Tennessee Tax Laws for Individuals and Businesses

Tennessee’s tax system is structured differently from many other states, as the government does not levy a general income tax on wages and salaries. This feature means the state’s revenue relies heavily on consumption and business-related taxes. For individuals, tax obligations are primarily linked to purchasing activities, while for businesses, the landscape is defined by levies on corporate profits and net worth.

State Taxes Affecting Individuals

The most notable feature of Tennessee’s individual tax system is the absence of a general state income tax on wages and salaries. Previously, the state levied a Hall Income Tax on interest and dividends, but this was fully repealed as of January 1, 2021. As a result, Tennessee no longer taxes any form of personal income at the state level.

With no tax on personal income, the primary tax individuals encounter is the sales and use tax, a source of state and local revenue. The statewide sales tax rate is 7.00%. This base rate applies to most purchases of tangible personal property and certain services, such as repairs and telecommunications.

In addition to the state rate, counties and municipalities can levy their own local option sales taxes. These local taxes are added to the state rate, and the total sales tax paid by a consumer varies by location. The maximum local option sales tax is capped at 2.75%, resulting in a combined average rate of 9.55%.

When purchasing a single expensive item, the local option sales tax only applies to the first $1,600 of the sales price. A separate state tax of 2.75% is applied to the portion of the sales price between $1,600.01 and $3,200.

While most goods are subject to the full rate, food and food ingredients are taxed at a lower state rate of 4%, plus any applicable local tax. This distinction is meant to lessen the tax burden on essential purchases. Prescription drugs are fully exempt from sales tax.

Use tax is due on items purchased from out-of-state sellers for use in Tennessee if the seller did not collect sales tax. For example, if a resident buys furniture from an online retailer that does not collect the tax, that resident must remit the use tax to the Department of Revenue. The use tax rate is the same as the sales tax rate that would have been due locally.

Primary Business Taxes

Businesses in Tennessee are subject to franchise and excise taxes, which are filed together on a single return. These two taxes apply to most business entities, including corporations, LLCs, and certain partnerships, for the privilege of conducting business in the state.

The excise tax functions as a corporate income tax and is calculated on a business’s net earnings. The tax is a flat 6.5% on the net income from business activities within Tennessee. The taxable base starts with federal taxable income and is then adjusted per Tennessee law.

The franchise tax is levied on a business’s net worth at a rate of $0.25 for every $100 of net worth, or 0.25%. There is a minimum franchise tax payment of $100, ensuring nearly every registered business has some liability.

Many businesses must also pay a local Business Tax, a privilege tax imposed by local governments on gross receipts from sales. For tax years ending on or after December 31, 2023, the threshold for needing a Standard Business License and paying the tax was raised to $100,000 in gross receipts per jurisdiction. Businesses with gross receipts between $3,000 and $100,000 must obtain a Minimal Activity License but do not file a business tax return. Those with receipts below $3,000 have no licensing or tax requirement.

Understanding Property Tax

Property tax in Tennessee is a local tax administered and collected by county and city governments to fund services like schools and infrastructure. The state government does not levy a statewide property tax.

The process begins with an appraisal, where the county property assessor determines the fair market value of all property. Following the appraisal, an assessment is calculated. The assessed value is the taxable value of the property and is a percentage of the appraised market value.

Tennessee law establishes different assessment ratios for property types. For residential property, the assessed value is 25% of its appraised value. For commercial and industrial properties, the assessment ratio is 40% of the appraised value, meaning they carry a proportionally larger share of the tax burden.

Local legislative bodies, such as county commissions and city councils, set the property tax rate annually based on budget needs. The rate is expressed as an amount per $100 of assessed value. County trustees are responsible for mailing tax bills to property owners in the fall, with payment due early the following year to avoid penalties.

Registering and Paying State Taxes

Compliance with Tennessee’s tax laws begins with registration through the Tennessee Department of Revenue’s online portal, the Tennessee Taxpayer Access Point (TNTAP). This platform is where businesses register for tax accounts, file returns, and make payments. For a new business, the first step is to create a TNTAP logon and then register for the specific tax accounts it needs.

To complete the registration, a business will need several pieces of information:

• Federal Employer Identification Number (FEIN)
• The legal name and structure of the business
• Physical and mailing addresses
• The date the business began its operations in Tennessee

After the accounts are established, all subsequent filing and payment activities are handled through the TNTAP portal. A business owner logs into their account, selects the tax to be filed, and enters the required financial figures. Payments can be submitted electronically at the time of filing.