Tennessee Tennessee Business Tax Manual

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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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.

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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);

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

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.

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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

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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.

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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.”

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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:

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

[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.

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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:

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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.

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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

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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;

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

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.

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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;

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

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;

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

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.

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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