Introducing our Sales Tax Automation 101 series. The first installment covers the basics of sales tax automation: what it is and how it can help your business.
Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. Tennessee first adopted a general state sales tax in 1947, and since that time, the rate has risen to 7 percent. On top of the state sales tax, there may be one or more local sales taxes, as well as one or more special district taxes, each of which can range between 0 percent and 3 percent. Currently, combined sales tax rates in Tennessee range from 7 percent to 10 percent, depending on the location of the sale.
As a business owner selling taxable goods or services, you act as an agent of the state of Tennessee by collecting tax from purchasers and passing it along to the appropriate tax authority. Sales and use tax in Tennessee is administered by the Tennessee Department of Revenue (TNDOR).
Any sales tax collected from customers belongs to the state of Tennessee, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.
In Tennessee, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto collector.
To help you determine whether you need to collect sales tax in Tennessee, start by answering these three questions:
If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.
If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.
It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.
The need to collect sales tax in Tennessee is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.
Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.
In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.
While physical presence still triggers a sales tax collection obligation in Tennessee, it’s now possible for out-of-state sellers to have sales tax nexus with Tennessee.
Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:
Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise, and:
Economic nexus: Having a certain amount of economic activity in the state. Under Department of Revenue Rule 129, a remote seller must register, collect, and remit Tennessee sales tax if the remote seller had more than $500,000 in Tennessee sales during the previous 12-month period.
However, the Tennessee Legislature has prohibited enforcement of the economic nexus rule until further notice.
Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Tennessee in a warehouse owned or operated by Amazon.
If you have sales tax nexus in Tennessee, you’re required to register with the TNDOR and to charge, collect, and remit the appropriate tax to the state.
Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. As of May 2019, Tennessee does not have an explicitly defined trailing nexus policy.
If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Tennessee.
If you sell taxable goods to Tennessee residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.
In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing).
As of May 2019, Tennessee is an origin-based state. This means you’re responsible for applying the sales tax rate determined by the ship-from address on all taxable sales. However, the state is scheduled to switch to destination sourcing on July 1, 2019.
After determining you have sales tax nexus in Tennessee, you need to register with the proper state authority and collect, file, and remit sales tax to the state. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome. Avalara Licensing can help you obtain your Tennessee business license and sales tax registration.
You can register your business online through the Tennessee Taxpayer Access Point (TNTAP). To apply, you’ll need to provide certain information about your business, including but not limited to:
There is currently no cost to register for a seller’s permit in Tennessee.
You must register with the Tennessee Department of Revenue if you acquire an existing business in Tennessee. The state requires all registered businesses to have the current business owner’s name and contact information on file.
The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).
Tennessee became an associate member of the SST on October 1, 2005.
Once you've successfully registered to collect Tennessee sales tax, you'll need to apply the correct rate to all taxable sales, remit sales tax, file timely returns with the TNDOR, and keep excellent records. Here’s what you need to know to keep everything organized and in check.
How you collect Tennessee sales tax is influenced by how you sell your goods:
Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the sales tax rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.
Hosted store: Hosted store solutions like Shopify and Squarespace offer integrated sales tax rate determination and collection. Hosted stores offer sellers a dashboard environment where Tennessee sales tax collection can be managed.
Marketplace: Marketplaces like Amazon and Etsy offer integrated sales tax rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.
Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.
Tennessee sales tax collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver sales and use tax calculations in real time.
Some goods are exempt from sales tax under Tennessee law. Examples include some industrial machinery, agricultural equipment, fuel, and medical supplies.
We recommend businesses review the Tennessee Sales and Use Tax Guide (beginning on page 56) to see which goods are taxable and which are exempt, and under what conditions.
Some customers are exempt from paying sales tax under Tennessee law. Examples include government agencies, some nonprofit organizations, and merchants purchasing goods for resale.
Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction.
Tennessee sales tax exemption and resale certificates are worth far more than the paper they’re written on. If you’re audited and cannot validate an exempt transaction, the TNDOR may hold you responsible for the uncollected sales tax. In some cases, late fees and interest will be applied and can result in large, unexpected bills.
Sales tax holidays exempt specific products from sales and use tax for a limited period, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year.
As of May 2019, Tennessee has an annual tax holiday scheduled for July 26–28, 2019. State and local taxes will not be assessed on: