The Tennessee business tax is an often overlooked and misunderstood tax that entities should carefully consider when doing business in Tennessee. The tax originated in 1971 as a locally administered tax intended to replace local property taxes on business inventories but has morphed into a broad-based state-administered tax over the past decade.
Effective for tax years beginning January 1, 2016, the tax has even broader reach impacting businesses with no physical presence in Tennessee.
Impacted taxpayers
The 2016 Revenue Modernization Act enacted a bright line economic nexus standard (termed “substantial nexus”) where out-of-state vendors may be subject to the tax if their activity meets any of the following thresholds:
• 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 (using market-based sourcing); or
• 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
To be subject to theTax, a business, In addition to having substantial nexus, must also be engaged in a business activity that includes, but is not 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.
Business receipts may be tangible personal property (TPP) or sales of services; for tax purposes sales of software are treated as sales of services. Intangible or real property as defined by Tennessee code is usually exempt from business tax. P.L. 86-272 protection does not apply because this is a gross receipts tax.
Entities with physical presence in Tennessee should also evaluate the need to register and file at the municipal level as the bright line activity test is significantly lower.
Tax rates vary from 3/80 of 1% (.000375) to 1/10 of 1% (.001) depending on the determined entity classification having substantial nexus.
There are various exemptions and exclusion from the tax. A full list can be found in the Tennessee Business Tax Manual; common services exempt from business tax include educational, financial, medical, veterinarian, architectural, engineering, and legal services.
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