Sales and Use Tax Guide February 2011

Sales and Use Tax Guide February 2011
Sales and Use
Tax Guide
February 2011
SALES AND USE TAX
Dear Tennessee Taxpayer,
This business tax guide is intended as an informal reference for taxpayers who wish to gain a better
understanding of Tennessee business tax requirements. It is not an all-inclusive document or a substitute for
Tennessee business tax statutes or rules and regulations. The information in this guide is current as of the
date of publication. Tax laws, their interpretation, and their application can change due to legislative
action, reviews, and court decisions.
Periodically, registered taxpayers are mailed information letters with updates on tax laws and policies. Be
sure to read any letter you receive carefully; this information may save you time and money. Informational
publications are also available for specific industries. Contact the Taxpayer and Vehicle Services Division
to obtain these publications.
The Department of Revenue offers a toll-free tax information line for Tennessee residents. The number is
(800) 342-1003. If calling from Nashville or outside Tennessee, you may call (615) 253-0600. The
Department of Revenue also offers a telecommunications device for the deaf (TDD) line at (615) 741-7398.
If you have questions, please do not hesitate to contact any of the offices listed below.
Sincerely,
Taxpayer and Vehicle Services Division
Tennessee Department of Revenue
Taxpayer and Vehicle Services Division
Andrew Jackson Building, 3rd Floor
500 Deaderick Street
Nashville, Tennessee 37242-1099
Toll-Free: (800) 342-1003
Out-of-State: (615) 253-0600
TDD: (615) 741-7398
Regional Offices
Nashville:
1321 Murfreesboro Road
Nashville, TN 37217
(615) 360-0423
Chattanooga:
540 McCallie Avenue
Suite 350
Chattanooga, TN 37402
(423) 634-6266
Jackson:
Lowell Thomas State Office Building
225 Dr. Martin L. King Jr. Drive
Suite 340
Jackson, TN 38301
(731) 423-5747
Johnson City:
204 High Point Drive
Johnson City, TN 37601
(423) 854-5321
Knoxville
531 Henley Street
Room 606
Knoxville, TN 37902
(865) 594-6100
Memphis
3150 Appling Road
Bartlett, TN 38133
(901) 213-1400
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SALES AND USE TAX
TABLE OF CONTENTS
Sales or Use Tax
7
Sales or Use Tax
Local Option Sales or Use Tax
Sales Tax Application to the Lease or Rental of Tangible Personal Property
Who Must Have a Sales or Use Tax Registration?
Who is Liable for Sales Tax?
Who is Liable for Use Tax?
How to Register
Tennessee Retailers
Out-of-state Retailers
Revocation of Certificate of Registration
Changes in Ownership, Address, or Business
Additional References
Definitions
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Computer Software
Occasional and Isolated Sales
Single Article
Motor Vehicles
Boats
Manufactured Homes
State Tax on Purchases of Single Article
Computing Sales Tax Due on Single Articles
Tangible Personal Property
Third Party Drop Shipment
Specified Digital Products
Food and Food Ingredients
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What Are “Food and Food Ingredients?”
Examples of “Food and Food Ingredients”
Items Not Taxable at the 5.5% Food Rate
Candy
Dietary Supplements
Meal Substitutes
Prepared Food
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18
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Tax Credits
19
Credits
Sales or Use Tax Paid in Another State
Emerging Industry Credit
Fuel or Petroleum Products Sold to Air Common Carriers
Taxable and Non-taxable Property and Services
Taxable Tangible Personal Property
Specified Digital Products
Prepaid Telephone Calling Cards
Services
Taxable Services
Non-taxable Tangible Personal Property
Non-taxable Services
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Exemptions Requiring Certificates
24
Documenting Exemptions
Blanket Certificate of Resale
Direct Pay Permits
Government Certificate of Exemption
Certificate of Exemption for Nonprofit Organizations
Certificate of Exemption for Call Centers
Agricultural Exemption Certificate
3
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SALES AND USE TAX
TABLE OF CONTENTS
Exemptions Requiring Documentation
28
Removal from Tennessee by Buyer
Exemption for Railroad Track Materials and Locomotive Radiators
Exemption for Rural Electric Cooperatives, Community Service Cooperatives
and Governmental Utility Districts
Exemption for Electric Generating and Distribution Systems, Resource
Recovery Facilities, or Coal Gasification Plants
Agricultural Exemptions
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Agricultural Exemption Certificate
Agricultural Exemptions
Sales by Farmers and Nursery Operators
Purchases of Livestock Drugs by Veterinarians
Exemptions and Reduced Rates for Qualified Manufacturers
Industrial Machinery
Industrial Machinery Authorization
Pollution Control Equipment
Energy Fuel and Water
Computers
Material Handling and Racking Systems Equipment
Industrial Materials
Headquarters Facility
Food Service Establishments
Other Exemptions from Sales or Use Tax
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Aircraft Parts and Supplies
Amusements
Automobiles
Computer Software
Design Professionals
Display Property
Energy
Exemptions for Tennessee Sales for Out-of-state Consumer Use
Films
Food
Fuel
Leased Vehicles
Medical Equipment and Supplies
Miscellaneous Nonprofit Sales
Motor Vehicles Used by Common Carriers
Packaging
Pollution Control
Preservation of Historic Property
Publications
Railroad Cars
Sales in Interstate Commerce
Sales Tax Holiday
Specified Digital Products
Telephone Cooperatives
Telecommunications
Transactions between Parent Companies and Wholly Owned Subsidiaries
Time-share Accommodations
Used Property
Utility Poles
Vending Items
Warranty Services
Watershed Districts
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SALES AND USE TAX
TABLE OF CONTENTS
Flea Markets
42
Flea Market Registration
Sales on Less than Permanent Basis
Submission of Flea Market Returns
Dealers Registering Annually
Dealers Registering Quarterly or Monthly
Penalty for Late Filing
42
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Contractors
44
Contractors as Consumers
Liability for the Sales or Use Tax
Exemptions
Tax on Fabricated Materials
Asphalt Fabricators
Installation of Industrial Machinery
Lump Sum or Unit Price Contracts on Realty in Effect on July 15, 2002
Property Owned by the United States Government
Qualified Disaster Restoration
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Returns and Payments
48
Returns and Payment
Electronic Data Interchange (EDI)
Electronic Funds Transfer (EFT)
Online Filing
Mailing Date
Penalty and Interest
Audits and Assessments
Right to a Conference
Keeping Records
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Tennessee Taxpayer Bill of Rights
52
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SALES AND USE TAX
Changes to the Sales or Use Tax Guide for 2010
(1) Addition of machinery and equipment used to produce electricity for certified green energy production
facilities to the credit provided in Tenn. Code Ann. Section 67-6-346 for pollution control equipment and
machinery. (Page 18)
(2) Revision of the definition of “sale for resale” to clarify that sales of tangible personal property or
computer software to persons engaged in the business of selling services or the sale of services to a dealer
in the business of selling, leasing, or renting tangible personal property or computer software do not qualify
as sales for resale. (Page 23)
(3) Enactment of a credit for sales or use tax for persons engaged in qualified disaster restoration projects.
(Page 45)
6
SALES AND USE TAX
SALES OR USE TAX
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[Tenn. Code Ann. Sections
67-6-102, 67-6-202]
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Sales or Use Tax
+
The sales or use tax is a combination of a state
tax (7%) and a local option tax (which varies
from 1% to 2.75%) imposed by city and/or
county governments. This tax is generally
applied to the gross sales of any business,
organization, or person engaged in retail sales,
including the selling, leasing, or renting of
tangible personal property and the selling of
certain taxable services specified in the law. In
addition, there is a state single article tax rate of
2.75%, which is discussed later in this text.
Interest charges on purchases bought on an
installment plan.
Any tax legally imposed on the consumer and
separately stated on the invoice, bill of sale, or
similar document given to the consumer.
The value of items taken as “trade-ins” on
purchases of similar new or used items. The
trade-in item must be listed by model and
serial number, when applicable, on the
customer’s invoice. [Tenn. Code Ann. Section 676-510]
There are some exceptions to the 7% general
state sales or use tax rate:
+
Tangible personal property and taxable services
specifically intended for resale or sold to a
government or sales or use tax-exempt agency
are considered in the gross receipts total, but are
not included in the net taxable total.
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Sales of food and food ingredients as defined
in the law. These items are taxed at a state rate
of 5.5%. What constitutes food and food
ingredients is addressed later in this text.
Aviation fuel actually used in the operation of
aircraft motors is taxed at 4.5%. [Tenn. Code
Ann. Section 67-6-217]
+
The “sales price” of an item of tangible personal
property is the total amount of consideration
(including cash, credit, property, and services)
for which property or services are sold,
including:
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Sales of property to common carriers for use
outside Tennessee are taxed at the rate of
3.75%. [Tenn. Code Ann. Section 67-6-219]
When sold to or used by manufacturers, water
is taxed at 1%, and gas, electricity, fuel oil, and
other energy fuels is taxed at a rate of 1.5%.
[Tenn. Code Ann. Section 67-6-206]
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Interstate telecommunications services sold to
businesses are taxed at a rate of 7.5%.
[Tenn. Code Ann. Section 67-6-221]
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Cost of the property sold;
Cost of materials, labor, or service cost;
Costs of transportation or delivery to the
seller;
All taxes imposed on the seller;
Expenses, interest, losses, and overhead;
Charges by the seller for services necessary to
complete the sale;
Delivery charges made by the seller;
Installation charges, and
Exempt property given to the purchaser where
taxable and nontaxable products are bundled
and sold as a single product for one price.
+
Section 67-6-216]
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The tax is imposed on the sales price of leases
and rentals of tangible personal property and the
sales price for taxable services and amusements.
For example: A consumer buying four
automobile tires subject to the sales or use tax is
charged a fee for mounting the tires. The fee for
mounting the tires is also subject to the sales or
use tax.
Property of a sole proprietorship that becomes
property of a corporation as a result of
incorporation of the sole proprietorship is not
subject to tax. [Tenn. Code Ann. Section 67-6-223]
Cable and wireless cable television services are
taxed at a state rate of 8.25% on all charges of
$15.01 - $27.50. Charges of $27.51 and higher
are taxed at the regular state and local sales or
use tax rates. Charges of $15 or less are
exempt from tax. [Tenn. Code Ann. Sections 676-103(f), 67-6-226, 67-6-227]
+
Sales of direct-to-home satellite television
programming or television services are taxed at
a state rate of 8.25% only. [Tenn. Code Ann.
Section 67-6-228]
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Electricity sold to or used by an qualified data
center is taxed at a state rate of 1.5%. [Tenn.
Code Ann. Section 67-6-206]
Tennessee vendors must indicate in specific
ways whether customers are paying sales or use
tax. If the purchase price of a product includes
the tax, it must be indicated in writing on the
invoice, on a sign posted in the business, or in a
The term “sales price” does not include:
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Gross receipts from the sale of manufactured
homes, including accessories, furnishings, and
delivery or installation fees, are taxed at half
the current rate of state tax. [Tenn. Code Ann.
Dealer cash discounts allowed on property or
services purchases. Manufacturer rebates are
included in the tax base.
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SALES AND USE TAX
Vending machine sales of both food and nonfood items are taxed at a flat rate of 2.25% local
tax on all sales regardless of the local tax rate
levied by the local jurisdiction.
SALES OR USE TAX (cont’d)
[Tenn. Code Ann. Sections 67-6-102, 67-6-202]
manner that is assured to make the customer
aware of that fact. [Tenn. Code Ann. Section 67-6-503]
Specified digital products are subject to tax, and,
effective January 1, 2009, the local tax rate on
digital audio-visual works, digital audio works,
and digital books is set at a standard 2.50%
local tax rate regardless of the local tax rate
levied by the local jurisdiction. [Tenn. Code Ann.
Local Option Sales or Use Tax
Any county or incorporated city may levy a tax
on the same privileges that are subject to the
state’s sales or use tax; all counties and some
incorporated cities have adopted a local option
tax of up to 2.75%. The tax is imposed in the
locality where water and telephone services are
delivered to the consumer or where the dealer of
other tangible personal property or services is
located. [Tenn. Code Ann. Section 67-6-702]
Section 67-6-702(g)]
Sales Tax Application to the Lease or Rental
of Tangible Personal Property
For leases in which the lessee will make periodic
(weekly or monthly) payments, sales tax is to be
collected on each lease payment at the time the
payment is due. For leases in which the lessee
will make a lump sum payment up front, tax is
due with that payment.
The law limits some local option tax rates:
There is no local option tax on electric power or
energy, natural or artificial gas, coal, or fuel oil.
The tax rate for water sold to manufacturers is
0.5%. If the local tax rate is less than 1%, the
rate for water sold to manufacturers is 0.33%.
For lease contracts entered into on or after
January 1, 2008, contracts for transfers of
property that require the transfer of title upon
completion of all payments and payment of an
option price that does not exceed the greater of
$100 or 1% of the total payments under the
contract is a financing contract and not a lease.
Sales tax is due at the time of sale, and the
periodic payments, including interest and
financing charges made under the agreement are
not subject to tax.
[Tenn. Code Ann. Section 67-6-702]
The tax rate for sales of tangible property to
common carriers for use outside Tennessee is
1.5%. [Tenn. Code Ann. Section 67-6-702]
Intrastate telecommunication services are
taxed at the state rate of 7% and a flat 2.5%
local tax rate regardless of the local tax rate
levied by the local jurisdiction. [Tenn. Code Ann.
Sales tax law assesses sales tax on the “sales
price” of the lease or rental. Generally, the total
amount received from the customer becomes the
base for state sales tax. However, charges that
are optional to the purchaser and separately
stated are not part of the sales price that is
subject to tax for the lease of the property.
Interest charges associated with the lease or
rental are included in the sales price upon which
sales tax is to be collected.
Section 67-6-702]
Interstate and international telecommunication
services sold to businesses are subject to the
state tax rate of 7.5% and exempt from local
tax. [Tenn. Code Ann. Section 67-6-702]
Interstate and international telecommunication
services sold to persons other than businesses are
subject to a state tax rate of 7% and a flat 1.5%
local tax rate regardless of the local tax rate
levied by the local jurisdiction. [Tenn. Code Ann.
For sales and use tax purposes, insurance
policies such as accident, collision, and GAP on
motor vehicles and charges for fuel used in
motor vehicles are not included in the sales price
of a lease or rental when the charges are
separately stated on the invoice and the
purchaser has the option of leasing the property
without purchasing the insurance policy or fuel
from the lessor.
Section 67-6-702]
Video programming services including cable
television, wireless cable television, and video
services provided through wireline facilities that
are offered for public consumption are exempt
from local tax up to an amount of $27.50. [Tenn.
Code Ann. Section 67-6-714]
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SALES AND USE TAX
SALES OR USE TAX
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(cont’d)
[Tenn. Code Ann. Sections 67-6-102, 67-6-202]
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Extended warranties or repair and maintenance
agreements are specifically named in sales tax
law as being subject to sales tax.
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The state general sales tax rate of 7% is collected
for the entire length of the lease contract. Tenn.
Code Ann. Section 67-6-702 defines a “single
article” for purposes of the local option tax.
Generally, the local option tax is required only
on the first $1,600 of the cost of statutorily
defined single articles of tangible personal
property.
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Selling, renting, or leasing, even by a transient
vendor, any type of tangible personal property.
Selling any type of taxable service in the state.
Furnishing property or services that are subject
to the sales or use tax.
Charging admission, dues, or fees that are
subject to the sales or use tax.
Using tangible personal property not
previously taxed.
Selling any item from a vending machine or
device in which merchandise is provided upon
deposit of money, other than certain vending
machines operated for the benefit of taxexempt organizations, is taxable under the
sales or use tax law. A separate registration is
required for vending sales.
This requirement applies whether your business
is a sole proprietorship, partnership, LLC,
corporation, or any other type organization
including those that are not for profit. Retailers
from other states that maintain a physical
location in Tennessee, whether temporary or
permanent, must also hold a Certificate of
Registration. A business having more than one
location must hold a certificate for each business
location. For example: A clothing business with
locations in two malls must hold a certificate for
each location.
The state single article tax rate of 2.75% is levied
on the sales price of single articles of tangible
personal property beginning at $1,600.01 and
continuing up to and including $3,200. On a
lease or rental, this basically means the local tax
applies to the first $1,600 of lease or rental
income on each single article, then the state
2.75% begins and continues up to and including
$3,200 on the single article lease price. Tenn.
Code Ann. Section 67-6-204(c)(3) allows for a
lump sum payment of the local option tax due on
the cost price to the lessee; this can be remitted
to the department on the sales tax return for the
tax period in which the tax for the first periodic
lease payment is due. [Tenn. Code Ann. Section 67-6-
Dealers having average monthly gross sales of
$400 or less and taxable services of $100 or less,
may, at the discretion of the commissioner, be
required to pay tax to their suppliers on
purchases in lieu of registering for sales or
use tax purposes. For these taxpayers, the
department’s cost of administering the account
would exceed the taxes reported.
204 and Revenue Rule 1320-5-1-.32]
When leased property is relocated to Tennessee
from another state during the lease period,
Tennessee use tax applies to each lease payment
for periods during which the property is located
in Tennessee. The lessor is required to register
with the Department to collect and remit the use
tax. If the lessor does not collect the tax, the
lessee must remit the tax directly to the
Department. If the lessor properly collects and
remits sales tax to another state with respect to
the lease payments, such sales tax will be a credit
against the Tennessee use tax liability.
Who is Liable for Sales Tax?
[Tenn. Code Ann.
Section s 67-6-501, 67-6-502]
In Tennessee, the responsibility for sales tax
rests on the dealer that provides the taxable
transaction or service. The law requires that the
dealer pass the tax to the customer; failure to do
so does not relieve the dealer of the
responsibility to timely remit the tax to the state.
In the case of a property management company
hired to manage vacation lodging for an
individual property owner, the sales tax will be
imposed on the gross charge for rental and will
be remitted by the property management
company.
Who Must Have a Sales or Use Tax
Registration? [Tenn. Code Ann. Sections 67-6-102,
67-6-201, 67-6-211, and 67-6-602]
Any entity wishing to manufacture, distribute,
sell, rent, or lease tangible personal property, or
provide taxable services, in this state must hold a
Certificate of Registration to conduct business in
Tennessee. Business may be conducted by:
Tax will be reported and paid each month based
on the gross sales, or purchases, from all taxable
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SALES AND USE TAX
SALES OR USE TAX
How to Register
(cont’d)
[Tenn. Code Ann. Sections 67-6-
[Tenn. Code Ann. Sections 67-6-102, 67-6-202]
601, 67-6-602]
sales and purchases during the preceding month.
The tax is will be paid on the return for the
month in which the taxable event occurs, even if
the tax is not collected from the customer during
that month. For example: A charge sale is made
during the month of June. The dealer must pay
the tax on the June return even though the
customer may not pay the account until July.
Tennessee Retailers
Who is Liable for Use Tax?
Perhaps the best method of applying for the
certificate of registration is to register online at
http://www.tennesseeanytime.org/bizreg/. You
may also visit one of the Department of Revenue
offices listed on the inside front cover of this
publication. Trained personnel are available
there to explain Tennessee’s tax system and
answer any of your questions.
[Tenn. Code Ann.
Section 67-6-203]
Whether registering online, in person, or by mail,
you must have the following information to
complete your application:
When a user of tangible personal property does
not pay sales tax to a dealer, the user becomes
personally liable for the tax. This generally
occurs when a user purchases articles from an
out-of-state dealer not registered for Tennessee
tax. It also occurs when a dealer withdraws
inventory items purchased on a resale certificate
for business or personal use. For example: A
clothing store owner purchases clothing on a
resale certificate then takes items from inventory
for personal use. Use tax is then due on that
clothing.
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The use tax rate is equal to the sales tax rate
on both the state and local level. Use tax is
due even when a citizen imports tangible
personal property into Tennessee for use. For
example: A business relocating to Tennessee
brings property purchased in a state with no sales
or use tax. The dealer would be liable for use tax
on this property. [Tenn. Code Ann. Section 67-6-210]
+
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Out-of-state Retailers
Out-of-state retailers must register with the
Department of Revenue and obtain a certificate
of registration for payment of the sales or use tax
if they have a “nexus” in Tennessee. Retailers
are considered to have a nexus if they:
Use tax is normally incurred when:
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Purchasing a product in another state without
paying sales or use tax and bringing it into
Tennessee for use here. [Tenn. Code Ann. Section
67-6-210]
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Purchasing a product from a mail-order catalog
or on the Internet and paying no sales or use
tax. [Tenn. Code Ann. Section 67-6-210]
Purchasing a product from a transient business
that does not collect sales or use tax. [Tenn.
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Code Ann. Section 67-6-210]
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The name, address, and phone number of the
business, all owners, officers, or partners, and
the person making the application.
The Social Security Number(s) of the
owner(s), partners, or officers.
The Federal Employer Identification Number
(FEIN) issued by the U.S. Internal Revenue
Service if you have one.
A description of the business, the type of
ownership, a brief explanation of the nature of
the business, and, if the business is a
corporation, the date of incorporation.
If you have purchased your business, the name
and address of the previous owner.
The signature, on the application, of the sole
proprietor, a partner, or an officer of a
corporation.
Consuming or using a product that was
purchased without paying sales or use tax.
[Tenn. Code Ann. Section 67-6-203]
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Consuming, as a service provider, taxable
services or tangible products in the
performance of a service. [Tenn. Code Ann.
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Section 67-6-316]
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Have an office, distribution point, sales room,
warehouse, or any other temporary or
permanent place of business in Tennessee.
Have an agent, salesperson, canvasser, or
solicitor operating in Tennessee for the
purpose of making sales or taking orders for
sales.
Furnish any property or services subject to the
sales or use tax while in Tennessee.
Are the lessors of tangible personal property
located in Tennessee?
SALES AND USE TAX
SALES OR USE TAX (cont’d)
[Tenn. Code Ann. Sections 67-6-102, 67-6-202]
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Any person engaging in business as a dealer in
Tennessee without a certificate of registration
from the department is guilty of a Class C
misdemeanor. [Tenn. Code Ann. Section 67-6-606]
Are construction contractors performing jobs
in Tennessee?
Have any other physical presence in
Tennessee.
Changes in Ownership, Address, or Business
[Tenn. Code Ann. Section 67-6-602]
This requirement applies even though the sale of
the product or its delivery is in interstate
commerce. For example: An out-of-state
computer company sells computer systems to
Tennessee businesses through a salesperson that
travels in this state. This business is required to
obtain a certificate of registration and collect
sales or use tax on the price of the system.
You must notify the Department of Revenue if
the business ownership changes in any manner.
This change could be selling or closing
the business, adding or changing partners,
transferring or changing the ownership of the
business, or changing corporate structure
requiring a new charter or certificate of
authority. You must also notify the Department
of Revenue if the business location changes.
A business having a physical presence in
Tennessee must collect and remit sales or use tax
on all sales whether orders are taken in person,
by phone, or by mail.
If any of the changes mentioned should occur,
answer the questions on the back of the
business’s certificate of registration and mail it to
the Department of Revenue. The new owners or
officers, if applicable, must then apply for a new
Certificate of Registration.
Mail-order companies that do not have a physical
presence, either permanent or temporary, cannot
be held responsible for collecting and remitting
sales or use tax. They can voluntarily register to
collect the tax for their customers. Out-of-state
sellers who are not registered to collect and remit
tax in Tennessee and wish to volunteer to collect
tax for Streamlined states may register through
the Streamlined Sales and Use Tax Central
Registration System to collect tax on sales in this
state. However, if sellers do not collect and remit
the sales or use tax to the state, then the
consumer is responsible for reporting and paying
the tax. Use tax is due on products purchased
from companies not registered to collect the
Tennessee sales or use tax.
If you sell your business or go out of business,
you must make a final sale or use tax return and
pay all sales or use tax due within 15 days after
the date you sold or quit the business. If you sold
the business, the purchaser must apply for a
certificate of registration in his or her own name.
[Tenn. Code Ann. Section 67-6-513]
Additional References
For additional information, or to view actual
documents pertaining to Tennessee’s tax laws,
we invite you to visit these Internet Web sites:
Revocation of Certificate of Registration
[Tenn. Code Ann. Sections 67-6-603, 67-6-604]
For the Tennessee Code, as well as information
or changes to the Sales or Use Tax law, Revenue
Rulings, Important Notices, Answers to
Frequently Asked Questions, and Tax Forms,
visit the Department of Revenue’s Web site:
http://www.TN.gov/revenue.
Any taxpayer violating the provisions of the
sales or use tax law may have the certificate of
registration revoked by the Commissioner after
an opportunity for a due process hearing has
been afforded. If the certificate is revoked, that
person will not be eligible to apply for another
certificate for 12 months. The taxpayer is entitled
to a hearing with the department to determine if
revocation was justified. The taxpayer will
receive a 10-day notice of the hearing and be
allowed to present evidence as to why the
certificate should not be revoked.
Sales and Use Tax Rules and Regulations are
available on the Secretary of State’s web site at
www.TN.gov/sos/rules/1320/1320.htm.
11
SALES AND USE TAX
DEFINITIONS
A license to use computer software is a lease or
rental of computer software and subject to sales
and use tax.
Computer Software
Computer software is defined in sales tax law to
mean a set of coded instructions designed to
cause a computer or automatic data processing
equipment to perform a task. Computer
software subject to tax includes both customized
and prewritten computer software. Computer
software is subject to Tennessee sales and use
tax when created and sold or leased to another
entity or when imported into and installed on a
computer in this state. A sale of computer
software is subject to tax regardless whether
delivered electronically, via load and leave, or
obtained on tapes, discs, cards, or other
material. [Tenn. Code Ann. Section 67-6-102, 67-6-231]
Prewritten computer software is tangible
personal property. Single articles of prewritten
computer software qualify for the single article
local tax limitation on the first $1,600 of the
sales price for each single article and are subject
to the 2.75% additional state tax from $1,600.01
up to and including $3,200. Customized
computer software is not tangible personal
property. Customized computer software does
not qualify as a “single article” as defined in
Tenn. Code Ann. Section 67-6-702 and is
subject to the full local sales tax, but not the
2.75% additional state tax on a single article.
Generally, all activity performed on computer
software is subject to state and local sales tax.
The sales price of computer software includes
labor and service costs of the seller as well as
services necessary to complete the sale. These
activities even if separately billed as consulting
services include creating, designing, developing,
fabricating, programming, installing, repairing,
modifying, upgrading, or other activities.
Installation or repair of computer software, even
in labor-only contracts when the customer
provides the computer software materials and
computers that are being installed or repaired, is
subject to sales tax.
Prewritten computer software means computer
software, including prewritten upgrades, which
is not designed and developed by the author or
other creator to the specifications of a specific
purchaser. Computer software developed by the
author to the specifications of a specific
purchaser is considered to be customized
computer software. [Tenn. Code Ann. Section 67-6102]
Prewritten computer software includes: the
combination of two or more prewritten
computer software programs or portions;
subsequent sales of computer software initially
sold as customized computer software; and
prewritten upgrades designed to modify or
enhance previously purchased prewritten
computer software.
Activity performed on computer software for the
consumer is deemed a sale subject to sales tax
when the computer software remains in
Tennessee, even though the billing for the sale is
made to an out-of-state entity. If the software is
sent out-of-state after its creation, it will
constitute a sale in interstate commerce, exempt
from Tennessee tax and governed according to
the tax laws in the state of destination.
Customized modification or enhancement to
both customized and prewritten computer
software is subject to tax. When a person who
was not the original creator or author modifies
or enhances a portion of prewritten computer
software, that person is deemed the author of
only those modifications and enhancements.
Prewritten computer software that is modified
or enhanced to the specifications of a specific
purchaser remains “prewritten computer
software.” However, if a separately stated
reasonable charge is made for the modification
or enhancement, the modification or
enhancement will be considered customized
computer software, not “prewritten computer
software.”.
One area of confusion is the inclusion of services
in the sales price, because the service is
necessary to complete the sale of software. Tenn.
Code Ann Section 67-6-102 includes services
inherent to the sale of a product in the tax base in
defining “sales price.” Unlike installation or
repair services which are taxable services, stand
alone training services are not subject to tax.
Training services included in the price and not
separately itemized are subject to tax as part of
the sales price of the computer
12
SALES AND USE TAX
DEFINITIONS (cont’d)
No additional tax will be due on any repairs,
modifications, updates, or upgrades provided
under the terms of a computer software
maintenance contract that is subject to Tennessee
sales and use tax, unless the seller makes an
additional charge, including a deductible charge,
for such repairs, modifications, updates, or
upgrades.
software. If the customer is required by the seller
to purchase the training services with the
computer software, or if the seller only provides
the training services with the purchase of the
computer software, the training services are
considered part of the sales price of the computer
software even if the seller separately itemized the
price of the training services from the computer
software.
Additionally, a web site is considered computer
software, so the sale of web site development
and design are taxable under state law. If a web
site is created in Tennessee for hosting outside of
Tennessee, the sale is in interstate commerce and
not subject to sales tax. However, if a web site is
hosted in Tennessee, the sale of the computer
software that is the web site is subject to sales
tax. A dealer is liable for sales or use tax on any
type of tangible personal property or computer
software used in the conduct of business.
Therefore, if a Tennessee seller creates a web
site for an out-of-state customer and hosts the
web site in Tennessee, the out-of-state customer
is liable for tax if title to the computer software
transfers to the out-of-state customer. Generally,
a charge for merely hosting a web site is not
taxable.
Computer hardware and software maintenance
contracts are subject to sales and use tax. A
“computer software maintenance contract” is
defined to mean a contract that obligates a
person to provide a customer with future updates
or upgrades to computer software, support
services with respect to computer software, or
both.
A computer software maintenance contract does
not include telephone or other support services
that are optional purchases by the customer, that
are sold separately and invoiced separately and
that do not involve any transfer, repair, or
maintenance of computer software on the part of
the seller.
Tenn. Code Ann. Section 67-6-395 exempts,
from the sales and use tax, the use of computer
software that is developed or fabricated by an
affiliated company, or the repair of computer
software if the repair is performed by an
affiliated company. For these purposes the term
affiliated company requires 100% ownership
between the two companies or a 100%
ownership by a common parent
Computer software maintenance contracts are
subject to Tennessee sales and use tax if:
+
+
+
The computer software maintenance contract
is sold as part of or in connection with the sale
of computer software that is subject to
Tennessee sales or use tax;
The computer software maintenance contract
applies to computer software installed on
computers located within Tennessee; or
The location of the computer software
covered
by
the
computer
software
maintenance contract is not known to the
seller but the purchaser’s residential street
address or primary business address is located
in Tennessee.
Occasional and Isolated Sales [Tenn. Code Ann.
Section 67-6-102]
Occasional and isolated sales, also known as
casual and isolated sales, are sales made by
persons not in the business of regularly selling
the type of property being sold. These sales are
not subject to tax. Occasional and isolated sales
are also sales of tangible property taking place
only during temporary sales periods of 30 days
or less and occurring no more than twice per
year. Volunteer fire departments are allowed to
have such temporary sales periods which occur
no more than four times per calendar year. For
example: The sale of a piece of furniture in a
If a computer software maintenance contract
applies to computer software installed on
computers both in Tennessee and located outside
Tennessee, sellers or users may allocate to
Tennessee a percentage of the sales price or
purchase price of the contract that equals the
percentage of computer software installed on
computers located in Tennessee.
13
SALES AND USE TAX
DEFINITIONS
Boats
(cont’d)
Boat motors and any dealer installed accessories
that are installed prior to the sale, freight, and
labor, excluding trailers, will be treated as part of
the boat unit in the same manner as parts and
accessories for motor vehicles are treated for
purposes of the single article local tax limitation.
Items such as skis, ski ropes, personal flotation
devices, and similar items are not considered part
of the single item. Boat trailers will be taxed as a
separate single item. The state tax rate applies to
the total bill of sale.
yard sale and the sale of Girl Scout cookies are
both considered occasional and isolated sales.
Charitable organizations whose primary purpose
is fundraising in support of a county, municipal,
or metropolitan library system to elect to make
sales on a continuing basis in lieu of the two
semi-annual sales periods. These sales will be
exempt from tax as long as they do not exceed
$100,000 per calendar year. The election, once
made, must remain in effect for at least four
years. An election form is available on the
Department of Revenue’s web site. [Tenn. Code
Manufactured Homes
Ann. Section 67-6-102]
Parts, accessories, furniture, appliances, and
other items that are part of a manufactured home
at the time of sale are treated as parts of the
single unit for purposes of the single article local
tax liability. Also included as part of the single
article price are delivery fees, installation fees,
and other incidental items that are part of the
sale. Installation includes charges made for
setup, plumbing hookup, and electrical hookup.
Churches or similar organization that regularly
sells goods or taxable services are considered
dealers and generally will be liable for tax on
those sales. Sales of motor vehicles, boats, and
airplanes are not considered occasional and
isolated sales in sales tax law.
Single Article
[Tenn. Code Ann. Section 67-6-702(d)]
The term “single article” refers to any item that
is considered, by common understanding, to be a
separate unit, apart from any accessories, extra
parts, etc., that is capable of being sold as an
independent item or as a common unit of
measure. Independent units sold in sets, lots,
suites, or such groupings, are not considered to
be single articles. The local option tax rate
cannot exceed 2.75% and may be assessed only
on the first $1,600 of the purchase price of any
single item of tangible personal property.
State Tax on Purchases of Single Articles
Effective July 15, 2002, an additional state sales
or use tax at the rate of 2.75% is levied on the
portion of the sales price, from $1,600.01 up to
and including $3,200, of any single article sold.
This is a state tax only. This portion of the single
article sales price is not subject to local tax.
Computing Sales Tax Due on Single Articles
Sales of taxable services, amusements, custom
computer software, and warranty or maintenance
contracts are subject to the full local option tax.
Assume that the total sales price, including all
associated charges, of a single article is $20,000.
Tax computation would be calculated as follows:
(a) The general state sales tax rate of 7% applies
to the total $20,000 sales price. $20,000 x 7% =
$1,400.
Applications of the “single article” include:
Motor Vehicles
The local option sales tax applies to the
first $1,600 of the sales price. The local option
sales tax rate in Davidson County is 2.25%.
$1,600 x 2.25% = $36.
(b)
Parts and accessories for motor vehicles that are
installed at the factory and delivered as original
equipment will be treated as part of the unit.
Likewise, parts and accessories that are installed
by the dealer or distributor prior to, or at the time
of, sale and are included in the sale price will
also be considered as part of the unit. This also
applies to parts or equipment required to be
installed prior to the sale because of state or
federal law.
(c) The state single article sales tax applies to the
sales price from $1,600.01 up to and including
$3,200 (the second $1,600 of the sales price). The
state single article rate is 2.75%. $1,600 x 2.75% =
$44.
14
SALES AND USE TAX
DEFINITIONS
(d)
(cont’d)
If Customer C is a dealer buying for resale, a
nonprofit entity issued a Tennessee exemption
certificate, or if the transaction is exempt from
the Tennessee tax in any way, Customer C’s
Tennessee exemption documentation can flow
through Dealer B, back to Dealer A and relieve
Dealer A of the Tennessee sales tax obligation.
In this example, the total sales tax is $1,480.
If a single article with a total sales price of
$20,000 has $5,000 in manufacturer’s rebates
applied, making the total amount the consumer
pays only $15,000, the consumer still owes sales
and use tax on the full $20,000 sales price before
application of the rebates. The sales price of
$20,000 has not changed, even though the
consumer received a payment break because a
portion of the sales price is rebated to the dealer
by the manufacturer.
If the transaction is a transfer of taxable
merchandise to a non-exempt consumer, the only
relief for Dealer A is a Tennessee resale
certificate with a Tennessee registration number
issued to Dealer B. Neither Dealer B’s home
state resale certificate nor Customer C’s
declaration that it will pay use tax is of any value
in exempting Dealer A. That Dealer B may not
have a physical presence in Tennessee is not
material in this situation. However, Dealer B can
pay the tax to Dealer A and pass its value to
Customer C.
If a consumer purchases an extended warranty
plan on a single article, the warranty plan is also
taxable, and tax must be computed separately on
the single article and the warranty. Failure to
separately state the price and compute the tax
may result in assessment of the full local tax
from the consumer. And, because an extended
warranty contract does not qualify as a single
article of tangible personal property, the local
option tax rate applies to the entire purchase
price, even if it exceeds $1,600. There would be
no state single article tax application to the
purchase price of the warranty contract.
Dealer B’s home state resale certificate is not
acceptable in this scenario because there is never
a transfer of ownership or possession outside
Tennessee. Because the shipment begins with a
Tennessee-registered dealer and ends with a
Tennessee customer, the shipment is deemed an
instate shipment for purposes of determining
sales tax liability.
Tangible Personal Property
[Tenn. Code Ann.
Sections 67-6-102, 67-6-202, 67-6-203]
Specified Digital Products
“Tangible personal property” means personal
property that can be seen, weighed, measured,
felt, or touched, or that is in any other manner
perceptible to the senses, and includes electricity,
steam, water, gas, and prewritten computer
software.
Tennessee sales and use tax law defines specified
digital products. Specified digital products are
products that are electronically transferred to the
purchaser or accessed electronically by the
purchaser. The sale, lease, licensing, or use of
products that are specified digital products are
subject to the sales and use tax.
Tangible personal property does not include
stocks, bonds, notes, insurance, and other
securities. It does not include signals broadcast
over the airwaves.
Third Party Drop Shipments
[Tenn. Code Ann.
Section 67-6-102]
Products that are defined as specified digital
products include the following products:
[Sales or Use Tax
Digital audio-visual works: A series of related
images which, when shown in succession, impart
an impression of motion, together with any
accompanying sounds, that are transferred
electronically. Examples include motion
pictures, musical videos, entertainment and
news programs, and live events.
Rule 1320-5-1-.96]
Third party drop shipment transactions typically
involve a dealer registered for Tennessee tax
(Dealer A), selling to an out-of-state dealer not
registered for Tennessee tax (Dealer B). Dealer
A drop ships the product to Customer C (Dealer
B’s customer) in Tennessee.
Not included are video greeting cards sent by
electronic mail, video or electronic games, and
15
SALES AND USE TAX
DEFINITIONS
(cont’d)
individual digital photographs that do not impart
an impression of motion when viewed
successively.
Digital audio works: Works that result from the
fixation of a series of musical, spoken, or other
sounds, that are transferred electronically,
including prerecorded or live songs, music,
readings of books or other written materials,
speeches, ringtones, or other sound recordings.
Not included are audio greeting cards sent by
electronic mail.
Digital books: Works generally recognized in the
ordinary and usual sense as “books” that are
transferred electronically, including works of
fiction and nonfiction and short stories.
Not included are newspapers, magazines,
periodicals, web blogs, and chat room
discussions.
Taxable retail sales of specified digital products
include:
+
+
+
+
Obtaining the specified digital products by
download or access online;
Subscription fees (monthly, yearly, etc.) for
access to or downloads of specified digital
products;
Sales in which the seller limited the time a
purchaser has access to or can download the
specified digital products; and
Sales of digital codes that are to be used by
the purchaser to download or access specified
digital products.
Digital codes may be obtained in a tangible form
such as a card or through an e-mail. By entering
the code, the purchaser can download or access
the specified digital products.
16
SALES AND USE TAX
Items Not Taxable at the 5.5% Food Rate
FOOD AND FOOD INGREDIENTS
[Tenn. Code Ann. Sections 67-6-102, 67-6-228]
Candy
Tennessee sales or use tax law provides that
sales of food and food ingredients are subject to
a state rate of 5.5% plus the applicable local tax
rate. [Tenn. Code Ann. Section 67-6-228]
“Candy” is defined as a preparation of sugar,
honey, or other natural or artificial sweeteners in
combination with chocolate, fruit, nuts, or other
ingredients or flavorings in the form of bars,
drops, or pieces. Candy does not include any
preparation containing flour and must require no
refrigeration. If an item requires refrigeration or
has the word “flour” as an ingredient on the
label, it is not candy.
What Are “Food or Food Ingredients?”
In specifying that food and food ingredients
remains at the 5.5% state rate, the law defines
“food and food ingredients” to mean
“substances, whether in liquid, concentrated,
solid, frozen, dried, or dehydrated form, that are
sold for ingestion or chewing by humans and are
consumed for their taste or nutritional value.”
Examples of items that are considered to be
candy (the list is not all-inclusive) are breath
mints; candy bars; chocolate chips; fruit roll-ups;
marshmallows; caramel corn; caramel apples;
chocolate- or carob-covered raisins or nuts;
sweet or semi-sweet cooking bars or chips; gum;
honey roasted or beer nuts; trail mix that
includes candy; peanut brittle; sugarless candy;
and yogurt-covered raisins or nuts.
The law also specifies that the 5.5% rate does not
apply to candy, dietary supplements, or prepared
food.
Examples of “Food or Food Ingredients”
The following is a partial listing of items that
meet the requirements to be considered food and
food ingredients and are subject to the 5.5% state
rate, if not prepared by the seller. This list is not
all-inclusive.
Dietary Supplements
In order to be considered a dietary supplement, a
substance must meet all of these criteria:
“Dietary supplements” contain one or more of
the following dietary ingredients: a vitamin; a
mineral; an herb or other botanical; an amino
acid; a dietary substance for use by humans to
supplement the diet by increasing the total
dietary intake; or a concentrate, metabolite,
constituent, extract, or combination of the
ingredients listed.
Baking powder, baking soda, bread, cakes and
pies, cereal, chip dip, chips, cocoa and beverage
powders other than dietary supplements, coffee,
condiments, cookies, cooking oil, dairy products,
fruit (fresh or dried), eggs, fish and meats, flour,
frozen meals, fruit juices, gelatin, gravies and
sauces, herbs and spices, ice cream, sherbet,
frozen yogurt, ice, margarine and shortening,
nuts, popcorn, poultry, pumpkins, raisins,
relishes, salad dressing, salt and pepper, soft
drinks, sugar, sweeteners, vegetables, tea, and
water.
Dietary supplements are also intended for
ingestion as a tablet, capsule, powder, softgel,
gelcap, or liquid form. If it is not intended for
ingestion in one of these forms, it is not
represented as conventional food and is not
represented to be the sole item of a meal or diet.
The following is a partial list of items that are
not considered food or food ingredients and are
taxed at the 7% rate. This list is not all-inclusive.
Dietary supplements must be labeled as a dietary
supplement, identifiable by the “Supplement
Facts” box found on the label and required by
federal regulations. Any item that is required to
have a “Supplement Facts” label is taxable at the
full 7% state rate plus the applicable local rate.
Baking chips, baking bars, candy-coated items,
beer, alcoholic beverages, breath mints, cake
decorations, cigarettes and other tobacco items,
cough drops and lozenges, dried fruit with
sweeteners, gum, herbal supplements, honey
roasted or coated nuts, marshmallows, party
trays, vitamins, and minerals.
These items include amino acids; antioxidants;
bee pollen; enzymes; garlic capsules; ginseng;
17
SALES AND USE TAX
FOOD AND FOOD INGREDIENTS (cont’d)
Examples of prepared food items taxable at the
7% state plus local rate are any food item sold in
a heated state, if prepared by the seller; bakery
goods made by the seller; cold or frozen meals
and soups that are ready to heat and eat; fruit
trays, coffee or tea prepared by the seller; ice
cream in cones, sundaes, or such preparations;
party trays; ready to eat meats, poultry, or fish
(cooked, smoked, or dried such as summer
sausage, beef or venison sticks, and smoked
fish); rotisserie chicken; salad greens mixed by
the seller; salads and other deli dishes;
sandwiches; soups, casseroles, or meals sold
warm and ready to eat; warmed or honey roasted
nuts.
herbal supplements; immune supports; lecithin;
metabolic supplements; vitamins and minerals;
and zinc lozenges. This list is not all-inclusive.
Meal Substitutes
Meal substitutes are taxable at the 5.5% state rate
and applicable local rate. Meal substitutes are
labeled with “Nutrition Facts” and include
unsweetened breakfast bars or those containing
flour; unsweetened dried fruit snacks; drinks
such as Ensure or Boost; pop tarts; and soup
mixes. This list is also not all-inclusive.
Prepared Food
Food that is not prepared by the seller, but is sold
with eating utensils provided by the seller, is
prepared food and is taxable at the 7% state rate
plus the applicable local rate. Eating utensils
include, but are not limited to, plates, knives,
forks, spoons, glasses, napkins, cups, and straws.
A plate does not include a container or
packaging used to transport the food. An
example is a container or tray that is packaging
for a frozen dinner and also serves as a plate.
“Prepared food” means food that is sold in a
heated state or that is heated by the seller; food
where two more food ingredients are mixed or
combined by the seller for sale as a single item;
or food sold with eating utensils, provided by the
seller, such as plates, knives, forks, spoons,
glasses, cups, napkins, or straws. The seller may
prepare the item where the food is sold or at
another location.
Food that is only repackaged, pasteurized, or
sliced by the seller is not considered to be
prepared food. Serving size or quantity does not
affect the taxability of a food item.
Box lunches with straws, napkins, plastic forks,
and other utensils are considered prepared food.
If the manufacturer, rather than the seller,
provides an eating utensil with the food, that
food is not considered prepared food and is
taxable at the 5.5% state rate plus the applicable
local rate. For example, a box of crackers with
cheese spread that comes with a plastic spreader
is subject to the 5.5% state tax plus the
applicable local tax because the spreader is not
provided by the seller.
Effective January 1, 2008, the definition of
prepared food was amended to clarify: (1) tax
application when utensils are provided by the
seller, and (2) that food ingredients mixed or
combined by the seller that contain raw animal
foods requiring cooking by the consumer are no
longer defined as prepared food. Examples
include: marinated raw meats, uncooked
meatloaf, marinated raw seafood, combined raw
meats, and cookie dough containing raw eggs.
Eating utensils other than plates, bowls, glasses,
or cups necessary for the purchaser to receive the
product are “provided by the seller” if the
seller’s practice is to: (1) physically give or hand
the utensils to the purchaser, or (2) make the
utensils, such as napkins or straws, available out
on counters and the seller’s percentage of food
that is otherwise considered prepared food is
greater than 75% of all food sales.
The term “seller” means the legal entity that sells
the product at retail. If the seller prepares and
sells the food item, the item is taxed at the 7%
state rate plus the local option rate. If the seller
contracts with another legal entity to prepare the
food, the food is not prepared by the seller and is
taxed at the 5.5% state rate plus the local option
rate, unless the legal entity preparing the food is
an agent of the seller.
18
SALES AND USE TAX
TAX CREDITS
the taxpayer to establish entitlement to the credit.
Credits
[Tenn. Code Ann. Section 67-6-346 as amended by Public
Chapter 1134, Acts of 2010]
[Tenn. Code Ann. Section 67-6-507]
A dealer who has paid the sales or use tax on a
sale to an account that later becomes a bad debt
and is charged off for federal income tax
purposes may take that sale amount as a credit on
the current report. If that account is then paid to
the dealer, the dealer will report amounts paid in
the next regular return and the tax amount due.
If a consumer voluntarily returns articles of
property to a dealer after the sales or use tax has
been collected and remitted, the dealer may
deduct the sales price of that property from the
taxable transactions shown for the current
month’s return. The dealer must maintain
records clearly indicating that the price of the
item plus the sales or use tax was refunded to the
consumer.
There is a credit of the amount of any special
contractor tax paid in another state for the sale of
materials used by fire protection sprinkler
contractors for fabrication of pipe and pipe
fittings or use valves and pipe fittings in the
performance of out-of-state contracts. The credit
will be limited to the tax on the value of the
materials. [Tenn. Code Ann. Section 67-6-355]
A dealer who repossesses, or enforces a lien
against, property the dealer has sold, on which
there is an unpaid balance of greater than $500,
may deduct on the current report an amount
equal to the unpaid balance minus $500. The
amount of unpaid balance does not include
interest, carrying charges, or other similar
charges. The dealer must document the credit by
maintaining records on the parties and items
involved, dates of the sale and the repossession,
the original purchase price, and the amount of
the unpaid balance.
Sales or Use Tax Paid in Another State
Persons having paid a legally imposed sales or
use tax to another state on tangible personal
property imported into Tennessee may claim that
payment as a credit against any use tax liability
in this state. If the tax paid was less than what is
due in Tennessee, the taxpayer will be liable for
the difference. [Tenn. Code Ann. Section 67-6-507]
Auto body paint shops may take a credit of
100% of the cost of equipment purchased to
comply with governmentally imposed pollution
control standards. Dry cleaners may take a credit
of 50% on replacement equipment purchased to
comply with governmentally imposed pollution
control standards. Application must be made to,
and approval received from, the Department of
Revenue. Those businesses taking either credit
will provide documentation that the equipment
was necessary for compliance with current
standards.
Residents of other states who move to Tennessee
and import their automobiles, personal effects,
and household goods into the state are not liable
for use tax on these goods purchased prior to the
relocation. This does not apply to property
imported for business purposes. [Tenn. Code Ann.
Section 67-6-210]
Emerging Industry Credit
A credit or refund is also available to anyone
purchasing pollution control equipment required
by law that is used to treat pollution created by
the taxpayer. The credit does not apply to
taxpayers that primarily treat pollution created
by others.
A taxpayer that establishes a qualified facility to
support an emerging industry or major cultural
attraction in Tennessee is eligible for a credit of
all sales and use tax paid to Tennessee, less
0.5%, on the sale or use of qualified tangible
personal property.
The pollution control equipment credit also
applies to machinery and equipment used to
produce electricity in a certified green energy
production facility, as defined in Tenn. Code
Ann. Section 67-4-2004. A copy of the
Certification issued by the Department of
Environment and Conservation must be
furnished to the Commissioner of Revenue by
“Emerging industry” is an industry promoting
high-skill, high-wage jobs in high-technology
areas, emerging occupations, or clean energy
technology, including, but not limited to, clean
energy technology research and development and
installation as determined by the Commissioner
19
SALES AND USE TAX
TAX CREDITS (cont’d)
A “major cultural attraction” means a historical
site that has been in existence at least 25 years,
attracts at least 500,000 tourists each year, and
significantly contributes to the Tennessee
tourism industry, as determined by the
Commissioner
of
Revenue
and
the
Commissioner of Economic and Community
Development, but does not include any theme
park or trade show facility.
of Revenue and the Commissioner of Economic
and Community Development.
Clean energy technology is technology resulting
in energy efficiency, technology used to generate
energy from biomass, geothermal, hydrogen,
hydropower, landfill gas, nuclear, solar, and
wind sources, and technology that is designed to
result in the development of advanced coal
through carbon capture and sequestration or
other manner that significantly reduces CO2
emissions.
To qualify, a taxpayer must be subject to the
franchise and excise taxes or be an insurance
company as defined in Tenn. Code Ann. Section
56-1-102(2). Most other franchise and excise tax
credits, exemptions, or reduced rates cannot be
taken as a result of the same purchases or
minimum investment claimed in connection with
the emerging industry credit. The credits that
can be taken are specified in the statute.
Businesses engaged in the development and
construction of coal-fired power plants are not
eligible for the emerging industry tax credit.
“Qualified facility” means a building or
buildings, improvements and other infrastructure
built or installed in conjunction with operations
at such building(s), either newly constructed,
remodeled, or expanded, and located in a county
or metropolitan statistical area in Tennessee
where the taxpayer has made a minimum
investment of $100 million or more during an
investment period beginning one year prior to
the start of construction, expansion, or
remodeling, and ending three years after
substantial completion of the qualified facility.
The investment period cannot exceed six years.
The qualified facility must maintain 50
qualifying full-time employee positions and be
utilized to support an emerging industry for a
period of at least 10 years beginning from the
date of substantial completion.
The taxpayer must submit an application to the
Commissioner of Revenue to qualify as a
qualified facility and a plan describing the
investment to be made. If the qualified facility is
leased, the lessor will also file an application and
plan if any of the taxes paid by the lessor are to
be claimed as part of the credit. Upon approval
of the application and plan, the Commissioner
will issue a letter of tentative approval to the
taxpayer.
The taxpayer must submit a claim for credit and
required documentation showing that sales and
use tax has been paid to Tennessee on the
qualified tangible personal property. When the
50 full-time employee and the minimum
investment requirements have been met, the
Commissioner will review the claim for credit
and notify the taxpayer of the approved credit
amount and how to take the credit. The credit
cannot be taken until notification is received
from the Commissioner. The credit can only be
taken by the taxpayer establishing the qualified
facility.
“Qualified tangible personal property” means
building materials, machinery, equipment,
furniture, and fixtures used exclusively in the
qualified facility and purchased or leased during
the investment period and computer software
used primarily in the qualified facility and
purchased or leased during the investment
period. Supplies or repair parts are not included,
nor are payments with respect to leases of
qualifying tangible personal property that extend
beyond the investment period. It does not include
materials, machinery, or equipment that replaces
tangible personal property that previously
generated an emerging industry credit.
If the qualified facility does not maintain 50
qualifying full-time positions or is not used to
support an emerging industry for at least 10
years, the taxpayer will be assessed the amount
of sales and use tax, plus any penalty and
interest, that would otherwise have been due or
for which credit was taken prorated for the
amount of time during which the taxpayer
20
SALES AND USE TAX
TAX CREDITS (cont’d)
remained qualified for the credit.
[Tenn. Code Ann.
Section 67-6-232]
Fuel or Petroleum Products Sold to Air
Common Carriers [Tenn. Code Ann. Section 67-6349]
A dealer selling fuel or other petroleum products
to air common carriers on which Tennessee sales
tax was collected, and the product is
subsequently used by the air common carrier in a
manner exempt under Tenn. Code Ann. Section
67-6-349(a), may, upon meeting certain criteria,
take a credit equal to the amount of tax
previously remitted to the department.
The dealer must provide a credit/refund to the
common carrier, obtain documentation sufficient
to establish that the fuel was used in an exempt
manner, and must take the credit on a tax return
filed within one year of the date the tax was
initially remitted to the Department of Revenue.
21
SALES AND USE TAX
TAXABLE AND NON-TAXABLE
PROPERTY AND SERVICES
the Department of Revenue if you have questions
about any specific service.
Taxable Tangible Personal Property [Tenn.
Prepaid Telephone Calling Cards
Code Ann. Sections 67-6-102, 212]
The sale of a prepaid calling service and prepaid
wireless calling service is subject to the state and
local tax at the time of the sale or the recharging
of the calling card or authorization code to use
the calling card. No additional tax is due when
the telecommunications service is accessed or
received by the user of the calling card or
authorization code. [Tenn Code Ann. Section 67-6-
Most sales, leases, or rentals of tangible personal
property are taxable under Tennessee sales and
use tax law. “Tangible personal property” means
personal property that can be seen, weighed,
measured, felt, or touched, or that is in any other
manner perceptible to the senses, and includes
electricity, steam, water, gas, and prewritten
computer software. Examples are:
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230(a)]
Items sold by grocers to consumers at retail.
Clothing and other items of personal apparel.
Motor vehicles and marine vessels including
repair parts and accessories.
Watches, rings, and other items of jewelry.
Building materials sold at retail or to realty
contractors.
Supplies sold to and used or consumed by
dentists and veterinarians.
Furniture, appliances, and home furnishings.
Electronic equipment and supplies.
Computer hardware, software, and peripherals.
Souvenirs, gifts, and novelty items.
Books, magazines, and other periodicals.
Cellular phones and pagers.
Prepared meals and beverages purchased from
restaurants.
Water, gas, and electricity.
Taxable Services
[Tenn. Code Ann. Sections 67-6205, 67-6-212, 67-6-226, 67-6-227]
Charges for the use of rooms or accommodations
furnished for periods of less than 90 days by
hotels, motels, inns, or other tourist lodgings.
The tax does not apply to accommodations or
rooms furnished to the same person for 90 or
more continuous days.
Charges for the use of or the value of any timeshare estate and any charges for the use of or the
value of the use of a perpetual interest in
specified entities whose substantial purpose is
the ownership and control of real property are
not subject to the sales and use tax.
Amounts paid as a standard fee for the service of
facilitating the exchange of one timeshare
interval for another or for the service of making
a reservation for a time share interval via a
reservation system are not subject to the sales
and use tax. For this purpose, a “time-share
estate” is an ownership or leasehold estate in
property devoted to a time-share fee, tenants in
common, time span ownership, interval
ownership, and time-share lease.
This list is not all-inclusive. Many other items of
tangible personal property are subject to the sales
or use tax.
Specified Digital Products
The retail sale, licensing, lease, or use of
specified
digital
products
electronically
transferred to or accessed electronically by users
in Tennessee is subject to sales and use tax.
Specified digital products include digital videos,
digital music, ringtones, and digital books, as
defined in the law.
Charges for services rendered in the operation of
parking or vehicle storage facilities. The tax does
not apply for parking in state and local
government facilities or on the street where the
fees are collected by state or local government
parking meters. The storage of property other
than motor vehicles is not a taxable service.
Services
Most services are not subject to the sales tax.
However, some services are specifically named
in the law as being subject to the tax. The
following examples are services that are taxable
under Tennessee law. While not necessarily allinclusive, this list may assist you in determining
if your type of service is taxable. Please contact
Charges for repair services, both parts and labor,
of tangible personal property such as
automobiles, business machines, and appliances.
22
SALES AND USE TAX
TAXABLE AND NON-TAXABLE
PROPERTY AND SERVICES (cont’d)
+
Charges for warranty or service contracts,
provided that repairs performed under such
contracts are not also subject to tax.
+
Charges for installation of items of tangible
personal property that remain tangible personal
property after installation. An example is the
charge made by a retailer to set up computer
hardware in the buyer’s home.
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Charges for laundry and dry-cleaning services
except for coin-operated facilities.
Membership dues to sports and recreation
clubs or health spas.
Admissions to sporting events, musical and
theatrical
performances,
and
other
amusements except as exempted by law.
Charges for entering or engaging in any kind
of recreational activity.
Charges for using tangible personal property
for amusements, sports, entertainment, or
recreational activities such as golf carts, tennis
courts, or bowling shoes.
Complimentary dues and fees, with a value
equal to the normal cost, except when
provided to students at a public school or
university.
Non-taxable Tangible Personal Property
Furnishing intrastate, interstate, or international
telecommunications services or ancillary
services for a consideration.
Some items of tangible personal property are
specifically exempted from sales or use tax either
by Tennessee law or when purchased by specific
entities or for specific purposes. These items and
entities are discussed later in this publication.
Charges for bathing and grooming animals. This
service is taxable on the total charge if both the
bathing and grooming are performed for a single
charge. Bathing charges billed separately are
100% taxable. There is no tax applied to bathing
performed for a medical purpose by a licensed
veterinarian as a part of the practice of veterinary
medicine. There is no tax on grooming services
billed separately.
Non-taxable Services
Examples of some non-taxable services in
Tennessee are:
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Enriching uranium materials, compounds, or
products performed on a cost-plus or “toll
enrichment fee” basis.
Charges for renting space to a dealer with no
permanent location in Tennessee or to a dealer
registered for sales in another part of Tennessee
but making sales at this location on a temporary
basis. This does not include space rental at flea
markets, craft fairs, or antique malls. This does
not include gun shows or book fairs sponsored
by nonprofit organizations. This also does not
include conventions, trade shows, or expositions
that do not allow the general public to make sales
in the exhibit area.
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Furniture moving.
Barber and beauty shop services.
Hospital, physician, and dental services.
Carpet cleaning.
Window washing.
Taxidermy services.
Use of recording studios and television studios.
Furnishing of equipment when the owner
provides a person, or crew, to operate it.
Continuous supervision and control are
required.
Carpentry, painting, and carpet installing.
Lawn mowing.
Sales of goods or property to these providers that
are consumed or used in the performance of their
services are subject to the sales or use tax. Any
items of tangible personal property sold by these
providers, separately from their services are also
subject to the sales or use tax.
Charges for television programming services;
charges or subscriptions for access to or use of
television programming by a video programming
services provider; and charges for or subscription
to access or use direct-to-home satellite services.
These property and services listings are not
necessarily all inclusive. Tax laws in Tennessee
are also amended from time to time; some items
may be added or deleted. Any questions
concerning the taxability of tangible personal
property or services should be directed to the
Taxpayer and Vehicle Services Division.
Also taxable under Tenn. Code Ann. Section 676-212 are charges for a variety of amusement,
recreation, and entertainment activities such as:
23
SALES AND USE TAX
EXEMPTIONS REQUIRING
CERTIFICATES
certificate remains good until revoked in writing
by the issuer.
Three general types of exemptions are provided
in Tennessee sales or use tax law. These are
exempt entities, exempt items, and exempt
transactions. Many exempt transactions and sales
to exempt entities require that the purchaser
claiming the exemption provide specific
documentation to the dealer. The dealer is
required to keep the exemption documentation
on file to support the exempt sales for audit
purposes.
A “sale for resale” does not include a sale of
tangible personal property or computer software
to a dealer for use in the business of selling
services. Property used in the business of selling
services includes, but is not limited to, property
that is regularly furnished to purchasers of the
service without separate charge. A dealer that
sells services will be considered the end user and
consumer of property used in the selling,
performing, or furnishing of the services sold.
Documenting Exemptions
“Sale for resale” does include:
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Certificates are used to document authorization
for purchasing tangible personal property and
taxable services free of tax. These certificates are
issued directly to the specific taxpayer upon
application to and verification by the Department
of Revenue. A copy of the certificate is then
given to the seller by the taxpayer wishing to
purchase free of tax.
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In lieu of obtaining copies of certificates, sellers
may obtain a fully completed Streamlined Sales
Tax Certificate of Exemption form which must
include the exemption number appearing on the
certificate issued to the purchaser by the
Department of Revenue. Sellers may obtain the
certificates claiming exemptions in an electronic
format or medium. Sellers are liable for tax on
sales where the seller failed to obtain and keep
exemption certificates authorizing the tax-free
sales.
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Repair parts or other property sold to a
dealer if the property is subsequently
transferred to the customer in conjunction
with the dealer’s performance of repair
services.
Installation parts or other property sold to a
dealer if the property is subsequently
transferred to the customer in conjunction
with the installation of property that remains
tangible personal property after installation.
Mobile telephones and similar devices sold
to a dealer if the property is subsequently
transferred to the customer in conjunction
with the sale of commercial mobile radio
services.
Food or beverages sold to a hotel, motel,
inn, or other provider of lodging
accommodations if such food and beverages
are subsequently transferred to the customer
in conjunction with the sale of lodging
accommodations to the customer.
Whether or not the dealer makes a separately
stated charge for the property is not material.
Blanket Certificate of Resale
[Tenn. Code Ann.
Sections 67-6-102, 602; Sales or Use Tax Rule 1320-5-1.68]
“Sale for resale” also does not include a sale of
services to a dealer for use in the business of
selling, leasing, or renting tangible personal
property or computer software. Services used in
the business of selling, leasing, or renting
tangible personal property include, but are not
limited to, services such as cleaning,
maintaining, or repairing property that is held as
inventory for sale, lease, or rental.
Sellers shall require certificates of resale for all
tangible personal property sold, or services
rendered in this state, for the purpose of resale.
These certificates must be available for audit. A
person duly registered under the provisions of
the sales tax law, and continually engaged in the
business of selling tangible personal property or
taxable services at retail shall not be required to
execute additional certificates of resale for
individual purchases as long as there is no
change in the character of the business operation
and the purchases are of tangible personal
property or taxable services of the kind usually
purchased by the purchaser for resale. This
A dealer that sells, leases, or rents tangible
personal property or computer software is
considered the end user and consumer of the
services used in conducting such business. [Tenn.
Code Ann. Section 67-6-102 as amended by Public Chapter
1134, Acts of 2010]
24
SALES AND USE TAX
EXEMPTIONS REQUIRING
CERTIFICATES (cont’d)
sales or use tax return for the period in which the
goods were used.
All sales for resale that are not supported by
resale certificates or a fully completed
Streamlined Sales Tax Certificate of Exemption
indicating the purchases are for resale shall be
deemed retail sales, and the seller will be held
liable for the tax.
Direct Pay Permits
A direct pay permit is special written permission
granted to a registered taxpayer by the
commissioner to make all purchases free of tax.
The taxpayer must then report all sales or use
taxes due directly to the Department of Revenue.
Tennessee will not accept direct pay permits
issued by other states. This permission may be
extended only under exceptional circumstances
or hardship to the taxpayer. A copy of the direct
pay permit issued by the Department of Revenue
shall be filed with the wholesalers or retailers.
This special written permission to remit the sales
or use tax shall in no way alter or affect the
criteria for determining whether a transaction is
taxable in Tennessee.
Certificates of resale may not be used to obtain
tangible personal property or taxable services
that would be used by the purchaser, not resold.
Such use will be grounds for the commissioner
to revoke the registration certificate of the
purchaser wrongfully making use of the
certificate of resale. In addition to this penalty, it
is a misdemeanor to misuse the certificate of
registration and resale certificate for the purpose
of obtaining tangible personal property or
taxable services without the payment of the sales
or use tax when due.
In lieu of obtaining a copy of the direct pay
permit, sellers may obtain a copy of a fully
completed Streamlined Sales Tax Certificate of
Exemption form, which must include the account
number appearing on the direct pay permit issued
to the purchaser by the Department of Revenue.
Purchasers providing sellers with certificates of
resale for property or services that are used and
not resold will be held liable for the tax. Sellers
that fraudulently fail to collect tax or that solicit
a purchaser to participate in the unlawful claim
of an exemption will be held liable for the tax.
[Tenn. Code Ann. Section 67-6-102; Sales or Use Tax Rule
1320-5-1-.68(4)]
Government Certificate of Exemption
For example, it would be proper use of a resale
certificate for a candy wholesaler to accept a
resale certificate for candy purchased by a
grocery store. It is reasonable for the wholesaler
to believe the candy will be resold by the grocery
store; the sales or use tax will be collected on the
final sale to the customers.
This exemption is valid for entities of the United
States government, the state of Tennessee, and
counties and municipalities in Tennessee. Sales
to other state governments or to cities and
counties outside this state are not exempt from
tax. This exemption form is generic in nature and
is not issued to a specifically named government
entity. The government entity must enter its
name in the block provided on the exemption
form. The completed form is valid for purchases
made by the governing entity. Employees
traveling on paid expense accounts or paying
with personal funds (checks or credit cards)
cannot use the government exemption for
purchases. The government exemption form
certificate has no expiration date.
However, it would be improper for an
automobile dealer to issue a resale certificate for
its purchase of office furniture to a furniture
dealer. The automobile dealer will be held liable
for the tax not paid as a result of issuing a resale
certificate for the furniture purchased for use and
not resold. If it is determined that the furniture
dealer unlawfully solicited the automobile dealer
to issue the resale certificate to purchase the
furniture tax free, the furniture dealer will be
held liable for the tax.
In lieu of obtaining a government exemption
form, sellers may obtain a fully completed
Streamlined Sales Tax Certificate of Exemption
form. On Line 4 of the Streamlined form, the
purchaser should circle Item 18 for government
If a buyer purchases for resale and later uses the
product rather than reselling it, the buyer is
responsible for reporting and paying sales or use
tax on the items used. This must be done on the
25
SALES AND USE TAX
EXEMPTIONS REQUIRING
CERTIFICATES (cont’d)
These organizations include churches, temples,
synagogues, mosques, boys’ and girls’ clubs,
universities, colleges, schools, orphanages, foster
home institutions, homes for the aged, hospitals,
community health councils, volunteer fire
departments, organ banks, organizations
primarily for the spiritual and recreational
environment of the armed forces, state-owned
historical properties, nonprofit community blood
banks, senior citizen centers, certain nonprofit
talent and beauty contest corporations, and 26
USC Section 501(c)(3) organizations, (c)(5)
labor organizations, (c)(13) nonprofit cemeteries,
and (c)(19) wartime veterans’ organizations.
organizations and on Line 5, circle Item B, and
include the name of the government entity
claiming the government exemption.
Certificate of Exemption for Nonprofit
Organizations [Tenn. Code Ann. Section 67-6-322]
This certificate is used by non-governmental
organizations, that have been issued a certificate
of exemption by the Commissioner of Revenue
to purchase free of tax, to buy goods and taxable
services that the organization will use, consume,
or give away. The certificate will contain an
exemption number that is unique to the
organization receiving the letter.
Out-of-state organizations that hold a federal tax
exemption under 26 USC Section 501(c)(3) must
submit a copy of their federal exemption letter in
lieu of a certificate of exemption from the
Commissioner of Revenue. Instate Section
501(c)(3) entities require a certificate of
exemption issued by the Commissioner of
Revenue or a properly completed Streamlined
Sales Tax Certificate of Exemption. A properly
completed Streamlined Sales Tax Certificate of
Exemption must include the nonprofit tax
number issued to the entity by the Department of
Revenue.
The seller making a sale to one of these
organizations must maintain a copy of the
exemption certificate in the entity’s files for
audit purposes.
In lieu of obtaining a nonprofit organization
exemption certificate, sellers may obtain a fully
completed Streamlined Sales Tax Certificate of
Exemption form. On Line 4 of the Streamlined
form, the purchaser should circle either item 16
for education or health care services or item 17
for religious or educational organizations. On
Line 5, the purchaser should circle either item E
for charitable organizations or item F for
religious or educational organizations. The
Streamlined form must include the exemption
number appearing on the nonprofit exemption
certificate issued to the organization by the
Department of Revenue.
Other than out-of-state 501(c)(3)
letters,
Tennessee does not accept nonprofit or
charitable exemption documents issued by other
states.
Certificate of Exemption for Qualified Call
Centers [Tenn. Code Ann. Section 67-6-356]
When accepting an exemption, the seller must
ensure that the purchase is billed to the exempt
organization and is paid for with checks or credit
cards of the organization. Members and
employees of the organization may not use the
exempt organization’s exemption certificate to
make tax-free purchases for the member or
employee’s own use.
Sales of interstate telecommunications services
to businesses for operation of one or more call
centers are exempt upon presentation of an
appropriate exemption certificate. Call centers
are single locations having at least 250 employee
jobs and utilizing telecommunications services in
one or more of the following activities:
Sellers that have obtained a copy of the nonprofit
exemption certificate or a fully completed
Streamlined exemption form and ensured billing
to and payment by the exempt organization are
not liable for the tax if the purchaser improperly
claimed the exemption for the purchases. The
purchaser will be liable for the tax.
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Customer services.
Soliciting sales.
Reactivating dormant accounts.
Fund raising.
Conducting surveys or research.
Collection of receivables.
Receiving or taking orders.
Receiving reservations.
SALES AND USE TAX
EXEMPTIONS REQUIRING
CERTIFICATES (cont’d)
Agricultural Exemption Certificate
[Tenn. Code Ann. Section 67-6-207]
A discussion of this certificate is found later in
this Sales or Use Tax Guide.
27
SALES AND USE TAX
EXEMPTIONS REQUIRING
DOCUMENTATION
Exemption for Railroad Track Materials and
Locomotive Radiators
Under sales or use tax law, some sales are taxexempt without the necessity of a certificate
issued by the department but do require
documentation between the seller and buyer.
Examples of the many exemptions that fall under
this category are shown below, but this list is not
all-inclusive. Dealers should contact the
department for more information on the types of
exemptions available.
This exemption is for railroads seeking to
purchase railroad track materials and locomotive
radiators for use outside the state of Tennessee as
provided in Tenn. Code Ann. Section 67-6-340.
If the railroad fails to keep records sufficient to
prove these materials were used out-of-state and
not within Tennessee, then the railroad will be
liable for the sales or use tax on these items.
[Tenn. Code Ann. Section 67-6-529]
Exemption for Rural Electric Cooperatives,
Community Service Cooperatives, and
Governmental Utility Districts – for entities
organized under Tenn. Code Ann. Sections 6525-201, et seq., and Tenn. Code Ann. Sections 782-101, et seq.
Removal from Tennessee by Buyer
Tennessee law allows a buyer to purchase a
motor vehicle in Tennessee and have up to
three days to remove the motor vehicle to
another state without having to pay sales or use
tax on the purchase. This exemption applies to
all motor vehicles that would be subject to
registration and titling in Tennessee were the
vehicle to remain instate. This also includes all
off-highway motor vehicles as defined in Tenn.
Code Ann. Section 55-3-101(c)(2).
Exemption for Electric Generating and
Distribution Systems, Resource Recovery
Facilities, or Coal Gasification Plants – for
entities created by the federal, state, or local
governments under the Electric Membership
Corporation or the Electric Cooperative Laws.
There is also a provision under Tennessee law
that exempts, from the sales or use tax, the retail
sale of boats, motorboats, and other vessels that
are subject to registration in this state that are
removed from Tennessee to another state within
three days after purchase.
When purchasing these items under this
privilege, the buyer presents the seller with the
Seller/Purchaser Affidavit of Exemption for
Motor Vehicles, Boats, and Vessels Sold For
Removal From Tennessee Within Three Days
indicating the city and state to which the item
will be delivered. [Tenn. Code Ann. Sections 67-6-313,
343, 345]
28
SALES AND USE TAX
consumption of the following items may be
purchased tax-exempt when sold to a qualified
farmer, logger, or nursery that provides the seller
with a copy of the agricultural exemption
certificate or card. Exempt items include:
AGRICULTURAL EXEMPTIONS
Agricultural Exemption Certificate
Farmers, timber harvesters, and nursery
operators must qualify for and receive an
Agricultural Sales and Use Tax Certificate of
Exemption from the Department of Revenue to
make agricultural purchases exempt from tax. A
qualified farmer, logger, or nursery operator
must present a copy of the agricultural
exemption
certificate
issued
by
the
Commissioner of Revenue to the seller. The
copy of the certificate is the seller’s
documentation of tax-exempt sales of goods and
services to qualified farmers, loggers, and
nursery operators.
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This certificate replaced the Exemption
Certificate for Farm Machinery and Equipment
and for Purchase of Electricity and Liquefied
Gas at a Reduced Rate that was previously used
by farmer and nursery operators and which was
no longer valid as of January 1, 2008.
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Also, in lieu of providing the seller with a copy
of the agricultural exemption certificate,
qualified persons making exempt agricultural
purchases can also provide a fully completed
Streamlined Sales Tax Certificate of Exemption
which must include the exemption number
included on the agricultural exemption certificate
issued by the commissioner.
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The buyer is obligated to ensure that all goods
and services purchased under this certificate are
actually purchased for the production of
agricultural or nursery products. The buyer is
also liable if he or she allows others to use his or
her exemption certificate or number to make taxexempt purchases. Sellers may refuse acceptance
of the agricultural certificate to make tax-free
sales of items that obviously do not qualify for
agricultural exemption. Sellers remain liable for
the tax if they do not maintain copies of the
agricultural certificate or card in their records or
if the invoice or bill does not contain the name
and address of the buyer and a description of the
products sold. [Tenn. Code Ann. Section 67-6-207]
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Agricultural Exemptions
[Tenn. Code Ann. Sections 67-6-207 and 301]
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The retail sale, lease, rental, use, consumption,
distribution, repair, or storage for use or
29
Farm equipment or machinery used for
producing agricultural products for sale.
Automobiles, trucks, household appliances,
and tangible personal property that becomes
real property upon installation are not included
in this exemption.
Grain bins and attachments thereto.
Aircraft designed and used for crop dusting.
Equipment used solely for harvesting timber.
Trailers used for transporting livestock.
Self-propelled fertilizer or chemical spreading
equipment not designed for over-the-road use.
Systems for poultry environmental control,
feeding and watering, and conveying eggs.
Parts and labor used in the repair of exempt
farm machinery.
Gasoline or diesel fuel used for “agriculture
purposes” as defined in Tenn. Code Ann.
Section 67-6-102. Effective January 1, 2008,
this includes dyed diesel fuel used in cutting
and harvesting trees by qualified timber
harvesters.
Containers for farm products or plastic and
canvas used in the care of plants or as a
protective covering for agricultural products.
Feed for livestock, poultry, or other domestic
animals usually found on a farm, other than
pets, for commercial purposes.
Seeds, seedlings, and cuttings that will produce
food, fiber, or tobacco.
Fertilizer and pesticides used to aid the growth
and development of seeds, seedlings, or plants.
Also included are solutions specifically for
mixture with pesticides or for use as a soil
conditioner.
Livestock
wormers,
medications,
and
instruments used to administer medications.
Any substance used in the reproduction of
livestock, including embryos and semen.
Agri-sawdust – sawdust, wood shavings, chips,
and slabs.
Any seeds, seedlings, cuttings, fertilizers,
pesticides and additives, or containers, canvas,
and plastic as previously indicated that are sold
directly to a nursery operator.
Electricity, natural and liquified gas, including
propane and butane, used directly for
producing food or fiber for human or animal
consumption or to aid in growing horticultural
products for sale.
Coal, wood, wood products, or wood byproducts or fuel oil used as energy fuel to
produce food or fiber or nursery or greenhouse
crops. [Tenn. Code Ann. Section 67-6-207]
SALES AND USE TAX
AGRICULTURAL EXEMPTIONS (cont’d)
will issue a certificate granting the exemption for
a period of four years. The exemption must be
renewed by the farmer, logger, or nursery
operator by submitting a renewal application
every four years.
These items are only exempt when purchased by
persons issued a personalized farmer, logger, and
nursery operator exemption certificate by the
Department of Revenue.
Straw purchased from a supplier other than the
agricultural producer does not qualify for
exemption when presenting the certificate. Straw
is not one of the items specified in the statute as
tax-exempt even when purchased by a farmer,
logger, or nursery operator.
Sales by Farmers and Nursery Operators
Proceeds from the sale of livestock, poultry,
nursery stock, or other farm products by the
farmer or nursery operator are exempt from the
tax. A person does not have to qualify for the
agricultural exemption certificate to make taxexempt sales of agricultural products grown or
produced by that person. If the farmer or nursery
operator produced at least 50% of the
agricultural products sold, then 100% of the
proceeds are tax-exempt. If the farmer or nursery
operator produced less than 50%, then the
proceeds from products produced by them are
tax-exempt. The 50% test is applied per calendar
year. [Tenn. Code Ann. Section 67-6-301]
A farmer, logger, or nursery operator is qualified
for issuance of the exemption certificate if one or
more of the following criteria are met.
+
+
+
+
+
+
Is the owner or lessee of agricultural land
from which one thousand dollars or more of
agricultural products were produced and sold
during the year, including payments from
government sources;
Provides for-hire custom agricultural services
of plowing, planting, harvesting, growing,
raising, or processing agricultural products or
the maintenance of agricultural land;
Is the owner of land that qualifies for taxation
under the provisions of the Agricultural Forest
and Open Space Land Act of 1976;
The person’s federal income tax return
contains one or more of the following: (a)
Business activity on IRS schedule F (Profit or
Loss From Farming); or (b) Farm rental
activity on IRS form 4835 (Farm Rental
Income and Expenses) or Schedule E
(Supplemental Income and Loss);
The person otherwise establishes to the
satisfaction of the commissioner that the
person is actively engaged in the business of
raising, harvesting or otherwise producing
agricultural commodities as defined in Tenn.
Code Ann. Section 67-6-301(c)(2).
Persons qualifying as manufacturers cannot
also qualify for the agricultural exemption
certificate. [Tenn. Code Ann. Section 67-6-207(f)]
Sales made directly from a farmer to a consumer
though an online nonprofit farmers’ market are
exempt from sales or use tax providing that:
+
+
An amount equal to the consumer’s full
purchase price is transmitted by the consumer
or the online farmers’ market to the farmer;
and
The cooperative or other organizing body of
the online farmers’ market charges no fee or
other charge for facilitating the sales other
than “virtual booth” rental fees assessed to
participating farmers to cover actual costs
incurred in operating the online farmers’
market.[Tenn. Code Ann. Section 67-6-301(a)]
Purchase of Livestock Drugs by Veterinarians
Veterinarians who wish to make tax-exempt
purchases of livestock drugs and instruments to
administer livestock drugs must present a
completed Streamlined Sales Tax Certificate of
Exemption to the drug supplier.
To receive an agricultural certificate of
exemption, persons who qualify for the
exemption must apply to the Department of
Revenue using the farmer, logger, and nursery
operator’s application for exemption. The
exemption application form is available on the
department’s web site.
This form is a multi-purpose exemption and is
found on the department’s web site at
http://www.TN.gov/revenue/streamlined/exempti
oncertificate.pdf.
If the Commissioner of Revenue determines that
the applicant is entitled to be a qualified farmer,
logger, or nursery operator, the commissioner
30
SALES AND USE TAX
AGRICULTURAL EXEMPTIONS (cont’d)
Veterinarians who are not registered for sales
and use tax purposes because they do not make
taxable sales do not need to register with the
Department of Revenue to receive a sales and
use tax account number.
If the veterinarian is not registered for sales and
use, he or she can include some other
identification number, such as a Federal
Employers Identification Number (FEIN), and/or
some other state identifying account number,
such as a driver's license number.
31
SALES AND USE TAX
Industrial Machinery Authorization
EXEMPTIONS AND REDUCED RATES
FOR QUALIFIED MANUFACTURERS
To be eligible for this exemption, a manufacturer
must file an application with the Department of
Revenue and receive an authorization letter with
a unique industrial machinery number. [Tenn. Code
A manufacturer is a business whose principal
activity (more than 50%) at a specific location is
fabricating and processing tangible personal
property for resale and consumption off the
premises. A qualified manufacturer enjoys
substantial tax benefits. Before receiving
eligibility for these exemptions, a manufacturer
must file an application with the Department of
Revenue and receive an authorization letter with
a unique Industrial Machinery Number assigned
to each specific manufacturing location. [Tenn.
Ann. Section 67-6-206]
Once the department approves this authorization,
the manufacturer may be entitled to tax-exempt
purchases and service of qualified industrial
machinery as well as reduced or tax-exempt
purchases of electricity and water as provided
under the law.
Code Ann. Section 67-6-206]
The industrial machinery exemption is also
available for natural gas used to generate heat for
the production of aluminum sheet foil.
Fabricating or processing tangible personal
property for resale includes providing fabrication
and repair services of aircraft for unrelated
commercial or governmental entities provided
the dealer engaged in such business qualifies for
the jobs tax credit in Tenn. Code Ann. Section
67-4-2109(b).
Dealers
meeting
these
requirements may qualify for sales and use tax
manufacturing exemptions. [Tenn. Code Ann. Section
A fully-completed Streamlined Sales Tax
Certificate of Exemption can be accepted for
industrial machinery and material exemption
purchases provided the certificate contains the
manufacturer’s exemption authorization number
issued by the commissioner. [Tenn. Code Ann.
Section 67-6-206(b)]
67-6-102]
Industrial Machinery
Pollution Control Equipment
Industrial machinery is machinery necessary to,
and primarily for, fabricating or processing
tangible personal property for consumption off
the premises. The purchase, lease, or rental of
qualified machinery, and repair and replacement
parts, are exempt from the sales or use tax.
Pollution control machinery and equipment
needed to control or eliminate air and water
pollutants resulting from manufacturing are
considered industrial machinery. As such, they
are tax-exempt to the qualified manufacturer.
[Tenn. Code Ann. Section 67-6-102]
Energy Fuel and Water
Exempt qualified machinery generally includes
the machines that transfer raw materials from
inventory and begin the processing cycle,
process the product through the various phases
of manufacture, and transfer the finished product
from the final processing step to inventory. Any
device that powers this machinery and the oils
and lubricants used in the machinery are also tax
exempt. [Tenn. Code Ann. Sections 67-6-102, 206]
Qualified manufacturers are authorized to make
purchases at a reduced 1.5% state tax rate on all
forms of energy used in any manner on the
manufacturing site. This includes electricity,
natural gas, coal, firewood, fuel oil, and propane
and butane gases. These energy sources are not
subject to a local option tax. Any energy fuel that
comes into direct contact with the product during
manufacturing and is metered separately is taxexempt. [Tenn. Code Ann. Section 67-6-206]
The definition of industrial machinery includes
machinery and equipment necessary and
primarily for conversion of tangible personal
property into taxable specified digital products
for resale and consumption off the premises. The
exemption does not include machinery and
equipment used primarily for the storage or
distribution of specified digital products after
conversion. [Tenn. Code Ann. Section 67-6-102]
Manufacturers are also entitled to a reduced state
tax rate of 1% and a local tax rate of 0.33% to
0.5% on water used within the manufacturing
site. Water wetting the product during the
manufacturing process that is separately metered
is tax-exempt. [Tenn. Code Ann. Sections 67-6-206, 702]
32
SALES AND USE TAX
EXEMPTIONS AND REDUCED RATES
FOR QUALIFIED MANUFACTURERS
(cont’d)
Computers
or conversion into articles of tangible personal
property for resale where such industrial
materials or explosives become a component part
of the finished product or are used directly in
fabricating, dislodging, or sizing. [Tenn. Code Ann.
[Tenn. Code Ann. Section 67-6-206]
Section 67-6-329(12)]
Any computer, including software, which is
primarily used to control the operation of
industrial machinery, is tax-exempt.
Headquarters Facility
Eligibility exists for a partial credit for building
materials and equipment used for construction of
a new, expanded, or remodeled headquarters
facility. The taxpayer or lessor to the taxpayer
must invest either:
Industrial machinery also includes any computer,
computer network, computer software, or
computer system, as defined in Tenn. Code Ann.
Section 39-14-601, and any peripheral devices
including hardware such as printers, plotters,
external disc drives, modems, and telephone
units, including repair parts, warranty or service
contracts, and any necessary repair or taxable
installation labor, when the equipment is used in
the operation of a qualified data center. [Tenn.
+
+
Code Ann. Section 67-6-102]
Material Handling and Racking Systems
Equipment
Material handling and racking systems
equipment used in a qualified new or expanded
warehouse or distribution facility, purchased
beginning one year prior to the start of, and
ending one year after the substantial completion
of, the construction or expansion of the facility,
not to exceed three years, qualifies for the
industrial machinery exemption. An investment
of more than $10 million is required. A taxpayer
must submit an application with a plan
describing the investment to be made, to the
Department of Revenue. If approved, the
taxpayer will receive an Industrial Machinery
number authorization letter. [Tenn. Code Ann.
A minimum of $50 million in a building or
buildings, either newly constructed, expanded,
or remodeled, or
A minimum of $10 million in a building or
buildings, either newly constructed, expanded,
or remodeled along with the creation of not
less than 100 new full-time employee jobs,
created during the investment period with
average wages or salaries equal to, or greater
than, 150% of the average wage in the county
or metropolitan statistical area in which the
taxpayer is located.
The investment may include the purchase price
of existing buildings, costs of building materials,
labor, equipment, parking facilities, and
landscaping, but will not land or inventory.
The completed facility must house the taxpayer’s
international, national, or regional headquarters.
To be eligible for this credit, the taxpayer must
apply for, and receive, authorization from the
Department of Revenue.
A taxpayer that has qualified for the headquarters
tax credit or an affiliate of such taxpayer can
enjoy a sales and use tax exemption for “private
communication
services”
used
for
communication
with
a
computer
or
telecommunications center located in Tennessee.
To make purchases of private communication
services without the payment of sales tax, the
taxpayer must provide sellers a copy of an
exemption certificate issued by the Department
of Revenue.
Sections 67-6-102]
Industrial Materials
Chemicals, solvents, greases, and similar items
coming into direct contact with the product,
becoming a part of the finished product, or being
rapidly used in production of the finished
product are tax-exempt. Once removed from
inventory, these items must be totally used or
consumed within 25 days. This exemption is
available to all manufacturers and is not subject
to the 51% test. [Revenue Rule 1320-5-1-.40]
Taxpayers moving tangible personal property
into Tennessee in conjunction with establishing a
qualified headquarters are exempt from any sales
and use tax that arises as a result of moving
Also exempt are industrial materials and
explosives for future processing, manufacturing,
33
SALES AND USE TAX
EXEMPTIONS AND REDUCED RATES
FOR QUALIFIED MANUFACTURERS
(cont’d)
Taxpayers eligible for the headquarters sales and
use tax credit are those taxpayers who are subject
to the Tennessee franchise and excise taxes,
insurance companies, as defined in Tenn. Code
Ann. Section 56-1-102(2), and, effective with
business plans filed on or after January 1, 2008,
general partnerships entitled to compute a jobs
tax credit under Tenn. Code Ann. Section 67-42109(b)(3)(H). [Tenn. Code Ann. Section 67-6-224]
property into Tennessee as long as that property
was previously used in the operation of the
taxpayer’s business. [Tenn. Code Ann. Section 67-6398]
Companies that establish a new headquarters
facility in Tennessee many move otherwise
taxable aircraft into the state without incurring
use tax liability. This provision expires on July 1,
2010. [Tenn. Code Ann. Section 67-6-224]
Food Service Establishments
The term “manufacturer” does not include any
entity whose principal business is the preparation
of food for immediate sale. In addition, Tenn.
Code Ann. Section 67-6-102 was amended to
state that “industrial machinery” does not include
machinery that is used in the preparation of food
for immediate retail sale.
Furniture and fixtures may be included in the
calculation of “Minimum investment” and may
also be included under the definition of the
“Qualified tangible personal property” for
purposes of qualifying for the qualified
headquarters facility credit. Computer software
purchased or leased during the investment period
and used primarily in the qualified facility also
qualifies as qualified tangible personal property
for purposes of the headquarters facility credit.
[Tenn. Code Ann. Section 67-6-322]
34
SALES AND USE TAX
OTHER EXEMPTIONS FROM SALES OR
USE TAX
+
Many products and services are identified as
exempt in the sales or use tax law. The sale of
these items or services requires no special
documentation between the seller and buyer. A
number of them are identified below. If you have
questions about specific exemptions, please
contact Taxpayer and Vehicle Services.
Aircraft, Parts, and Supplies
+
+
+
[Tenn. Code Ann.
Sections 67-6-302, 329]
+
+
+
Charges for the sale, use, or storage of aircraft
owned or leased by commercial air carriers
primarily for use in interstate or international
commerce and parts and supplies for servicing
them. This does not apply to fuel, petroleum
products, or shop tools.
Dealers should
maintain documentation of buyer’s eligibility.
Payments on leases or rental of property,
owned by airport authorities, to businesses
primarily engaged in the repair of aircraft
owned or leased by commercial air carriers.
Aircraft used for and owned by a person
providing flight training.
Amusements
+
+
+
+
+
+
+
+
organizations, which have been held in the
same city for 30 years or longer.
Admissions to musical concerts conducted
solely by nonprofit community group
organizations.
Events held entirely by employers and solely
for the benefit of their employees.
Dues and fees paid to physical fitness facilities
that meet certain program and staffing
requirements established by law, if the
exemption has been approved in advance by
the Department of Revenue.
Entry fees for any contest, tournament, or
charity horse show. Fishing tournament
registration fees are also exempt.
Automobiles
+
Automobiles registered in Tennessee to active
duty members of the armed forces stationed
anywhere in Tennessee or at Ft. Campbell
military installation. [Tenn. Code Ann. Section
67-6-303]
+
Transfer of automobiles between spouses as
the result of a divorce. [Tenn. Code Ann. Section
67-6-306]
+
Motor vehicles sold in Tennessee but removed
from the state within 3 days and registered
outside the state. [Tenn. Code Ann. Section 67-6343]
[Tenn. Code Ann. Section 67-6-330]
+
Events held for, or sponsored by, schools in
grades K-12 or athletic events for participants
18 years old or younger sponsored by civic or
nonprofit organizations.
Admissions to county fairs and participation in
fair activities such as rides, shows, or
grandstand events.
Admission to museums, historical sites, and
historical societies operated by nonprofit
entities.
Fees resulting from the production of film,
television, radio, or theatrical presentations.
Charges for admission to these presentations
are not exempted by this provision.
Receipts from coin-operated amusement
devices.
Admissions to recreational or amusement
facilities operated and controlled by city or
county governments.
Member assessments made for capital
improvements by recreation, community, or
country clubs.
Proceeds from and entry fees to rodeos and
beauty pageants, conducted by nonprofit
Equipment used to adapt motor vehicles for
use by honorably discharged disabled veterans
of the armed services of the United States.
[Tenn. Code Ann. Section 67-6-353]
+
Sales of motor vehicles to members of the
Tennessee National Guard and reserve
component units who are called into active
military service and who are stationed outside
the United States during hostilities in which
such person is actually engaged in combat.
The exemption from sales tax begins on the
effective date of the orders assigning the
member to the combat zone and expires
ninety days after the effective date the
individual receives military orders releasing
him or her from the combat zone. A copy of
the military orders must be provided to the
dealer or county clerk, as appropriate. [Tenn.
+
Purchases of motor vehicles made by
members of the Tennessee National Guard on
Active Guard and Reserve (AGR) tour and
stationed in Tennessee or at Ft. Campbell
military installations. [Tenn. Code Ann. Section
Code Ann. Section 67-6-303]
67-6-303]
35
SALES AND USE TAX
OTHER EXEMPTIONS FROM SALES OR
USE TAX (cont’d)
+
Computer Software
+
+
Computer software fabricated by any person
or that person’s direct employee for that
person’s own use and consumption. A direct
employee means an employee to whom the
person is obligated to issue a federal W2 form
and has an obligation to withhold taxes for
FICA purposes. [Tenn. Code Ann. Section 67-6-
Code Ann. Section 67-6-334]
+
387]
+
Computer software that is developed and
fabricated by a qualifying affiliated company.
Repair of such software is also exempt if the
repair is rendered by a qualifying affiliated
company. [Tenn. Code Ann. Section 67-6-395]
Exemptions for Tennessee Sales for Out-ofstate Consumer Use
+
Concept sketches, drawings, and models made
by architects, engineers, landscape architects,
and interior designers used to develop a
prototype for production. [Tenn. Code Ann.
+
+
Section 67-6-354]
+
The transfer of preliminary artwork by an
advertising agency to its client and the use of
preliminary artwork created by the advertising
agency to provide advertising services.
Preliminary artwork means tangible personal
property and digital equivalents that are
produced by an advertising agency in the
course of providing advertising services solely
for the purpose of conveying concepts or
ideas or demonstrating an idea or message to a
client. This includes, but is not limited to,
concept sketches, illustrations, drawings,
paintings, models, photographs, storyboards,
and similar materials. [Public Chapter 530, Acts
The sale of helicopters within Tennessee to
purchasers who are not Tennessee residents are
exempt when those helicopters remain in
Tennessee after the sale solely for purposes of
repair or refurbishment and are removed from
Tennessee within 15 days of the completion of
such repair or refurbishment. Repair and
refurbishment
includes
modifications,
conversions, and installations. This exemption
works in conjunction with existing exemptions
for the sale and repair of helicopters that are
removed from the state within 15 days. [Tenn.
Code Ann. Section 67-6-313(h)]
Display Property
+
Inventory items used by a dealer for display or
demonstration that are returned to inventory
within 120 days. Items consumed in display
or demonstration or remaining out of
inventory for more than 120 days are subject
to the use tax. The dealer will pay use tax on
the amount that the cost to the dealer exceeds
the sales price of the article at the time it is
sold. [Tenn. Code Ann. Section 67-6-305]
Repair and refurbishment services within
Tennessee on airplanes and airplane
components and parts, performed pursuant to a
“supplemental type certificate” issued to the
repairer by the FAA, where the airplane is
sitused outside of Tennessee and is removed
from Tennessee within 15 days from the
completion of the repair. [Tenn. Code Ann.
Sections 67-6-313, 345]
+
Energy
+
Sale or use of materials for fabrication of
structural metal products for use on out-ofstate jobs. [Tenn. Code Ann. Section 67-6-339]
Sale of boats or other marine vessels moved to
another state within three days of purchase.
Sales to non-residents of helicopters and
airplanes that will have a situs out of
Tennessee and will be removed from
Tennessee within 15 days of purchase. [Tenn.
Code Ann. Section 67-6-313]
+
of 2009]
+
Retail sales of kerosene through dispensers
designed and constructed to prevent delivery
directly from the dispenser into a vehicle fuel
supply tank. [Tenn. Code Ann. Section 67-6334(b)(4)]
Design Professionals
+
Charges for gas, electricity, or other energy
fuels sold directly to consumers for residential
use. [Tenn. Code Ann. Section 67-6-334]
Sales of propane in cylinders of 100 pounds or
more made over the counter by the seller for
residential use. Other over-the-counter sales of
energy fuel, including propane in containers of
less than 100 pounds, are subject to tax. [Tenn.
+
Money paid by customers of city and county
utilities, electric cooperatives, and electric
membership cooperatives, directed to capital
construction. [Tenn. Code Ann. Section 67-6-332]
Sales of fuel and petroleum products to air
common carriers for flights destined for, or
continuing from, outside the United States.
[Tenn. Code Ann. Section 67-6-349]
Sales of computer media exchange services or
other storage media when that media is to be
shipped out of Tennessee or to a government
agency or non-taxable business in Tennessee.
[Tenn. Code Ann. Section 67-6-313]
36
SALES AND USE TAX
OTHER EXEMPTIONS FROM SALES OR
USE TAX
(cont’d)
Films
+
+
Sales of property for use by commercial
marine vessels when the deliveries are made
mid-stream in waterways that are part of the
geographical boundaries of Tennessee.
+
[Tenn. Code Ann. Section 67-6-326]
+
Repair services, including parts and labor,
performed on certain tangible personal
property, when the repair services are initiated
and/or completed in Tennessee, where the
repaired property is delivered or shipped out of
state. The exemption applies to repairs to
mining, logging, and other natural resource
extraction
equipment;
road-building
equipment; land-clearing, excavation, and
construction equipment; and equipment for
loading or unloading containers or truck
trailers from railcars, ships, barges, or aircraft.
Food
+
Fuel
[Tenn. Code Ann. Section 67-6-313(b)]
+
+
Repair service labor on aircraft engine
equipment and aircraft mainframes, when the
repair services are initiated, performed, or
completed in Tennessee. “Aircraft engine
equipment” and “aircraft mainframes” are
defined by statute and limited to aircraft used
by a commercial interstate or international air
carrier. [Tenn. Code Ann. Section 67-6-313(c)]
Repair services, including parts and labor,
performed out of state on equipment used
primarily in interstate commerce, when the
original purchase of the equipment was exempt
from sales and use tax. [Tenn. Code Ann. Section
+
+
+
Repair parts and labor for firefighting
equipment owned by an out-of-state fire
department. [Tenn. Code Ann. Section 67-6-
+
Repair service labor on railroad rolling stock,
when the repair services are initiated,
performed, or completed in Tennessee.
+
313(e)]
[Tenn. Code Ann. Section 67-6-313(g)]
+
+
[Tenn. Code Ann. Sections 67-6-337, 67-6-338]
Food paid for by food stamps, food coupons,
or approved electronic benefits transfer
systems from special supplemental food
programs for women, infants, and children as
required by federal law, or any other means
approved by the Department of Human
Services and issued by the department or the
federal government.
[Tenn. Code Ann. Section 67-6-329]
Motor vehicle fuels taxed per gallon under the
petroleum products statutes of Tennessee law.
Gasoline on which a privilege tax is paid, not
including premixed two-cycle engine fuel
containing gasoline and oil sold in containers
of one gallon or less.
Liquefied gas taxed under Tenn. Code Ann.
Title 67, Chapter 3.
[Tenn. Code Ann. Section 67-6-388]
Insurance proceeds paid to the owner of a
leased vehicle pursuant to a damage
settlement are exempt. The exemption applies
when the vehicle has sustained damage that
renders it a salvage vehicle, a non-repairable
vehicle, or a flood vehicle, and the owner
transfers title of the leased vehicle to the
insurance company.
Medical Equipment and Supplies
Parts and accessories, materials and supplies
used in servicing and/or maintaining railroad
rolling stock used, or intended to be used, in
interstate commerce. [Tenn. Code Ann. Section
[Tenn. Code
Ann. Sections 67-6-314, 67-6-320]
+
67-6-321(a)]
+
Rental fees of films to theaters that charge tax
on admission prices to view the films.
Rental prices for films, recordings, or
transcriptions charged to radio and television
stations operating under license by the Federal
Communications Commission.
Leased Vehicles
67-6-313(d)]
+
[Tenn. Code Ann. Section 67-6-309]
The transfers of railroad rolling stock and
vessels or barges of 50 tons or more
displacement that are used in interstate
commerce or outside Tennessee. [Tenn. Code
Ann. Section 67-6-321]
Repair services, including renovations and
improvements, performed on barges and
vessels of 50 tons and over displacement, used
in interstate commerce, and the parts,
accessories, material, and supplies used in
such repairs if the parts, accessories, material,
and supplies become a part of the barge. [Tenn.
+
Code Ann. Sections 67-6-321, 327]
37
Prosthetic devices for human use., repair and
replacement parts, and repair services for such
items. .
Durable medical equipment for home use sold
with a prescription for human use. Items
generally understood and intended to be used
outside the home are not exempt. Repair and
replacement parts and repair services are
exempt only if the equipment qualified for
exemption. Parts, components, or attachments
that are for single patient use are not exempt.
SALES AND USE TAX
OTHER EXEMPTIONS FROM SALES OR
USE TAX (cont’d)
+
+
+
+
+
+
+
+
+
+
Kidney dialysis equipment for treatment of
humans, repair parts and repair services for
such equipment, and attachments, components,
and parts that are for single patient use with
such equipment.
Enteral feeding systems for treatment of
humans, repair parts and repair services for
such equipment, and attachments, components,
and parts that are for single patient use with
such equipment.
Mobility enhancing equipment sold with a
prescription for human use, repair and
replacement parts, and repair services for such
equipment.
Oxygen prescribed for medical treatment of
humans and equipment for administering
medical oxygen; repair and replacement parts
and repair services for such equipment;
attachments and components that are for single
patient use with such equipment;, and
disposable medical supplies needed to
administer or deliver medical oxygen.
Insulin and any syringe used to dispense
insulin for human use.
Disposable medical supplies, such as bags,
tubing, needles, and syringes dispensed by a
licensed pharmacist on a prescription by a
practitioner of the healing arts for the
intravenous administration of any prescription
drug and which come into actual contact with
the drug or medicine. This exemption applies
only to such items used to treat a patient
outside of a hospital, skilled nursing facility, or
ambulatory surgical treatment center.
Computer software, prescribed by a
practitioner of the healing arts, designed for the
treatment of people with learning disabilities.
Sales or use of disposable non-prosthetic
ostomy products for use by persons who have
had colostomies, ileostomies, or urostomies.
Repair parts and services for helicopters and
aircraft used by government organizations and
nonprofit hospitals and medical facilities
for medical evacuation or transportation.
Durable medical equipment and mobility
enhancing equipment purchased and used by
pharmacies and home health care providers in
rendering outpatient health care services in the
home is not eligible for the exemption for
durable medical equipment for home use or
mobility enhancing equipment. Exceptions are
oxygen delivery equipment, kidney dialysis
equipment, and enteral feeding systems. [Tenn.
Code Ann. Section 67-6-352(b)]
Miscellaneous Nonprofit Sales
+
Prescription drugs distributed at no charge by
the manufacturer. [Tenn. Code Ann. Section 67-6-
+
Drugs or medicines, including over-thecounter drugs, for human use dispensed on a
prescription. [Tenn. Code Ann. Section 67-6-320]
Veterinarian purchases of drugs, including
wormers, used to treat livestock. Other
purchases of drugs by veterinarians are taxable
based on the veterinarian’s purchase price.
+
Sales of school textbooks and workbooks,
including
electronically
accessed
or
transmitted digital textbooks and digital
workbooks. [Tenn. Code Ann. Section 67-6-329]
Sales of school meals in grades K-12. [Tenn.
Code Ann. Section 67-6-329]
+
Sales of parking privileges sold by colleges,
universities, technical institutes, or technology
centers to students. [Tenn. Code Ann. Section 67-
+
Sales of United States or Tennessee flags by
nonprofit organizations. [Tenn. Code Ann.
+
Sales made by schools (grades K-12) or school
support groups. Such schools or school support
groups are required to pay Tennessee sales tax
on the purchase price of the goods or services
purchased for resale to others but are not
subsequently required to collect tax when the
goods or services are resold. [Tenn. Code Ann.
6-329]
Section 67-6-329]
Section 67-6-229]
The requirement for schools or school support
groups to pay tax to the supplier at time of
purchase does not apply to purchases of
textbooks and workbooks to be sold to students
or purchases of food to be sold as meals for
public or private school students in grades K –
12.
319]
+
Sales at gun shows conducted by a nonprofit
organization of gun collectors. Sales by dealers
who regularly conduct gun sales, and sales of
guns for later delivery are not tax exempt.
[Tenn. Code Ann. Section 67-6-310]
+
[Tenn. Code Ann. Section 67-6-347]
+
Drugs, including over-the-counter drugs, sold
to healthcare service providers such as
hospitals, nursing facilities, physicians, and
dentists that will be prescribed for treatment of
humans.
[Tenn. Code Ann. Section 67-6-351]
38
SALES AND USE TAX
OTHER EXEMPTIONS FROM SALES OR
USE TAX
(cont’d)
a nonprofit entity, is organized for the purpose
of preserving or rehabilitating a historic
property listed on the National Register of
Historic Places, and the controlling nonprofit
entity has received approval of its historic
certification application by the U.S.
Department of the Interior National Park
Service. [Tenn. Code Ann. Section 67-6-322]
Motor Vehicles Used by Common Carriers
[Tenn. Code Ann. Section 67-6-331]
The transfer, by any dealer in personal property,
of motor vehicles with a Gross Vehicle Weight
Rating of Class 3 (maximum gross weight of
vehicle and load of 16,000 pounds) [Tenn. Code
Ann. Section 55-4-113] and above, and trailers, semitrailers, and pole-trailers [Tenn. Code Ann. Sections
55-1-105, 55-4-113] which will be used in the
service of passenger or cargo transportation,
principally in interstate or foreign commerce, by
a common carrier or contract carrier under
authority granted by the federal government or
other state regulatory agency, shall be exempt
from the sales or use tax. The term “principally”
means more than 50% use. This exemption is
available regardless whether or not the carrier
sells its services for a fee, provided that all
requirements of Tenn. Code Ann. Section 67-6331 are met.
Publications
+
+
A motor vehicle is used in the service of cargo or
passenger transportation in interstate or foreign
commerce if it transports passengers or cargo
from:
+
+
labeling, or delivering of these items to the
postal
service
or
common
carrier,
maintenance of stock or newsgathering
activities. [Tenn. Code Ann. Section 67-6-329]
Publications printed on newsprint or bond
paper and advertising supplements or other
printed inserts delivered with the publications
on a biweekly or more frequent basis.
[Tenn. Code Ann. Section 67-6-329]
+
+
Magazines and books distributed to
consumers via the United States Postal
Service or common carriers by sellers or
distributors whose only Tennessee
activities involve the printing, storing,
Direct mail advertising, in the form of
discount coupons or advertising leaflets for
more than one business, distributed in
Tennessee from out of state. [Tenn. Code Ann.
Section 67-6-344]
+
A point of origin in another state or foreign
country to a point within this state.
A point of origin within this state to a point in
another state or foreign country.
A point of origin in another state or foreign
country, moving through Tennessee, to a point
in a different state or foreign country.
+
Packaging
Direct mail delivery charges, including
postage and mailing services, for direct
mailing to a mass audience printed materials,
such as advertising, are exempt if the delivery
charges are separately itemized on the
invoice. [Tenn. Code Ann. Section 67-6-102]
Hospital records, as defined in Tenn. Code
Ann. Section 68-11-302, provided to an
attorney, agent, or other authorized
representative acting in a lawsuit on behalf of
an exempt nonprofit hospital. [Tenn. Code Ann.
Section 67-6-329(a)]
+
Containers and packaging materials actually
accompanying products sold, without which
their delivery would be impracticable on
account of their character, and for which there
is no separate charge. [Tenn. Code Ann. Section
Railroad Tank Cars
+
67-6-102]
Pollution Control
+
6-329]
Sales of chemicals and supplies used in air
and water pollution control. [Tenn. Code Ann.
Sales in Interstate Commerce
Section 67-6-346]
+
Preservation of Historic Property
+
Materials used for the lining or protective
coating of railroad tank cars and charges made
for installing or repairing such linings or
protective coatings. [Tenn. Code Ann. Section 67-
Tangible personal property or taxable services
sold, given, or donated to an entity that is
directly or indirectly owned and controlled by
39
When title and possession of property passes
from seller to buyer outside Tennessee, the
sale is considered to be in interstate commerce
and exempt from state and local sales or use
tax in the state where the seller is located.
SALES AND USE TAX
OTHER EXEMPTIONS FROM SALES OR
USE TAX
(cont’d)
Telecommunications
Sales Tax Holiday
+
Tennessee holds an annual sales tax holiday from
12:01 a.m. on the first Friday of August through
11:59 p.m. on the following Sunday. During the
holiday, these items are exempt from sales and
use tax:
Charges made by local telephone exchanges to
long-distance resellers and cellular telephone
companies for local access and use of
intercompany facilities. [Tenn. Code Ann. Section
+
Charges for Internet access or information
services are exempt from sales and use tax.
+
+
+
+
67-6-342]
[Tenn. Code Ann. Section 67-6-102]
Transactions between Parent Companies and
Wholly Owned Subsidiaries
Clothing with a price of $100 or less per item.
School supplies with a price of $100 or less
per item.
School art suppliers with a price of $100 or
less per item.
Computers with a price of $1,500 or less per
item.
+
The sale, transfer, or lease of construction
machinery between parent companies and
wholly owned subsidiaries is not taxable
provided the Tennessee sales or use tax was
paid on the property at its initial purchase.
[Tenn. Code Ann. Section 67-6-311]
Articles normally sold together as a single unit,
cannot be priced and sold separately to obtain the
exemption. For shipping charges, if all items in a
shipment qualify individually for exemption, the
shipping charge is also exempt. If both exempt
and taxable items are shipped, the percentage of
the shipping charge determined to be allocated to
the taxable items is also part of the tax base.
+
Services, which would otherwise be taxable,
are not subject to the sales tax if the
corporations involved meet certain ownership
and control requirements. The services must
not be performed for profit. [Tenn. Code Ann.
Section 67-6-350]
Time-share Accommodations
Items specifically excluded from the holiday
exemption include computer software, clothing
accessories, protective equipment, sports and
recreation equipment, school instructional
material, and school computer supplies. The
exemption also does not apply to items used in a
trade or business or to items that are rented.
+
[Tenn. Code Ann. Section 67-6-393]
Specified Digital Products
Charges for the use of, or the value of any
time-share estate and any charges for the use
of or the value of the use of a perpetual
interest in specified entities whose substantial
purpose is the ownership or control of real
property, are not included in the definition of
“retail sale,” “sale at retail,” and “retail sales
price.” A definition of “time-share estate” was
added to Tenn. Code Ann. Section 67-6-102
and is consistent with the Tennessee Time
Share Act of 1981. [Tenn. Code Ann. Section 676-102]
+
Sales of specified digital products are exempt
from tax when the same product in tangible
form is exempt from tax. [Tenn. Code Ann.
Used Property
Section 67-6-329]
+
+
Specified digital products provided to the
customer without charge on a trial basis.
[Tenn. Code Ann. Section 67-6-329]
Sales of used factory-manufactured structures
to the extent the Tennessee sales or use tax
was paid on the initial purchase of the
structure in Tennessee. [Tenn. Code Ann.
Section 67-6-336]
Telephone Cooperatives
+
+
Sales of tangible personal property to
telephone cooperatives organized under
Tennessee law, for their own use or
consumption. [Tenn. Code Ann. Section 67-6-325]
Retail sales of used clothing by 501(c)(3)
nonprofit organizations that have been issued
an exemption certificate by the Commissioner
of Revenue. [Tenn. Code Ann. Section 67-6-348]
Utility Poles
+
Utility poles, anchors, guys, and conduits are
exempt from sales or use tax. [Tenn. Code Ann.
Section 67-6-329]
40
SALES AND USE TAX
OTHER EXEMPTIONS FROM SALES OR
USE TAX
(cont’d)
Vending Items
+
The proceeds of vending machines operated
for the benefit of a charitable nonprofit
organization by which merchandise of the
market value of not more than 25 cents is sold
or delivered to customers are subject to a gross
receipts tax of 1.5% rather than the sales or use
tax. [Tenn. Code Ann. Section 67-4-506]
Warranty Services
+
Parts supplied to consumers for replacement,
under warranty, of faulty parts are not taxable
if the sales or use tax was originally paid on
the item under warranty. [Tenn. Code Ann.
Section 67-6-324]
Watershed Districts
+
Sales of tangible personal property for use by
watershed districts. [Tenn. Code Ann. Section
67-6-328]
41
SALES AND USE TAX
displayed by the dealer and shall serve as
evidence of proper registration
FLEA MARKETS
Flea Market Registration
[Tenn. Code Ann.
Sections 67-6-102, 220]
The provisions of this section do not apply to
dealers who sell prepared foods at flea markets
for consumption.
Dealers who sell at flea markets will register and
pay an annual registration fee of $45. This
registration fee shall be credited against that
person’s actual annual sales tax liability. This
registration shall be valid at any location in the
state during the period for which it is issued.
Submission of Flea Market Returns
[Tenn. Code Ann. Sections 67-6-102, 220]
Dealers Registering Annually
If the annual sales tax liability is less than $45
for a dealer registering annually, that person is
not required to file an annual sales tax return. In
no case will any person receive a refund of any
portion of the registration fee. Should any
dealer’s tax liability exceed $45, then that dealer
will file an annual return. The return will be due
by January 20 and reflect the gross sales during
the preceding calendar year. A dealer beginning
business after January 1 will be responsible for
transmitting an annual return on or before
January 20 of the subsequent calendar year for
all months in which the dealer made taxable
sales or purchases through December 31 of the
preceding year.
Sales on Less than Permanent Basis
Dealers engaging in retail sales at flea markets
on less than a permanent basis may register, at
their option, as follows:
(A) On a quarterly basis for a fee of $15. This
registration fee is to be paid per location at which
retail sales are made. A person may register a
maximum of three times per year at each
location. A dealer, needing to register more than
three times per year at any one location, must
purchase an annual registration certificate. No
refund is payable from the registration fee. This
registration fee shall, however, be credited
against any such person’s actual sales tax
liability.
Dealers Registering Quarterly or Monthly
(B) On a monthly basis for a fee of $5. This
registration fee is to be paid per location at which
retail sales are made. A person may register a
maximum of three times per year at each
location. A person needing to register in excess
of three times must purchase either a quarterly or
an annual registration certificate. No refund is
payable from the registration fee. This
registration fee shall, however, be credited
against any such person’s actual sales tax
liability.
Dealers registering on a quarterly or monthly
basis shall file quarterly returns if their tax
liability exceeds the amount of the registration
fees paid during that quarter. The quarterly
returns will be due by the 20th day of the month
next following the end of each quarter and will
show the gross sales from all taxable sales or
purchases during the preceding quarter.
At the time of transmitting any of the returns, the
dealer shall remit the amount of tax due. Failure
to so remit the tax or to file the return will make
the tax delinquent. Failure to remit the tax or to
file the return will subject the dealer to penalties
and interest and the possibility of further actions.
The flea market operator is responsible for
ensuring that all dealers operating at the flea
market are properly registered with the
department. The flea market operator is
empowered to accept applications for registration
with all required fees. The operator will supply
the dealer with a copy of the application
for registration, together with evidence of the
amount of fee submitted. This copy shall be
Penalty for Late Filing
The flea market operator will submit the
registration fees collected on the operator’s
monthly return to the commissioner, together
42
SALES AND USE TAX
FLEA MARKETS (cont’d)
The term “negligent” includes, but is not limited
to, any failure of the flea market operator to
make a reasonable attempt to ensure that every
dealer renting space from the operator is properly
registered for tax purposes. A determination by
the commissioner that a flea market operator has
been negligent shall be deemed presumptively
correct. Such determination may be rebutted only
if the flea market operator makes a showing of
due care. As used, “due care” means that the flea
market operator has made every reasonable
effort to ensure that every dealer renting space
from the operator is properly registered for tax
purposes.
with the registration applications received by the
operator. Failure to comply will subject the flea
market operator to the penalty provided by law
for delinquent tax payments.
The penalty to the dealer will be $10 per booth
per day for violations of tax remittance
requirements. The department may also impose a
penalty upon the flea market operator of $10 per
booth per day, up to a maximum fine of $100 per
day at any location where it is determined by the
commissioner that the flea market operator has
been negligent in allowing dealers to operate at
the flea market without proper registration.
43
SALES AND USE TAX
CONTRACTORS
Suppliers making sales to contractor-dealers and
delivering the materials to a job site for use, or
tagging particular supplies for a particular job,
must collect the applicable sales tax on those
sales, even if the contractor/dealer presents a
certificate for resale. [Sales Tax Rule 1320-5-1-.08]
Generally, contractors are persons who perform
installations of personal property as an
improvement to realty. Contractors may include
persons performing management services. The
term “contractor” also includes subcontractors as
well.
Contractors as Consumers
Exemptions
[Tenn. Code Ann. Sections 67-6-102, 209,
384]
[Tenn. Code Ann.
Section 67-6-209]
Under specific circumstances outlined in the law,
contractors or subcontractors are not liable for
the sales or use tax on construction materials.
These specific exemptions are:
Contractors and subcontractors who improve
realty, or otherwise use personal property in the
performance of a contract, are considered the
users and consumers of the materials that are
used or installed as part of the real property. If
the sales tax is not paid when the materials are
purchased, the contractor or subcontractor owes
the use tax on the cost of their materials. The
labor costs of installation or erection and markup
on materials are not taxable. The sales or use tax
cannot be itemized separately and collected from
the contractee.
+
+
Liability for the Sales or Use Tax
If materials are purchased by a church and are
used in church construction, the materials are
exempt from both state and local sales or use
tax. Similarly, carpet installed by a contractor
for church construction is exempt.
If materials are purchased by a private,
nonprofit college or university and are used in
college or university construction, they are
exempt from the state sales or use tax but not
from the local tax.
Specific exemptions from sales or use tax are
available to contractors for specific types of
contracts. Examples are:
Generally speaking, the contractor or
subcontractor remains liable for the sales or use
tax on materials used in providing the contracted
service even when the contractee is an otherwise
exempt entity, such as federal, state, county, or
city
governments,
and
most
exempt
organizations. This is true even when the taxexempt entity buys the materials and turns them
over to the contractor or subcontractor for use.
+
+
+
+
A contractor-dealer is one who improves realty
and is also engaged in selling building materials
and supplies to other contractors, consumers, or
users. Materials that may be sold at retail to other
users can be purchased on a resale certificate;
sales tax will be collected and remitted on the
retail sales.
Electrical generating facilities and distribution
systems owned by a government entity.
Wastewater and sewage systems, and sanitary
sewer pipes owned by a county or city.
Coal gasification plants and distribution
systems owned by government entities.
A neutron spallation facility owned by the
federal government.
Tax on Fabricated Materials
Contractors fabricating raw materials for use in
building construction are liable for the sales or
use tax on the cost of the raw materials. On the
other hand, contractors fabricating materials for
use in non-building projects, such as bridge steel,
are liable for tax on the fabricated value of the
materials.
Contractor-dealers who cannot separate the
portions of their materials and supplies that they
will consume in fulfillment of their contracts and
those they will resell to other consumers may
give a resale certificate to the seller of their
materials and supplies. The contractor-dealer
will then collect and report sales tax on the
materials resold and use tax on the materials
used in fulfillment of their contracts.
44
SALES AND USE TAX
CONTRACTORS (cont’d)
15, 2002. Vendors of materials who have a
lump sum or fixed price contract to provide
materials are required to collect and remit the
new rate of tax.
Asphalt Fabricators
Asphalt fabricators must remit use tax based on
the fair market value of asphalt they use in
fulfilling their contracts. The tax amount must be
computed on the amount the fabricator would
charge for the asphalt if it were sold and
delivered in an arms length transaction. The
Department of Revenue will accept as fair
market value $5 per ton plus the cost of materials
as the tax base.
General or prime construction contractors
making improvements to real property under a
lump sum or unit price construction contract
entered into prior to July 15, 2002, or contracts
awarded by the state or a political subdivision
pursuant to a bid opening which occurred prior
to July 15, 2002, if the provisions of such
provide that the amount payable remains fixed
without regard to costs, may file a claim for
refund with the Department of Revenue for tax
paid to any of the contractor’s vendors at a rate
in excess of the 6% state rate and the applicable
local option sales tax in effect July 1, 2002. A
claim for refund must be supported by a copy of
the contract that was signed prior to July 15,
2002, and documentation in the form of
schedules and invoices to support the payment
of sales tax in excess of the 6% state rate. A
separate claim form will be required for each
contract.
Asphalt fabricators that sell asphalt to other
contractors or customers without performing
installation and who also install asphalt may
purchase their materials on a certificate of resale.
The asphalt contractor must collect sales tax on
the total sales price of the asphalt fabricated and
sold to other contractors. If the asphalt fabricator
uses the asphalt rather than sells it, the asphalt
fabricator will owe the use tax as previously
indicated.
Use of asphalt by an asphalt fabricator or
installer in a contract with a government or other
tax-exempt entity subjects the fabricator or
installer to payment of the use tax. Use tax is due
even if the asphalt is provided by the government
or tax-exempt entity. However, if asphalt is sold
directly to the exempt entity with no installation
or use by the seller, the purchase is tax-exempt.
Subcontractors entering into lump sum or unit
price contracts to make improvements to realty
prior to September 1, 2002, with general or
prime contractors that have entered into
contracts described in the preceding paragraph
prior to July 15, 2002, may file a claim for
refund with the Department of Revenue for tax
paid in excess of the 6% state rate and the
applicable local option sales tax in effect July 1,
2002. A claim for refund must be supported by
a copy of the subcontractor’s contract that was
signed prior to September 1, 2002, a copy of the
contractor’s contract entered into prior to July
15, 2002, and documentation in the form of
schedules and invoices to support the payment
of sales tax in excess of the 6% state rate. A
separate claim form will be required for each
contract.
[Tenn. Code Ann. Section 67-6-209 and Tenn Comp R. &
Regs 1320-1-1.03(1)(a)]
Installation of Industrial Machinery
Contractors installing qualified tax-exempt
industrial machinery for qualified manufactures
must apply to the Department of Revenue for
their own industrial machinery authorization
number for each project.
Lump Sum or Unit Price Construction
Contracts on Realty in Effect on July 15, 2002
Contractors and subcontractors who have made
purchases without the payment of tax on
tangible personal property that will be used in
the performance of qualifying lump sum or unit
price construction contracts that became
binding prior to July 15, 2002, should report
All construction contractors and subcontractors
will pay to their vendors the increased state tax
of 7% on materials purchased on or after July
45
SALES AND USE TAX
CONTRACTORS (cont’d)
Qualified Disaster Restoration
and remit the use tax at the 6% state rate and the
applicable local option tax rate. Dealers are
required to keep records to demonstrate the
tangible personal property was subject to the 6%
state rate. Such records include a copy of the
contract with the dates that the contract was
entered into, records indicating the materials
used in the performance of the qualifying lump
sum contract, and records demonstrating that the
state rate of 6% and the applicable local tax rate
was reported and paid to the department
An entity that engages in a qualified disaster
restoration project in Tennessee is eligible for a
credit of all Tennessee state sales or use tax
except for one-half percent on the sale or use of
qualified tangible personal property used in the
project.
A “qualified disaster relief project” is a project
undertaken in connection with the restoration of
real or tangible personal property located within
a declared federal disaster area that suffered
damages as a result of the disaster. The project
must involve a minimum of $50 million or more
in the restoration of the property.
“Lump sum or unit price construction contract”
is defined as a written contract for the
construction of, or improvements to, real
property under which the amount payable to the
contractor, subcontractor, or material vendor is
fixed without regard to costs incurred in the
performance of the contract. apply to equipment
or other property used to conduct the test. [Tenn.
The investment may include, but is not limited
to, the cost of constructing or refurbishing a
building and the cost of building materials, labor,
equipment, furniture, fixtures, computer
software, and other tangible personal property
within the building. The investment may not
include land or inventory.
Code Ann. Section 67-6-209]
Property Owned by the United States
Government
“Qualified tangible personal property” means
building materials, machinery, equipment,
computer software, furniture, and fixtures used
exclusively to replace or restore real or tangible
personal property that suffered damages as a
result of the disaster and purchased or leased
prior to substantial completion of the qualified
disaster restoration project.
An exemption from contractor’s use tax is
available for any tangible personal property that
is owned by the United States and is provided to
a contractor on a temporary basis to be tested,
provided that the exemption applies only to
contracts awarded under the Small Business
Innovation Research Program, and does not
apply to equipment or other property used to
conduct the test. [Tenn. Code Ann. Section 67-6-209]
“Qualified tangible personal property” does not
include payments with respect to leases of
qualifying tangible personal property that extend
beyond substantial completion of the disaster
restoration project.
There is also an exemption from contractor’s
use tax for tangible personal property that is
provided to a contractor on a temporary basis to
be tested, provided that the testing facility is
owned by the United States or any agency
thereof. The exemption does not apply to
property consumed or destroyed during the test.
No other sales or use tax credits, exemptions, or
reduced rates that may be available may be taken
as a result of the same purchases or minimum
investment.
“Testing” is limited to diagnostic, analytical,
and/or scientific testing in a controlled
environment dedicated to such testing for the
purpose of providing information and findings
supportive of the aerodynamic, hypersonic, aero
propulsion, space, missile, aircraft, and
aerospace technologies and/or industries. [Tenn.
Code Ann. Section 67-6 209]
Persons seeking the credit must submit an
application to the Commissioner of Revenue to
qualify the project as a qualified disaster
restoration project, together with a plan
describing the investment to be made. In the case
of a leased building, the lessor must also submit
an application and plan if any taxes paid by the
lessor are to be claimed as part of the credit.
46
SALES AND USE TAX
CONTRACTORS (cont’d)
Upon approval of the application and plan, the
commissioner will issue a letter to the applicant
stating that the applicant has tentatively met the
requirements for the credit.
To receive the credit, the taxpayer must submit a
claim for the credit and documentation showing
that Tennessee sales or use taxes have been paid
to the state on qualified tangible personal
property. The claim may include taxes paid by
the taxpayer, the lessor in the case of a leased
building, contractors, and subcontractors.
Documentation verifying that the minimum
investment requirements have been met can
include employment records, invoices, bills of
lading, lease agreements, contracts, and all other
pertinent records and schedules required by the
commissioner.
The commissioner will review the claim for
credit and notify the taxpayer of the approved
credit amount and directions for taking the
credit. Such notification must be given before the
taxpayer can take the credit.
If any of the qualifying requirements for this
claim are not met, the taxpayer will be subject to
an assessment of any sales or use tax, penalty,
and interest that would have been due and for
which credit was taken.
The taxpayer does not have to establish its
commercial domicile in Tennessee to be eligible
for the credit.
47
SALES AND USE TAX
RETURNS AND PAYMENTS
Electronic Data Interchange (EDI)
Returns and Payment
[Tenn. Code Ann. Sections
67-6-504, 505, and 506]
The Electronic Data Interchange program is a
method of filing tax returns electronically from
one computer to another. Tennessee sales or use
tax taxpayers that are required to make their tax
payments by Electronic Funds Transfer are
required to file their returns through EDI.
Taxpayers that choose to voluntarily file their
returns via EDI must remit their tax payments
electronically. All other Tennessee sales or use
tax taxpayers have the option of filing their
returns through EDI.
After completing the registration process, you
will receive reporting information. A computergenerated sales or use tax return will be mailed
to you monthly unless otherwise instructed. You
must file a timely return, beginning with the date
entered in Item 4 of the application, even if no
sales were made and no tax is due.
Sales or use taxes are due on the first day of each
month for the preceding month. The last day for
returns to be timely filed with the Department of
Revenue, on forms provided by the department,
is the 20th of each month. The amount of tax due
will be sent with the return. Failure to do so will
make the return delinquent. The postmark date
on the envelope in which the return is mailed is
considered the filing date.
The EDI setup involves several steps including
selecting a certified software vendor or Internet
tax service provider, completing the registration
process, establishing communications, and
performing a test of the chosen software. It is the
taxpayer’s responsibility to choose a software
vendor. Internet tax services provide or develop
its own software.
The commissioner may decide, when it is in the
best interest of the state, that specific taxpayers
may file returns on other than a monthly basis.
The commissioner may also, under emergency or
extraordinary reasons, extend a taxpayer’s time
for filing a return for up to 30 days. In the latter
case, any interest payment will be added to the
amount of payment due.
Each taxpayer that files sales tax returns
electronically must have a Registration for Sales
Tax Electronic Filing Application on file with
the Department of Revenue. If using a software
vendor, the taxpayer must also complete a
Transmission Specification Questionnaire for the
department. Additionally, each taxpayer that
pays sales taxes electronically must have an
Electronic Funds Transfer (EFT) agreement on
file with the department. Taxpayers who file
electronically must pay electronically.
If a taxpayer has paid a legally imposed sales or
use tax to another state for property imported
into this state, that payment may be claimed as a
credit against the tax on the Tennessee return.
The taxpayer must be able to furnish the name of
the vendor from whom the property or service
was purchased and an affidavit or bill of sale
showing the tax has been paid. [Tenn. Code Ann.
Software vendors and Internet tax services
usually offer both “Filing Only” and “Filing and
Payment” options. If the “Filing Only” option is
selected, the software or tax service will only
initiate a transaction for filing the return. The
associated EFT payment will need to be initiated
via the department’s EFT program.
Section 67-6-507]
If a taxpayer fails to report and pay the sales or
use tax as required or files a grossly incorrect or
fraudulent report, the commissioner will estimate
the amount of tax due plus interest and penalties,
if applicable, and the taxpayer will be assessed
accordingly. [Tenn. Code Ann. Section 67-6-517]
To avoid late delivery of the return and payment,
taxpayers using a tax service must contact their
provider for cutoff deadlines. Taxpayers using
software must transmit to the department’s filing
service by 4:15 p.m. Eastern Time on the
business day prior to the due date for “Filing
and Payment” transactions, and by 11: 59
p.m. Eastern Time on the due date for “Filing
Only” transactions.
48
SALES AND USE TAX
RETURNS AND PAYMENTS (cont’d)
Online Filing
Electronic Funds Transfer (EFT)
Another option for filing returns is online filing
through the state’s Web portal. Online filers can
file all periodic returns and make payments
directly from checking accounts. They can also
update business information, such as location
and mailing addresses. They can also file past
due and amended returns. Returns can be filed
right up to midnight of the return due date to
ensure timely filing. Online filing will also
calculate the return and provide an immediate
confirmation of receipt by the Department of
Revenue. Online filing is free without
purchasing additional software. Information
about initiating online filing is available on the
department’s Web site.
The Tennessee General Assembly has authorized
the Commissioner of Revenue to require certain
tax payments to be made by funds readily
available to the state. Electronic Funds Transfer
is a method approved by the Commissioner for
accomplishing this. Rules for the administration
of this legislation went into effect on January 1,
1992.
Two payment options are available that use the
Automated Clearing House (ACH) system to
electronically transfer tax payments. The ACH
system is a nationwide network designed for this
purpose and is the preferred transaction method
for many financial institutions and corporations.
A third payment option, federal wire transfer,
should be used only as an emergency option.
Mailing Date
If the due date for a return falls on Saturday,
Sunday, or a holiday, the due date is
automatically extended until the next business
day. Returns mailed through the United States
mail or transmitted by an alternate delivery
service will be considered filed and received on
the date shown by the post office cancellation
mark on the envelope or other appropriate
wrapper containing it. If the cancellation mark is
not legible or is missing, then the return will be
considered filed on the date the envelope or
wrapper is stamped as “Received” by the
Department of Revenue. [Tenn. Code Ann. Section 67-
Penalty and interest charges may be incurred if
the taxpayer fails to remit by the chosen method.
No matter which method is chosen, the taxpayer
must complete the Electronic Funds Transfer
Agreement with the Department of Revenue.
The department will notify taxpayers that they
are required to file electronically if the
taxpayer’s average payment is $1,000 or more. A
taxpayer may also choose to participate
voluntarily when not required to do so.
Voluntary participants are subject to the same
rules and regulations as persons required to
participate. [Tenn. Code Ann. Section 67-1-703(b)]
1-107]
Penalty and Interest
A taxpayer filing returns for multiple locations
and required to file returns electronically from
one location, outlet, or place of business must
with multiple locations may be required to file
electronic returns and make electronic payments
from each of the taxpayer’s locations. [Tenn. Code
A penalty is imposed for the late filing of a tax
return and for late payment of taxes owed the
state. The penalty is computed at a rate of 5% per
month, or any portion of a month, from the due
date until the date the taxes are paid. The
maximum penalty is 25% of the tax amount due;
the minimum penalty is $15.
Ann. Section 67-6-504(f)]
Beginning August 1, 2007, the Department of
Revenue will offer payment warehousing for
sales and use tax payments. Taxpayers will be
able to file a return upon its completion and
delay the accompanying payment until it is due.
Additional information on EDI and EFT, and the
required forms, may be obtained by contacting
the Department of Revenue’s Electronic
Commerce Unit at (866) 368-6374.
Interest is imposed on any taxes not paid by the
date required by law even though a filing date
extension has been granted. The interest rate on
deficient tax payments is established each year
on July 1st.
49
SALES AND USE TAX
not levy on the taxpayer’s property to satisfy the
assessment.
RETURNS AND PAYMENTS (cont’d)
When a taxpayer fails to submit a timely return
and penalties and/or interest are applied, the
penalties and interest become a part of the tax
due. The Department of Revenue has no
discretion to refund or waive any interest
charges. [Tenn. Code Ann. Section 67-1-804]
If the taxpayer timely requests an informal
conference, the 90-day period for filing suit stops
running until a conference decision is issued in
writing. After the decision is issued, the 90-day
period recommences. The 90-day stay for most
collection activity is likewise extended. The
taxpayer is not required to request an informal
conference before contesting an assessment in
court.
Audits and Assessments
All tax returns filed with the Department of
Revenue undergo some type of audit or
examination to ensure that the correct tax has
been paid. This may be a computer math audit, a
manual examination by a trained auditor, or both.
The taxpayer will be contacted if additional
information is needed to complete the audit. The
taxpayer will receive written notification of any
adjustments made to the return.
If the taxpayer does not file suit within the 90day period to contest the assessment, the
taxpayer may pay the assessment, request a
refund, and then file suit in chancery court within
6 months from the date the request is denied or
deemed denied by operation of law. Procedures
outlined in Tenn. Code Ann. Section 67-1-1802
must be followed.
Taxpayers selected for field audits will be
contacted by the department to set up a
convenient time for the audit. Taxpayers will
receive advance notice of which records will be
needed for the audit. A field audit generally
involves examination of documentation and
records used to file returns for three previous
years.
Keeping Records
Taxpayers are required to establish and maintain
records that are adequate for auditors to use in
determining the correct amount of a business’s
tax liability This responsibility includes not only
those liable for sales tax but also businesses or
individuals subject to use tax – persons
importing untaxed tangible personal property for
storage, use, or other consumption in the state.
Records of business transactions must be kept
for a minimum of three years from December 31
of the year in which the associated sales and use
tax return was filed. [Tenn. Code Ann. Section 67-6523] and must include:
At the completion of the audit, the auditor will
leave the taxpayer a written report for review.
Once the auditor has made any necessary
changes to the report, the notice of assessment
for any underpaid taxes will be issued. [Tenn. Code
Ann. Section 67-1-1301]
Right to a Conference
[Tenn. Code Ann. Section
67-1-1801]
+
Taxpayers are entitled to an informal conference
to discuss an assessment. If this request is made
in writing within 30 days from the date of the
Notice of Assessment, the conference must be
granted. If made after 30 days, the conference
may be granted at the commissioner’s discretion.
+
+
Taxpayers wishing to contest an assessment
without making payment have 90 days following
the mailing of the notice of assessment to file
suit in chancery court, as provided by statute.
Interest will continue to accrue at the prevailing
rate until payment is received. A lien may be
filed against the taxpayer’s property during this
90-day period, but the department generally may
+
+
A daily record of all cash and credit sales
including those under a finance or installment
plan.
A record of the amount of all merchandise
purchased including bills of lading, invoices,
and purchase orders.
A record of all deductions and exemptions
allowed or claimed including exemption and
resale certificates.
A record of all property used or consumed in
the conduct of the business.
A true and complete yearly inventory of the
value of stock on hand.
All such records shall be open for inspection, at
all reasonable hours, to the Commissioner of
Revenue or authorized representatives of the
commissioner. [Tenn. Code Ann. Section 67-6-523]
50
SALES AND USE TAX
RETURNS AND PAYMENTS (cont’d)
If the taxpayer maintains any such records in an
electronic format, the taxpayer shall comply with
reasonable requests by the commissioner, or the
commissioner’s authorized agents, to provide
those electronic records in a standard record
format. [Tenn. Code Ann. Section 67-1-113]
51
SALES AND USE TAX
TENNESSEE TAXPAYER BILL OF RIGHTS
You, as a taxpayer, have certain rights. Your rights are so important that, in 1992, the Tennessee General Assembly enacted legislation to spell
them out. The Tennessee Taxpayer Bill of Rights summarizes state tax laws and revenue rules with which the Department of Revenue must
comply while serving you.
TAXPAYER RIGHTS
[Tenn. Code Ann. Section 67-1-110]
Tennessee guarantees that you, the taxpayer, have the right to:
• Fair and courteous treatment from all employees of the Department of Revenue.
• Tax forms and information written in plain language.
• Prompt and accurate responses to all inquiries and requests for tax assistance.
• Access public records not confidential or otherwise protected by law, and to review such records at an appropriate time and location.
• Obtain all tax information relating to your account, including financial information, which is kept confidential, except to the extent required by
law.
• Tax notices that clearly explain the amount being billed.
• Clear rules and procedures to resolve tax problems.
• An informal conference, as provided by law, with the Commissioner of Revenue or her delegate to dispute any tax assessment. (Taxpayers have
the right to be represented by an attorney, certified public accountant, or other representative at such conference).
• Assurance that employees of the Department of Revenue are not paid, promoted, or in any way rewarded on the basis of assessments or
collections.
• Suggest ways the Department of Revenue may better serve the public.
• Prompt notification of any refund to which you are entitled.
• Assistance through statewide meetings held by the Department of Revenue in convenient locations in which taxpayers are allowed to ask
questions and voice opinions.
• Notice and demand for payment 10 days before the Department of Revenue makes any collection effort, except as otherwise provided by law.
• 30 days notice before seized assets are liquidated, except as otherwise provided by law.
TAXPAYER’S RIGHT TO A CONFERENCE
[Tenn. Code Ann. Section 67-1-1801]
Taxpayers are entitled to an informal conference to discuss an assessment. If this request is made in writing within 30 days from the date of the
Notice of Assessment, the conference must be granted. If it is made beyond the 30 days, the conference may be granted within the discretion of
the Commissioner.
Requests for conferences may be sent by mail or fax transmittal to:
Administrative Hearing Office
Tennessee Department of Revenue
500 Deaderick Street, Room 1240
Nashville, TN 37242
Phone (615) 741-3810
Fax (615) 741-6463
Taxpayers who wish to contest an assessment without making payment have 90 days to file suit in chancery court, as provided by
statute. Interest will continue to accrue at the prevailing rate until payment is received. A lien may be filed against the taxpayer’s
property during this 90-day period, but the department generally may not levy on the taxpayer’s property to satisfy the assessment.
If the taxpayer timely requests an informal conference, the 90-day period for filing suit stops running until a conference decision is
issued in writing. After the decision is issued, the 90-day period resumes running. The 90-day stay for most collection activity is
likewise extended. The taxpayer is not required to request an informal conference before contesting an assessment in court.
If the taxpayer does not timely file suit to contest the assessment, the taxpayer may pay the assessment, request a refund, and then
file suit in chancery court for a refund in accordance with the procedures set forth in Tenn. Code Ann. Section 67-1-1802.
52
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