4.................................................................................................................... 50 5. Classification 5.................................................................................................................... 51 3|Page 6. Antique Malls, Flea Markets, Gun Shows, Etc. ............................................................... 51 7. Transient Vendors ............................................................................................................. 52 8. Miscellaneous Industry Specific Classifications ............................................................. 52 Retailer vs. Wholesaler .................................................................................................................. 59 1. Retail Sales .......................................................................................................................... 60 2. Wholesale Sales ................................................................................................................. 61 3. Sales for Resale .................................................................................................................. 62 4. Wholesaler to Wholesaler Sales ....................................................................................... 63 Retailer to Retailer Sales ............................................................................................................ 64 Tax Rates ......................................................................................................................................... 64 Wholesaler/Retailer Certificate ..................................................................................................... 66 Chapter 6: Filing Requirements ............................................................................................ 67 Filing the Return ............................................................................................................................. 67 1. Payments ............................................................................................................................ 67 2. Electronic Filing .................................................................................................................. 67 3. State-Level and Municipal-Level Filings .......................................................................... 68 4. Consolidated Returns ........................................................................................................ 69 5. Single-Member LLC Filing ................................................................................................. 71 Filing Period..................................................................................................................................... 72 Filing Due Dates .............................................................................................................................. 72 1. Due Dates ........................................................................................................................... 72 2. Filing Extension .................................................................................................................. 73 3. Estimated Assessment ...................................................................................................... 74 Final Returns ................................................................................................................................... 74 1. Filing Requirements for Final Returns ............................................................................ 74 2. Tax Clearance ..................................................................................................................... 75 3. Events Not Resulting in a Final Return ............................................................................ 76 Overpayments ................................................................................................................................ 77 Penalties .......................................................................................................................................... 77 4|Page 1. Penalties and Penalty Rates ............................................................................................. 77 2. Penalty Waivers .................................................................................................................. 78 Interest............................................................................................................................................. 80 Assessments ................................................................................................................................... 81 1. Assessment Following an Audit ....................................................................................... 81 2. Estimated Assessment ...................................................................................................... 81 Statutes of Limitations ................................................................................................................... 82 1. Assessments ....................................................................................................................... 82 2. Refunds ............................................................................................................................... 82 3. Extensions ........................................................................................................................... 83 Record Maintenance and Retention ............................................................................................ 83 Chapter 7: Sourcing and Distribution .................................................................................. 85 Sourcing ........................................................................................................................................... 85 1. In-State Taxpayers other than Video Programmers, Mobile Telecommunications Providers, and Classification 4 Contractors ............................................................................ 85 2. Out-of-State Taxpayers other than Video Programmers, Mobile Telecommunications Providers, and Classification 4 Contractors ....................................... 85 3. Taxpayers with both In-State and Out-of-State Locations other than Classification 4 Contractors .................................................................................................................................. 86 4. Contractors ......................................................................................................................... 86 5. Video Programmers .......................................................................................................... 87 6. Mobile Telecommunications Service Providers ............................................................. 88 Distributions.................................................................................................................................... 89 1. In-state Taxpayer Distributions........................................................................................ 89 2. Municipal-Level Business Tax Collections from In-state Taxpayers ........................... 89 3. Fees Levied Under Tenn. Code Ann. § 67-4-710 ............................................................ 90 4. Taxpayers Without Licenses or Locations ...................................................................... 90 5. Audited Taxpayers ............................................................................................................. 90 Chapter 8: Exemptions and Exclusions ................................................................................ 91 5|Page Exempt Sales of Services ............................................................................................................... 91 1. Medical, Dental, and Allied Health Services ................................................................... 92 2. Legal Services ..................................................................................................................... 93 3. Educational Services .......................................................................................................... 93 4. Services Rendered by Nonprofit Membership Organizations ..................................... 94 5. Domestic Services Provided in Private Households ...................................................... 95 6. Nonprofit Educational and Research Agencies ............................................................. 95 7. Services by Religious and Charitable Organizations ..................................................... 96 8. Accounting, Auditing, and Bookkeeping Services.......................................................... 96 9. Public Utilities ..................................................................................................................... 97 10. Banking and Related Functions ....................................................................................... 99 11. Insurance Services ..........................................................................................................101 12. Operators of Residential and Nonresidential Buildings ............................................101 13. Lessors of Real Property .................................................................................................102 14. Veterinary Services ..........................................................................................................102 15. Architecture, Engineering, and Land Surveying Services ...........................................103 16. Services Provided by Farmers to Other Farmers ........................................................104 Other Miscellaneous Exemptions ..............................................................................................104 1. Services Sold for a Lump Sum........................................................................................104 2. Services for Affiliated Entities .........................................................................................105 3. Internet Services ...............................................................................................................105 Taxable Sales by Providers of Exempt Services .......................................................................105 Persons/Entities ............................................................................................................................106 1. Persons with Taxable Sales < $100,000 ........................................................................107 2. Radio and Televisions Stations .......................................................................................108 3. Providers of Direct-to-Home Satellite Services ............................................................108 4. Publishers or Printers of Newspapers and other Periodicals ....................................108 5. Qualified Blind Persons and Disabled Veterans ..........................................................109 6. Manufacturers ..................................................................................................................110 6|Page 7. Persons Making Casual and Isolated Sales...................................................................117 8. Taxpayers Responsible for Other Privilege Taxes .......................................................118 9. School Bus Operators and Drivers ................................................................................118 Exempt Sales .................................................................................................................................119 1. Qualified Amusement Activities .....................................................................................119 2. Agricultural Sales .............................................................................................................119 3. Sales of Intangibles ..........................................................................................................120 4. Wholesaler to Wholesaler ...............................................................................................120 5. Sales or Rentals of Real Property ..................................................................................121 6. Short-Term Rentals of Real Property ............................................................................121 7. Sales of Items Donated to Religious and Charitable Institutions ..............................123 8. Freight & Delivery Charges .............................................................................................123 Exclusions ......................................................................................................................................123 Chapter 9: Deductions ......................................................................................................... 125 Overview ........................................................................................................................................125 1. Cash Discounts .................................................................................................................125 2. Returned Items ................................................................................................................125 3. Trade-In Allowances ........................................................................................................126 4. Repossessed Goods ........................................................................................................126 5. Subcontractor Payments ................................................................................................128 6. Sales of Services Delivered to a Location Outside Tennessee ...................................130 7. Sales of Tangible Personal Property in Interstate Commerce ...................................131 8. School to Student Sales...................................................................................................132 9. Bad Debts..........................................................................................................................132 10. Miscellaneous Federal and State Excise Taxes ............................................................133 11. Accommodation Sales .....................................................................................................134 12. Patronage Dividends .......................................................................................................135 13. Public Warehousing and Storage – Leases ...................................................................135 14. Motor Vehicle Rentals – Refundable Deposits .............................................................135 7|Page 15. Funeral Directors – Cash Advances ...............................................................................135 Chapter 10: Credits .............................................................................................................. 136 Overview ........................................................................................................................................136 Personal Property Taxes .............................................................................................................136 1. Personal Property Taxes Assessed During Audit ........................................................137 2. Taxes Paid on Property Leased or Rented ...................................................................137 3. Providers of Video Programming Services ...................................................................138 4. Special School District Taxes ..........................................................................................138 5. Property Transferred to a Government Entity .............................................................138 Privilege Taxes ..............................................................................................................................139 Chapter 11: Industry-Specific Guidance ............................................................................ 140 Contractors ...................................................................................................................................140 1. Overview ...........................................................................................................................140 2. Reporting Sales and Progress Payments ......................................................................140 3. Deemed Location .............................................................................................................140 4. In-State Contractors ........................................................................................................141 5. Out-of-State Contractors ................................................................................................145 6. Subcontractors .................................................................................................................147 7. Speculative Builders ........................................................................................................148 Agriculture .....................................................................................................................................149 1. Agricultural Commodity Brokers ...................................................................................149 2. Agricultural Exemptions ..................................................................................................149 Mobile Telecommunications Providers .....................................................................................150 1. Registration and Reporting ............................................................................................150 2. Sales of Phones and Accessories from Outside the State ..........................................151 3. Personal Property Tax Credit .........................................................................................151 4. Sales of Internet Access ..................................................................................................152 Performance Entities ...................................................................................................................152 1. In-state Performance Entities.........................................................................................152 8|Page 2. Out-of-State Performance Entities ................................................................................153 3. Are Touring Artists Transient Vendors? ........................................................................153 Traveling Photographers .............................................................................................................153 Lottery Commissions ...................................................................................................................154 Funeral Directors ..........................................................................................................................154 1. Unit Price ...........................................................................................................................154 2. Itemization ........................................................................................................................155 3. Cash Advances .................................................................................................................155 Cemeteries and Memorial Gardens...........................................................................................156 Municipal Airports ........................................................................................................................156 Leased Departments ...................................................................................................................156 Commission Agents .....................................................................................................................157 Vending Machines ........................................................................................................................157 Antique Malls, Flea Markets, Craft Shows, Antique Shows, Gun Shows, and Auto Shows.157 1. Fee in Lieu of Business Tax.............................................................................................158 2. Businesses Selling Antiques at Least 5 Days Per Week ..............................................159 Transient Vendors ........................................................................................................................159 1. Temporary Premises .......................................................................................................159 2. Transient Vendor License Fee ........................................................................................160 3. Transient Vendors and Business Tax ............................................................................160 Food Trucks ...................................................................................................................................161 9|Page The Tennessee General Assembly passed the “Business Tax Act of 1971” (the “Act”) as a replacement to a local property tax (commonly referred to as an “ad valorem tax”) imposed on business inventories. However, the Tennessee State Constitution required that inventory be “taxed according to its value,” and thus, Tennessee courts ruled that the Act could not be applied in lieu of the ad valorem tax but instead had to be applied in addition to the ad valorem tax. Because this was not the intent of the General Assembly, in 1971, the General Assembly held a Limited Constitutional Convention to amend Article II, Section 28 of the Tennessee State Constitution. This amendment stated the General Assembly “may levy a gross receipts tax on merchants and businesses in lieu of ad valorem taxes on the inventories of merchandise held by such merchants and businesses.” The amendment became effective in 1973. As described by the Tennessee Court of Appeals in 1979, the General Assembly desired this shift from a local ad valorem tax to a gross receipts tax, in part, because of following tax disparity: It is our opinion that one of the purposes of the Constitutional Amendment of 1973 was to prevent repressive taxation whereby unsold inventories of merchants, who most likely had to borrow funds at substantial interest rates to obtain those inventories, would be taxed on an ad valorem basis while such inventories remained unsold in these merchants' hands...1 The Act eliminated this disparity by allowing merchants to pay the business tax (a tax on gross sales) in lieu of the ad valorem tax. At the time of enactment, the business tax was comprised of two parts – a county-level tax and a city-level tax. In its original form, the appropriate local governmental body had to adopt the tax. Additionally, the local governmental body administered the tax and remitted a portion of the tax collected to the Department of Revenue (the “Department”). Beginning January 1, 2010, in accordance with Public Chapter 530, 2009 Acts, the Department assumed responsibility for administering and collecting the business tax. All businesses subject to the tax were to file tax returns with, and remit the tax to, the 10 | P a g e Department. However, the general structure of the tax remained the same under the 2009 amendment. Effective January 1, 2014, in accordance with Public Chapter 313, 2013 Acts the structure of the business tax changed. Significantly, Public Chapter 313 changed the county tax to a uniform state-level tax. While the Department still distributes the state-level tax to the counties where a taxpayer performs business, counties no longer adopt or impose the tax. Local municipalities, however, still must adopt a municipal-level tax. In 2016, the Revenue Modernization Act (the “RMA”) made a substantial change to the business tax statutes by codifying substantial nexus (see Chapter 2 of this Manual for more information). After passage of the RMA, the Department updated sixteen different business tax rules and regulations, including three rules repealed in their entirety. On May 11, 2023, the Tennessee Works Tax Reform Act of 2023 (the “Act”), Public Chapter 377 (2023), was signed into law. This legislation introduces substantive changes to Tennessee business tax law. The following section provides an overview of the business tax provisions contained in this legislation, including their effective dates. Additional information on these provisions can be found in the relevant sections of this manual, as indicated below. 1. Filing and Licensing Thresholds For tax years ending on or after December 31, 2023, the Act raises the filing threshold from $10,000 to $100,000 and changes the business licensing thresholds. The Act also changes how business tax is distributed to the local jurisdictions to hold said jurisdictions harmless from the decrease in revenue resulting from the increased filing threshold. These changes are reflected throughout the manual. Audit Tip: The amount reported on Schedule A, Line 1: Total Gross Sales (i.e., total sales) should be used to determine if the taxpayer meets the $100,000 threshold. 2. Deemed Location for Contractors For tax years ending on or after December 31, 2023, the Act raises the “deemed location” threshold for contractors from $50,000 to $100,000. This change is reflected on several pages in the manual. 11 | P a g e 3. Classification 5A Tax Rate The Act lowers the tax rate for Classification 5A taxpayers from 3/10 of 1% to 1/10 of 1% for tax years ending on or after December 31, 2023.This change is reflected on page 63 of the manual. 4. Manufacturing Exemption Effective May 11, 2023, the Act changes the application of the manufacturing exemption. Under the Act, to qualify for the manufacturing exemption the sales of manufactured products may be made from the manufacturing location or a storage or warehouse facility that is located within a ten-mile radius of the manufacturing location. Additionally, the Act provides that both in-state and out-of-state manufacturers may qualify for the manufacturing exemption. This change is reflected on page 109. The business tax statutes are found in Tenn. Code Ann. § 67-4-701 through Tenn. Code Ann. § 67-4-730 2 and the business tax rules and regulations are found in TENN. COMP. R. & REGS. 1320-4-5-.01 through TENN. COMP. R. & REGS. 1320-4-5-.61.3 The business tax is a privilege tax on the privilege of doing business by making sales of tangible personal property and services within Tennessee and its local jurisdictions. While anyone doing business in the state is subject to the state-level business tax, unless specifically exempt, each municipality must adopt the tax to impose it within its city limits. The business tax applies to a taxpayer’s gross sales (see Chapter 4 for more information on what constitutes “gross sales”). Taxpayers multiply the gross sales derived from taxable sales per location by the appropriate state and local tax rates to calculate the amount of tax owed per location. There are several different business tax rates. The rates are determined based on the taxpayer’s “dominant business activity” (see Chapter 5 for more information on Classifications) and whether the taxpayer is a wholesaler or a retailer (see Chapter 5 for more information on retailer/wholesalers). In general, all sales of tangible personal property and services made in Tennessee will be subject to the business tax. However, there are several exceptions and exemptions discussed throughout this Manual. 12 | P a g e As stated above, the Tennessee business tax is imposed on the privilege of doing business in the state of Tennessee. Unlike sales tax, which principally applies to retail sales of tangible personal property and certain specifically listed services, business tax applies to all taxable, non-exempt sales of services and sales of tangible personal property. Business tax applies at both the retail and wholesale sales. Businesses may invoice the business tax as a separate item and pass it on to its customer, though this amount is included in the sales tax and business tax base.4 1. State-Level and Municipal-Level Taxes Business tax is comprised of two separate but complementary taxes: a state-level tax and a municipal-level tax. Generally, every entity making sales of tangible personal property and/or services in Tennessee is subject to the state-level tax.5 Entities may be subject to the municipal-level tax if they have a business location in a municipality that has enacted the tax. The sections below provide a high-level overview of when a business is subject to business tax (see Chapter 2 of this Manual for a more detailed discussion of when a business is subject to business tax by having “nexus” with the state and Chapter 7 for a more detailed discussion on how the tax revenue is distributed). State-Level Tax Every person doing business in Tennessee with a physical location or place of business in the state is subject to the state-level business tax unless specifically exempt. For business tax purposes, “person” is defined as an “individual, firm, partnership, joint venture, association, corporation, estate, trust, business trust, receiver, syndicate, or other group or combination acting as a unit.”6 The term “person” does not include the United States of America, the State of Tennessee, or any political subdivision of the two; electric membership cooperatives or utility districts.7 A person without a physical location or place of business in Tennessee will be subject to the state-level business tax if that person has substantial nexus (see pg. 19) in the state and performs any of the following activities:  Sells tangible personal property that is shipped or delivered to a location in this state;  Sells a service that is delivered to a location in this state (see Chapter 4 for more information on services); 13 | P a g e  Leases tangible personal property that is located in this state; or  Makes sales as a natural gas marketer to customers located within this state through the presence in this state of the seller's property, pipeline capacity, or through the presence in this state of the seller's representatives acting on behalf of the seller to solicit orders, provide customer service, or conduct other activities in furtherance of such sales in this state.8 Municipal-Level Tax Each municipality, by passing a resolution or ordinance, may elect to levy the municipal-level business tax on any business activity conducted within its borders. 9 Currently, 215 municipalities impose the business tax. Unlike with the state-level business tax, a person must have a physical location, place of business, or other location10 in a municipality to be subject to the municipal-level business tax. If a taxpayer’s business is located in a municipality that has enacted business tax, the taxpayer is required to pay both the statelevel and municipal-level business tax. Please see Chapter 11 for special rules that apply to cable, telecom, and other specific industries. The taxpayer should contact the municipality or the county assessor if there is any question that the business may not be inside city limits. A list of cities imposing business tax is available HERE on the Department’s website. If a taxpayer’s business location is not included on the list, the taxpayer may still be subject to municipal-level business tax. Many areas in Tennessee are governed by and/or part of adjoining incorporated cities. For example, Antioch, Tennessee is not a city on the list, however it is part of Metropolitan Nashville, and the Nashville city business tax is due. Additionally, a county may have a multi-tiered, municipal-level business tax system. For example, Davidson County has a general services district and an urban services district. The city of Nashville is part of the Davidson County urban services district. Taxpayers can determine if their business is part of an urban services district if they are located in the urban services district for property tax purposes. 14 | P a g e 1. Doing Business Business tax is a privilege tax levied upon the privilege of doing business in the state of Tennessee. Business is defined as “any activity engaged in by any person, or caused to be engaged in by the person, with the object of gain, benefit, or advantage, either direct or indirect.”11 Business does not include:  Occasional and isolated sales (see Chapter 4) by someone not normally engaged in the business of selling the type of property being sold;12 or  Utilization of a property management company to manage vacation lodging for overnight property rentals by an individual property owner. However, business tax still applies to the rental of the property. The property management company would be responsible for filing. See the section titled Sales or Rentals of Real Property in Chapter 8 of this manual for more information. However, business does include any other activity of the individual property owner that is subject to the business tax. 2. Imposition Business tax is imposed on a business’s gross sales of tangible personal property and services. The vocations, occupations, businesses, or business activities listed in Tenn. Code Ann. §§ 67-4-708(1)-(5) are taxable privileges subject to Tennessee’s state-level business tax. Tenn. Code Ann. §§ 67-4-708(1)-(4) detail the taxable privileges subject to Tennessee’s municipal-level business tax. For information on vocations, occupations, businesses, or activities subject to business tax, please see Chapter 5 of this Manual. For more information on sales and services that are excluded from business tax and exempted sales, services, or entities, please see Chapter 8 of this Manual. 3. Business Tax Classifications An entity’s business tax classification determines the rate of tax that will apply. Businesses choose their classification for each of their locations based on the “dominant business 15 | P a g e activity” of the location. “Dominant business activity” is the activity that produces the most taxable income for the business location.13 There are five major business tax classifications as well as a separate category for antique malls, flea markets, transient vendors, and the like. Some classifications have subcategories that are discussed in more detail in Chapter 5. Business tax classifications are found in Tenn. Code Ann. § 67-4-708. Only one classification is allowed per business location. The business tax classifications each contain several business activities that businesses must choose to categorize as their dominant business activity. As the classifications increase in number from Classification 1 up to Classification 5, the types of business activities change in character from activities that meet basic needs such as the provision of food for home preparation in Classification 1 to the relatively small subset of industrial loan and thrift companies in Classification 5. Businesses engaged in the business activity of selling tangible personal property that is not listed in any other section of Tenn. Code Ann. § 67-4-708 file under Classification 2.14 Businesses engaged in the sale of services not otherwise specified file under Classification 3.15 A detailed analysis of the business tax classifications is available in Chapter 5 of this Manual. 4. Retailer vs. Wholesaler Businesses must also determine if they are primarily engaged in the business of making retail sales or wholesale sales. The determination of whether a business is a retailer or wholesaler is made on a location-by-location basis. This is important because the business tax rate differs for retailers and wholesalers at a given location. Generally, a business is a retailer if at least 50% of taxable gross sales are retail sales and a wholesaler if more than 50% of taxable gross sales are wholesale sales.16 For more information on retailers and wholesalers, please see Chapter 5 of this Manual. 16 | P a g e As covered in Chapter 1, the Tennessee business tax has undergone numerous statutory changes to adapt to modern business practices and e-commerce. One of the most important changes is to the application of “nexus,” which describes the connection that must be present before a taxing jurisdiction has the right to impose a tax on a business. An entity must have some contact or connection with a state before the state may constitutionally levy a tax. The question becomes, at what point is that connection sufficient to subject a person to taxation in the state? 1. Pre-2014 Tax Periods For periods beginning on or before January 1, 2014, Tennessee law provided that making sales by engaging in any vocation, occupation, business, or business activity listed in the business tax statutes is a privilege on which each county or incorporated municipality, or both, may levy a privilege tax.17 Furthermore, TENN. COMP. R. & REGS. 1320-04-05-.28(1) (2000) (“Rule 28”) stated that the business tax applies to each place, location, or outlet in the state from which business is carried on. Therefore, the Tennessee business tax applied to a person who made sales or performed services at a place of business or other location in Tennessee. During this period, the Department considered a taxpayer that did not have a physical place of business in Tennessee, but that operated through a warehouse or other location in Tennessee, whether or not the warehouse or other location is owned by the taxpayer, to have a business location where its sales were sourced. This was based on TENN. COMP. R. & REGS. 1320-04-05-.14 (“Rule 14”). Rule 14 states that:  “[S]ales of tangible personal property and services by a licensed wholesaler or retailer from a central warehouse or other distribution point other than his principal place of business shall be subject to the appropriate wholesale or retail tax, and persons making such sales shall be liable for the business tax for that location.” 17 | P a g e Accordingly, the Department imposed business tax on sales of tangible personal property made from a warehouse or other location in Tennessee at which a taxpayer maintained the tangible personal property sold. The Department also utilized the “sufficient local incidence” test. The United States Supreme Court coined the term “sufficient local incident” to illustrate when a business’s in-state activity rose to the level to contribute to the establishment and maintenance of an in-state market. This level of activity was sufficient to satisfy U.S. Constitutional requirements. 18 In Westinghouse Electric Corp. v. King, 678 S.W.2d 19 (Tenn. 1984), the Tennessee Supreme Court established as the relevant question of whether a taxpayer is subject to the business tax as whether there is a “sufficient local incident” upon which to base the tax. It concluded that a taxpayer who had marketing offices within the state and technical engineers performing work within the state had “sufficient local incident” to Tennessee such that its receipts from its sales to Tennessee customers were subject to business tax. In Boeing Equipment Holding Company v. Tennessee State Board of Equalization, 1987 WL 15202 (Tenn. Ct. App., August 7, 1987), the Tennessee Court of Appeals found an out-of-state taxpayer subject to business tax even though it had no offices or employees in Tennessee. To take advantage of an ad valorem tax exemption for inventories located in the state, the taxpayer argued it was subject to business tax based on the presence of tangible personal property leased to persons in Tennessee. The court found the taxpayer had a “sufficient local incident” based on the taxpayer owning property in Tennessee and receiving income from leases on that property. It concluded that the taxpayer “engaged in the ‘local business of renting [property] located in this state.’”19 The Westinghouse and Boeing cases both suggested that a taxpayer need not have an office or physical business location in Tennessee to be subject to business tax. 2. Periods Beginning on or after January 1, 2014 The Tennessee General Assembly clarified the application of the business tax as applied to out-of-state businesses with the “Uniformity and Small Business Relief Act of 2013” (the “Act”). Effective for periods beginning on or after January 1, 2014, the law was amended to state the following: 18 | P a g e  [T]he making of sales by engaging in any vocation, occupation, business, or business activity listed described, or referred to in § 67-4-708(1)-(5)” (the classifications section of the business tax statute) is subject to the state-level business tax.20  [T]he making of sales by engaging in any vocation, occupation, business, or business activity listed, described, or referred to in § 67-4-708(1)-(4)” (the classifications section of the business tax statute) is subject to the municipal-level business tax.21 The Act also added that:  [A]ny person engaged in any vocation, occupation, business, or business activity listed, described, or referred to in § 67-4-708(1)-(5) without establishing a physical location, outlet, or other place of business in the state” is subject to the state-level business tax but exempt from the municipal-level business tax.22  For purposes of the state-level business tax, to be engaged in business in this state includes performing a service that is received by a customer in this state. 23  Thus, for periods beginning after January 1, 2014, a taxpayer need not have a location in Tennessee to be subject to the state-level business tax but must have a physical location to be subject to the municipal-level business tax. A business entity located in the state will be subject to the state-level business tax if its gross receipts sourced to all of its locations within a county are $100,000 or more, and it is not specifically exempt from business tax.2425 An entity is also subject to the municipal-level business tax if it is in a municipality that has enacted the tax and its gross receipts sourced to its locations within the municipality are $100,000 or more.26 (See Chapter 7 for more information on sourcing). Please note, there are provisions that apply to telecommunications and cable providers, vending machine operators, and overnight lodging rentals. These provisions are discussed later in this Manual. Audit Tip: The amount reported on Schedule A, Line 1: Total Gross Sales (i.e., total sales) should be used to determine if the taxpayer meets the $100,000 threshold. 19 | P a g e A business entity that is located outside of the state will be subject to the state-level business tax if it has:  Substantial nexus with the state;  Is engaged in this state in one of the activities listed under Tenn. Code Ann.§ 67-4717(a); and  Its gross receipts within a county are $100,000 or more. As stated in Chapter 1, the business tax is comprised of a state-level tax and a municipallevel tax. Out-of-state business entities are exempt from the municipal-level business tax. While the business tax is comprised of a municipal-level and state-level tax, the county in which a business is located is relevant for sourcing and nexus purposes. 1. Substantial Nexus A business must have substantial nexus with this state to be subject to the business tax. The Revenue Modernization Act (“the RMA”) codified the substantial nexus standard in 2015. It became effective for tax years beginning on or after January 1, 2016. Substantial nexus is:  Any direct or indirect connection of the taxpayer to this state such that the taxpayer can be required under the Constitution of the United States to remit the tax imposed under this part.”27 Such connections include, but are not limited to, the following:  The business is organized or commercially domiciled in Tennessee;  The business owns or uses its capital in Tennessee;  The business has systematic and continuous business activity in Tennessee that has produced gross receipts attributable to customers in Tennessee;  The business has a “bright-line presence” in Tennessee, which applies when any of the following metrics are met: 20 | P a g e o Total Tennessee business receipts during the tax period exceed the lesser of $500,000 or 25% of the business’s total receipts everywhere during the tax period; o The business’s average value of real and tangible personal property owned or rented and used in Tennessee during the tax period exceeds the lesser of $50,000 or 25% of the average value of all the business’s total real and tangible personal property; or o The total amount of compensation paid by the business in Tennessee during the tax period exceeds $50,000 or 25% of the business’s total compensation pay by the business.28 Businesses formed and operating in Tennessee will always have nexus in this state. The question of nexus applies to out-of-state businesses with a limited connection to the state. Foreign entities must have effectively connected income with a United States trade or business, as determined by the Internal Revenue Code (“IRC”), to have substantial nexus in this state. If a business treated as a foreign corporation under the IRC has no effectively connected income, it also does not have substantial nexus in Tennessee. Effective for tax periods beginning January 1, 2016, the RMA’s substantial nexus standard expands the number of businesses that might have nexus in Tennessee. Businesses that would have been subject to the business tax before the RMA (and the substantial nexus definition) will continue to be subject to the tax even if they do not meet any of the brightline tests. However, under the substantial nexus definition, some out-of-state businesses that previously were not subject to business tax may now be subject to the tax. In other words, the nexus provisions in existence pre-RMA are still in effect, RMA simply expanded upon those provisions. It is not required that a taxpayer have bright-line presence to have substantial nexus with Tennessee. A taxpayer may have substantial nexus with Tennessee with lesser amounts of property, payroll, and receipts in Tennessee if it has any connection with the state that requires it to remit tax under the United States Constitution, such as performing services in the State. 21 | P a g e Sales Facilitated Through a Marketplace29 The sales and use tax marketplace facilitator legislation established in Public Chapter 759 (2020) does not affect the nexus requirements for business tax. Those taxpayers considered marketplace sellers for sales and use tax purposes should include receipts from sales facilitated through a marketplace when determining whether they have substantial nexus for business tax purposes. A marketplace facilitator is considered the retailer of sales facilitated through its marketplace solely for sales and use tax purposes. Marketplace facilitators should include only the commissions or third-party fees and sales of their own goods or services in their gross receipts for business tax purposes. 2. Activities Engaged in this State In addition to having substantial nexus, a business must also be engaged in one of the activities in Tenn. Code Ann. § 67-4-717(a) before being subject to the business tax. This section states that a business “engaged in this state” in any “vocation, occupation, business, or business activity set forth as taxable under § 67-4-708(1)-(5), the classifications section of the business tax statute, with or without establishing a physical location, outlet, or other place of business in the state, shall be subject to the tax.” The phrase "engaged in this state" shall include, but not be limited to, any of the following:  The sale of tangible personal property that is shipped or delivered to a location in this state;  The sale of a service that is delivered to a location in this state; or  The leasing of tangible personal property that is located in this state. 30 22 | P a g e 3. Nexus in Tennessee – Other Tennessee Taxes As mentioned above, nexus describes a connection that must be present before a taxing jurisdiction has the right to impose a tax on an entity’s activity. Determining whether a taxpayer has nexus in Tennessee for business tax is a different process than the determination of whether a taxpayer has nexus for Tennessee sales and use tax and franchise and excise tax. However, all businesses located in this state have nexus for sales and use tax, franchise and excise tax, and business tax. Sales and Use Tax Out-of-state dealers engaged in the following activities are considered to have nexus in this state:  Use of employees, agents, or independent contractors to solicit sales in Tennessee;  Use of third parties in Tennessee to conduct substantial business activities in Tennessee;  Maintaining inventory in Tennessee and using in-state independent contractors to fulfill Tennessee retail sales of that inventory;  In-state promotional activity by company personnel, including participation in trade shows;  Physical Tennessee business presence of a subsidiary that is acting as an agent of the out-of-state dealer or that is conducting activities in Tennessee on behalf of such a dealer (e.g., a retail store that takes returns of purchases made online from parent);  Use of company-owned trucks or use of contract-carriers acting as an agent for the seller;  Maintaining a store, office, warehouse, showroom, or other place of business in Tennessee;  Leasing or renting tangible personal property in Tennessee; 23 | P a g e  Repairing, installing, or assembling tangible personal property in Tennessee or the use of an agent or independent contractor to perform those services in Tennessee;  Providing telecommunication services to subscribers located in Tennessee;  Providing any taxable service in Tennessee; and  Use of an in-state party to route customers to the out-of-state dealer (commonly known as “click-through nexus”). Pursuant to the Wayfair decision, out-of-state dealers with no physical presence in Tennessee that make sales that exceed $100,000 to customers in this state during the previous tax year also have substantial nexus in Tennessee for sales and use tax purposes. For more information on sales and use tax nexus requirements, see the Department’s Sales and Use Tax Manual. Franchise and Excise Tax A taxpayer without a physical presence in the state may have substantial nexus in the state for franchise and excise tax purposes if it meets the bright-line presence definition of substantial nexus. A taxpayer meets the bright-line presence standard for substantial nexus for franchise and excise tax if a taxpayer has:  At least $50,000 of property or payroll in the state;  At least $500,000 of receipts in the state; or  At least 25% of its total property, payroll, or receipts in Tennessee. A taxpayer that does not meet the bright-line presence standards may also have substantial nexus in the state if its contact with the state is sufficient. For example:  A business engaged in systematic and continuous business activity in the state that has produced receipts attributable to Tennessee customers will have substantial nexus with the state. 24 | P a g e For more information on nexus for franchise and excise tax, see the Department’s Franchise and Excise Tax Manual. 4. Establishing a Location, Outlet, or Other Place of Business All persons that are subject to the state-level business tax and have a physical location, outlet, or other place of business within a municipality in this state shall also be subject to the municipal-level business tax. Persons that do not have a physical location, outlet, or other place of business within a municipality in this state shall not be subject to the municipal-level business tax.31 Persons engaged in the business of selling tangible personal property or services from a central warehouse or distribution point other than their principal place of business are liable for business tax at that location.32 For example:  A furniture store is principally located in Nashville, Tennessee. The Nashville location is advertised on its website, the taxpayer lists this address on its registration documents, and this is where the showroom is located. The business also has a warehouse located in Murfreesboro, Tennessee. As new furniture models are introduced, the taxpayer occasionally holds “warehouse sales” whereby the warehouse is opened to the public to display and sell the overstock merchandise. The taxpayer, therefore, should register and pay business tax for its Murfreesboro location as well. In the case of an audit, auditors will consider several factors when determining whether a taxpayer has established a location, outlet, or other place of business in Tennessee including:  The amount of time a person has engaged in business in Tennessee;  The regularity in which a person engages in business in Tennessee;  Whether the business holds itself out as having a location in Tennessee;  Taxable receipts generated within a jurisdiction;  Whether or not employees of a business are located in this state; 25 | P a g e  Whether or not the business has Tennessee payroll receipts in its franchise and excise tax apportionment factor;  Whether the business intends to operate at a location in Tennessee on a more than temporary basis; and  Whether or not a taxpayer leases or owns property in Tennessee. This is not an exhaustive list of factors. Each business is unique; thus, an auditor may use other facts or circumstances to determine whether a seller of tangible personal property or a service provider has established a location. For example:  A California information technology (“IT”) consultancy firm (“CA IT Company”) enters a 2-year contract with a Memphis, Tennessee business. The contract is valued at $5,000,000 dollars and the CA IT Company will have a team of 20 consultants working full-time from the Memphis business’s headquarters. The consultants will have designated parking spaces, designated office spaces, security access to the headquarters building, and access to the internet network. The CA IT Company has information on its website that it’s performing work in numerous states and cities, including Memphis, Tennessee. Under these circumstances, the California IT Company has likely established a business location in Memphis, Tennessee and should register and pay both state-level and municipal-level Tennessee business tax. Remote Employee Home Office Generally, an employee’s home office does not constitute a business location for purposes of determining whether a business is subject to municipal-level business tax in a given jurisdiction. However, compensation paid to such employee is included when determining whether an out-of-state business has substantial nexus in Tennessee. As discussed in section 1 of this chapter, out-of-state businesses must have substantial nexus in Tennessee to be subject to the state-level business tax. One way to have substantial nexus is if the business has a “bright-line presence” in Tennessee, which applies when any of the following metrics are met:  Total Tennessee business receipts during the tax period exceed the lesser of $500,000 or 25% of the business’s total receipts everywhere during the tax period; 26 | P a g e  The business’s average value of real and tangible personal property owned or rented and used in Tennessee during the tax period exceeds the lesser of $50,000 or 25% of the average value of all the business’s total real and tangible personal property; or  The total amount of compensation paid by the business in Tennessee during the tax period exceeds $50,000 or 25% of the business’s total compensation pay by the business.33 Therefore, if an out-of-state business pays an in-state employee more than $50,000 in compensation, the out-of-state business will have substantial nexus in Tennessee and is subject to the state-level business tax. However, if the business’s only physical precense in the state is an employee’s home office, such office does not constitute a physical location for business tax purposes, which means the business is not subject to municipal-level business tax in the jurisdiction in which the employee’s home office is located. In this circumstance, the business should register with the Department as an out-of-state business and pay statelevel business tax on its Tennessee gross receipts. 27 | P a g e Every person subject to state-level and/or municipal-level business tax must register with the Department of Revenue (the “Department”) before engaging in business in the state. 34 The Department registers businesses under one consolidated business tax account. For businesses with multiple locations, the Department will register each business
Extracted from PDF file 2023-tennessee-tennessee-business-tax-manual.pdf, last modified December 2023

More about the Tennessee Tennessee Business Tax Manual Individual Income Tax TY 2023

Businesses can use this manual to understand the business privilege tax they owe for doing business in Tennessee

We last updated the Tennessee Business Tax Manual in February 2024, so this is the latest version of Tennessee Business Tax Manual, fully updated for tax year 2023. You can download or print current or past-year PDFs of Tennessee Business Tax Manual directly from TaxFormFinder. You can print other Tennessee tax forms here.

Other Tennessee Individual Income Tax Forms:

TaxFormFinder has an additional 65 Tennessee income tax forms that you may need, plus all federal income tax forms.

Form Code Form Name
Form INC-250 Individual Income Tax Return Kit
Form SLS450 State and Local Sales and Use Tax Return
Form SLS450 (Instructions) Sales and Use Tax Return (Instructions)
Sales and Use Tax Guide Sales and Use Tax Guide
Tennessee Business Tax Manual Tennessee Business Tax Manual

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Tennessee usually releases forms for the current tax year between January and April. We last updated Tennessee Tennessee Business Tax Manual from the Department of Revenue in February 2024.

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About the Individual Income Tax

The IRS and most states collect a personal income tax, which is paid throughout the year via tax withholding or estimated income tax payments.

Most taxpayers are required to file a yearly income tax return in April to both the Internal Revenue Service and their state's revenue department, which will result in either a tax refund of excess withheld income or a tax payment if the withholding does not cover the taxpayer's entire liability. Every taxpayer's situation is different - please consult a CPA or licensed tax preparer to ensure that you are filing the correct tax forms!

Historical Past-Year Versions of Tennessee Tennessee Business Tax Manual

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2023 Tennessee Business Tax Manual

Business Tax Manual - December 2023

2022 Tennessee Business Tax Manual

Tennessee Business Tax Manual


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