What Is the State Tax in Tennessee?
Explore Tennessee's tax landscape, including sales, business, and property taxes, and understand how they impact residents and businesses.
Tennessee’s tax structure stands out among U.S. states, primarily due to the absence of a general personal income tax. This feature attracts individuals seeking favorable tax conditions, but understanding how the state generates revenue through other means is essential. Tennessee relies heavily on sales and use taxes, along with business-related taxes, to fund public services. A closer look at these components provides insight into the state’s fiscal landscape and helps residents and businesses effectively manage their financial responsibilities.
No General Personal Income Tax
Tennessee does not impose a general personal income tax, a key factor in its appeal to individuals seeking a tax-friendly environment. The state constitution prohibits taxing wages and salaries, allowing residents to retain more of their earnings. This is particularly beneficial for high-income earners and retirees. Compared to other states without a personal income tax, such as Florida or Texas, Tennessee’s relatively low cost of living enhances its appeal.
The state has historically relied on consumption-based taxes rather than personal income taxes. The Hall Income Tax, which applied to interest and dividend income, was repealed on January 1, 2021. This legislative change aimed to further solidify Tennessee’s attractiveness to residents and businesses alike.
Sales and Use Tax
Tennessee’s sales and use tax is a significant revenue source. The state sales tax rate is 7%, applying to most tangible personal property and certain services. Local jurisdictions can add a local option sales tax ranging from 1.5% to 2.75%, resulting in combined rates that vary by location. For example, Nashville has a combined rate of 9.25%, while Memphis reaches 9.75%.
The use tax applies to goods purchased out-of-state for use in Tennessee when sales tax has not been collected by the seller. This measure helps local businesses compete with out-of-state and online retailers. Businesses must maintain accurate records and file taxes on time to avoid penalties, including interest on unpaid taxes and fines for late filings.
Business Excise Tax
The business excise tax in Tennessee applies to the net earnings or income of businesses operating within the state. The tax rate of 6.5% has remained consistent, providing predictability for businesses. It applies to corporations, LLCs, partnerships, and other entities.
This tax is calculated based on federal taxable income, with adjustments as defined by Tennessee law. Businesses can deduct specific expenses, such as federal income taxes paid and net operating losses, which may be carried forward for up to 15 years. Compliance requires timely quarterly estimated payments, with the final return due on the 15th day of the fourth month after the fiscal year ends. Businesses must also understand nexus standards, which determine tax liability based on physical presence and economic activity within the state.
Business Franchise Tax
Tennessee’s business franchise tax is based on a company’s capital structure rather than income. It is imposed on the greater of a company’s net worth or the book value of its real and tangible personal property located in Tennessee. The tax rate is $0.25 per $100 of the taxable base.
Calculating franchise tax obligations involves adjustments to reported net worth, such as adding back specific liabilities. For companies operating in multiple states, apportionment using property and payroll factors determines the tax base attributable to Tennessee. Businesses must carefully assess their balance sheets to comply with franchise tax requirements.
Local Option Taxes
Local option taxes allow Tennessee’s counties and municipalities to impose additional taxes, creating variability in the overall tax burden. These taxes are often added to the state sales tax, with rates ranging from 1.5% to 2.75%. Businesses operating in multiple locations must account for these differing rates.
In addition to sales tax, local jurisdictions may levy taxes on specific industries or activities, such as hotel occupancy or liquor-by-the-drink taxes. For instance, hotel operators in Memphis face a 5% occupancy tax on top of state and local sales taxes. Businesses must stay informed about local ordinances to avoid unexpected liabilities.
Property Tax Basics
Property taxes in Tennessee are a primary revenue source for local governments and school districts. They are assessed on real estate and certain types of tangible personal property. The state does not levy a property tax; counties and municipalities are responsible for this. Property tax rates are expressed in dollars per $100 of assessed value, with residential properties assessed at 25% of market value and commercial properties at 40%.
Periodic reappraisals, conducted every four to six years, ensure property values reflect current market conditions, which can affect tax liabilities. Property owners can appeal assessments if they believe valuations are inaccurate. Businesses should monitor reappraisal cycles closely, as changes in property values can impact operating costs.