September 4, 2015
Understanding Tennessee’s Sales & Use Tax
Sales & Use Tax is more complicated than it often appears. There are different rates, schedules, and classes of goods and services of which retailers need to be aware. Plus, depending on the county in which you’re doing business, your local tax rates could be different from those in other counties. So, it makes good sense to pay attention to the laws relating to Tennessee’s Sales & Use Tax.
Here is some helpful information to get you started, along with a few links to help you dig deeper:
To What Does Sales & Use Tax Apply?
Understanding to which business activities Tennessee’s Sales & Use Taxes apply is not always as easy as it should be. This month’s issue of the Executive Legal Professionals Newsletter aims to help you better understand this tax and how to comply with your legal obligations with respect to the tax.
“Generally, if you make retail sales, leases, or rentals in Tennessee of any goods, computer software, warranty contracts, or certain services and amusements, you should register for the sales tax. You, as the retailer, are liable for the tax, but you may collect it from your customers. The sales tax applies to the sales price, which includes the entire amount the customer must pay for the item purchased.
A person must also register to report and pay use tax on purchases of tangible personal property, computer software and specified digital products that they cause to be imported for use in Tennessee. The use tax applies to the purchase price of the imported item, which includes the entire amount the customer must pay for the item.”
(Source: TN Dept. of Revenue)
When Should You Pay Sales & Use Tax?
How often you file a tax return with the TN Dept. of Revenue determines when your payment is due. If you file monthly (typical for high-volume retailers), the 20th day of the month following the end of your reporting period is the due date for your return. If you file quarterly, the due date is the 20th of the month following the end of the quarter. If you file annually, the due date for your return is the 20th of January, each year.
How Much Sales & Use Tax Should You Pay?
The rate of tax you pay varies depending on what is being bought and sold. Tennessee’s state sales tax rate on food is five percent (5%). Nearly everything else, except a few selected products (like aviation fuel or telecomm services, which have different tax rates), is taxed at a rate of seven percent (7%). Depending on where an item is sold, there may also be a “Single Article” local tax of up to 2.75%. Click the following link for more on Local Option Sales and Use Tax on Sigle Articles. Click the following link for a complete list of local tax rates set by local governments.
“The local option tax is applied only to the first $1600 of the purchase price of any single article of tangible personal property sold. A single article is defined as one item of tangible personal property in the form that it is delivered from the seller. … The local option tax on single articles applies to less than the first $1600 in the following counties: Grundy is $333, Hamblen is $300, and Hancock is $375.
The single article limitation does not apply to sales of taxable services, amusements, custom computer software, specified digital products, and warranty or service contracts and computer software maintenance contracts. These sales are subject to the full local option tax. There is also an additional state single article tax[, mentioned above].
The state single article tax rate of 2.75% is levied on the amount of the sales price of a single article of tangible personal property between $1,600.01 and $3,200. The state single article tax is paid on top of the general state sales tax.”
(Source: TN Dept. of Revenue)
For most goods in most places in Tennessee, the total tax rate is nine and three quarters percent (9.75%). The highest rate of state sales tax in the United States is 7.5% (California), and the highest total state sales tax rate in the U.S. is 12.7% (Arizona). Several states have no State or Local Sales Tax, including Delaware, Montana, New Hampshire, Oregon, and some parts of Alaska (parts of Alaska have local tax, though the state collects no State Sales Tax).
A Quick Aside About Income Tax:
Only seven U.S. states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Residents of Tennessee and New Hampshire technically pay no income tax, exceptthey do pay tax on dividends and income from investments; so,technically it is incorrect to say Tennesseans (and residents of New Hampshire) pay “no income tax.” The only way to avoid both State Income Tax and State Sales Tax is to live in a part of Alaska where no State or Local Sales Tax is collected. Living in Alaska is not as expensive as you might think, and the annual Permanent Fund Dividend helps offset some of the costs of living in remote Alaska.
No U.S. Citizen lawfully escapes the awful Progressive Federal Income Tax, though the FairTax gives Americans the best hope for abolishing this prosperity-strangling tax and the undeniably corrupt IRS which administers it. (See also: Corruption From The IRS to the DOJ and IRS Is Sued For Investigating Churches, though these articles are just the tip of the corruption iceberg, when it comes to IRS Corruption. For example, IRS employees spent 521,725 hours, in 2014, doing union activities while on the job, which cost taxpayers $23.5 million.)
What’s this ‘Use Tax’ thing?
“Use Tax is the counterpart to the sales tax. All Tennessee residents, as well as businesses operating in the state, must pay use tax when goods are purchased from outside the state of Tennessee and brought or shipped into the state and the seller did not collect sales tax on the purchase. Purchases made from outside the state include, but are not limited to, mail-order catalog purchases, purchases made online, over-the-phone purchases, and purchases made from a store located in another state. Use tax does not apply to the purchase of services.
The purpose of the use tax is not only to raise revenue, but also to protect local merchants, who must collect the sales tax, from unfair competition from out-of-state sellers who do not collect Tennessee’s sales tax. The 45 states that impose a sales tax also levy a use tax.”
(Source: TN Dept. of Revenue)
In the context of the purchase and sale of goods online, this is sometimes called the “Internet Sales Tax,” but the Consumer Use Tax applies in the context of goods purchased anywhere outside of Tennessee on which consumers pay no sales tax. For example, if you purchase goods from New Hampshire, where there is no sales tax, and you ship them to Tennessee, they may be subject to the Consumer Use Tax. Click the preceding link for more information from the TN Dept. of Revenue about the Consumer Use Tax.
Get Help With Your Taxes—CPAs and Tax Attorneys
Executive Legal Professionals is committed to being a powerful ally in businesses’ struggles to comply with their tax burdens. That’s why our BAIL Team includes savvy CPAs and why our attorneys include tax attorneys like Nikki McCain, who has an LLM in Tax Law. We want you to connect with the experienced professionals you need on your team. Give us a call, today, at (615) 669-6566 or visit us online, and see how we can help you tackle your legal risks before they become expensive legal problems.
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