Key Takeaways

  • Tennessee generally taxes services only if they involve creating, repairing, or installing tangible personal property. Professional services like accounting remain exempt.
  • Letter Rulings #13-16 and #13-21 illustrate how the Tennessee Department of Revenue evaluates service taxes, especially when services are bundled with taxable goods.
  • Businesses must register to collect sales tax and comply with origin-based sourcing rules. Out-of-state sellers must collect state and local rates in certain cases.
  • Service providers should not assume they are automatically tax-exempt—bundled or related services may trigger tax liability.
  • Tennessee requires timely filing of returns (monthly, quarterly, or annually), with penalties and interest for late payments.

Are services taxable in Tennessee is a question without a clear yes or no answer. Sales tax collected for services in the state of Tennessee will depend on the type of service being performed. If creating, manufacturing, repairing, or installing a product is part of the service, taxes will need to be collected, while the services of an accountant, for example, would not require sales tax.

Letter Ruling #13-16

The Tennessee Department of Revenue issued two letter rulings on January 22, 2014. The rulings show that determining whether a good or service is taxable should not be taken for granted. While the traditional approach of applying taxes on the sale of tangible items but only on certain services has expanded in many states, Tennessee has kept a more traditional approach.

In Tennessee, services that are generally not subjected to either sales or use taxes include data processing, information services, and management consulting services. Businesses that offer management consulting or management services are required to pay a local gross receipts tax. This isn't applied for services that have exemption status such as healthcare services, including medical and dental.

Letter Ruling #13-21

Letter #13-21 focused on sales and use tax in reference to technology consulting services. In this case, a virtual lab was used by the business to demonstrate and test software for the customer. Consulting and testing services in Tennessee are typically not taxable, while the sale or licensing of computer software and hardware and any related installation services are taxable.

If any of the non-taxable services are needed for the taxable good that is sold, the non-taxable services are then subject to taxation. However, in letter #13-21, it was determined that although the virtual lab served as a way for the seller to complete software testing and demonstrate services and although the software on the computer is normally a taxable service, it did not apply in this case because the software and hardware being demonstrated was owned by the company, not the customers. Taxation would only be applied if the customer purchased the software and received a license from the seller; otherwise, the service is not taxable.

Common Service Tax Triggers in Tennessee

While many services are not taxed in Tennessee, businesses must carefully evaluate whether their activities fall into taxable categories. Common triggers for service taxes include:

  • Repair and installation services – Charges for repairing or installing tangible personal property are taxable.
  • Bundled transactions – If a nontaxable service is provided together with a taxable product, the entire charge may be taxable unless the charges are clearly separated on the invoice.
  • Software and digital goods – Installing or selling prewritten software, even when delivered electronically, is taxable, while pure consulting on its use may not be.
  • Customization and modification – Customization of software or manufactured goods may still fall under taxable categories, depending on how closely it resembles a product sale.

Tennessee service providers should not assume they are “always tax-free.” Even activities that seem exempt—like consulting or digital access—can become taxable when combined with the sale of tangible property.

Registering for Sales Tax

In order to collect Tennessee sales tax on goods and applicable services, you must first register with the state. The information required includes:

  • The business name, phone number, and address.
  • The name, address, and phone number of all owners, officers, partners, and whoever is submitting the application.
  • The Social Security number of all owners, officers, and partners.
  • The Federal Employer Identification Number (FEIN).
  • A business description describing the nature of the business.
  • The type of ownership and the incorporation date if the entity is a corporation.
  • The previous owner's name and current address, if applicable.

The application must be signed by the sole proprietor, partner, or officer of the corporation applying. You are also required to estimate yearly gross sales, with a minimum of $4,800. If not, the sales tax license may be withdrawn.

Collecting sales tax in Tennessee is origin-based which means the tax rate is based on where the business is located. If the business is not based in Tennessee the sellers have two options. The first is to collect the sales tax based on where the buyer is located or collect the 7 percent state tax rate then add an extra 2.25 percent for a total of 9.25 percent.

Exemptions and Local Gross Receipts Taxes

Although many professional services are exempt from Tennessee sales tax, they may still be subject to other business taxes. For example:

  • Local gross receipts tax – Management consulting firms and certain other service providers may owe a local gross receipts tax, even if their services are not subject to sales tax.
  • Healthcare services – Medical, dental, and other healthcare services are exempt from sales tax.
  • Nonprofit or exempt organizations – Services sold to tax-exempt entities may not be taxable, but providers must maintain proper exemption certificates.

Understanding the interplay between exemptions and local taxes is essential for compliance.

Tennessee Sales Tax Return Dates

Tennessee requires that you file sales tax on a monthly, quarterly, or annual basis. This can be based on either a fiscal or annual calendar. Tennessee requires that all tax returns and subsequent tax payments must be completed online. Even if there is no sales tax to report, Tennessee still requires a sales tax return be filed. Sales tax deadlines in Tennessee are the 20th day of the month. If the 20th is a federal holiday or a weekend, the deadline will be the following business day.

If taxes are filed late, penalties will be assessed. The penalty will be 5 percent per month with a maximum of 30 percent. Any unpaid tax is assessed with a 7.5 percent compounded interest rate per year.

Frequently Asked Questions

  1. Are most services taxable in Tennessee?
    No. Tennessee generally exempts services unless they involve tangible personal property, such as installation, repair, or software licensing.
  2. Do digital products count as taxable services in Tennessee?
    Yes. Digital goods like prewritten software, e-books, or music are generally taxable if sold or licensed, regardless of delivery method.
  3. If I bundle a taxable product with a service, how is tax applied?
    If the charges are not separately stated, the entire bundle may be subject to sales tax. Clear invoicing helps avoid over-collection.
  4. Are professional services like legal or accounting taxable?
    No. Tennessee exempts most professional services, though providers may still owe business or gross receipts taxes.
  5. What happens if I file Tennessee sales tax late?
    A 5% monthly penalty (up to 30%) and 7.5% annual interest may apply for late filings or unpaid balances.

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