Tennessee Sales Tax—Requirements, Compliance, and Penalties

The state of Tennessee relies heavily on sales and use tax as a source of revenue. The Department of Revenue reports that Tennessee’s sales tax accounts for 60% of all of the taxes collected in the state. As a result, businesses that fail to collect or pass through sales tax can have a negative economic impact on the state as a whole and their community in particular. 

While complying with state tax laws can be confusing, particularly for new business owners who haven’t navigated these requirements before, failing to do so can have significant consequences.

As a business owner, it’s important for you to understand your obligations and rights when it comes to Tennessee sales tax. Keep reading to learn more about important Tennessee sales tax requirements, the penalties of non-compliance, what to expect from audits, and how to address sales tax issues. 

If you’re facing sales tax issues, such as penalties, audits, or compliance challenges, it’s time to turn to the team at Damiens Law. Our team specializes in helping Tennessee businesses get and stay compliant to avoid disputes with the Department of Revenue. Call us at 601-476-1361 to set up a consultation now. 

An Overview of Tennessee Sales Tax

Tennessee sales tax is split into two parts: the state’s portion and the local portion. Across the state, the tax rate is 7%. Each county or city, depending on the area, has its own local tax rate that is added to the state tax rate to determine the region’s total sales tax. Each municipality’s local tax rate must be a multiple of 0.25 and cannot be higher than 2.75%, meaning that no region may have a sales tax higher than 9.75%. 

Currently, much of the state has a local rate of 2.75%, although some communities in the eastern half of the state have local tax rates as low as 2%.

Sales Tax Collection

Any business that sells taxable goods or services in Tennessee must collect sales tax. This includes online sellers that have nexus in Tennessee. A business has sales tax nexus if it maintains a strong business connection with the state of Tennessee. 

Businesses with physical locations in Tennessee automatically meet this requirement even if they have fairly low sales thresholds. Remote sellers without a physical presence in Tennessee meet the threshold for sales tax nexus if they sell more than $100,000 in goods or services per year.

The vast majority of tangible products in Tennessee are taxed, but there are a few exceptions. Food paid for with food stamps or WIC vouchers is not taxed. Seller discounts for which the seller is not reimbursed are tax-exempt. Materials used for packaging are exempt from sales tax if the product is sold in its packaging directly to consumers. Lottery tickets are also tax-exempt.

Retail sales of food and food ingredients are taxed at a state rate of 4%, rather than 7%. Items that are not considered food or food ingredients and are taxed at the 7% rate include:

• Alcoholic beverages
• Tobacco
• Candy
• Dietary supplements
• Prepared food

Certain services are also taxable in Tennessee. Taxable services include the repair and installation of tangible personal property, lodging services, short-term space rental, cleaning of tangible personal property, telecommunication services, and parking and storage of motor vehicles.

Registering With the State and Collecting Sales Tax

Companies that must register with the Tennessee Department of Revenue can do so electronically via the Tennessee Taxpayer Access Point. This is also where businesses can pay their sales and use taxes.

How the State Enforces Sales Tax Collection

Tax audits are stressful and grueling experiences, no matter what type of taxes are being examined. But when it comes to sales tax audits, there is a substantial amount of money at stake if the auditor finds something amiss in your records. It’s important to understand how Tennessee tracks sales tax compliance and what they look for in an audit.

Factors That Prompt an Audit

A number of different factors can result in your business being audited. First, consider your industry—if your business is in an industry that has a high rate of non-compliance, either locally or nationally, you may be unlucky enough to be chosen. Businesses that deal largely in cash are often targeted, as it is much easier to do transactions “under the table” to avoid sales tax requirements. Industries subject to unusual or highly complex sales tax requirements may also be targeted since the risk of unintentional non-compliance is higher.

If your tax reports indicate unusual trends or put you far outside the norm for your industry or location, the Department of Revenue may choose you for an audit. For example, if your sales numbers vary widely between your state reports and your federal reports, that could be a red flag to auditors. Businesses with a high number or percentage of exempt sales may also be caught in an auditor’s crosshairs. Finally, businesses with an unusual number of refunds or credits are at a higher risk of being audited.

Of course, there’s always the possibility of being chosen at random. You could be in a low-risk industry, have numbers well within industry norms, and still get chosen for an audit.

Sales Tax Audit Process

Your audit may begin with the receipt of a Tennessee sales tax audit notice. This notifies you that your business is being audited and gives you the chance to begin preparations. The notice should tell you what time period they are auditing and any specific records they will be auditing. 

Perhaps one of the most important parts of an audit is records maintenance. Whether you’re the subject of a field audit or office audit, you have to preserve records as required by Tennessee law. The auditor may request these records:

• Invoices and other records of goods sold
• Daily records of cash and credit sales
• Records of purchased merchandise
• Records of deductions and exemptions
• Records of property used during business operations
• Yearly inventory of stock kept on hand

This is just an overview of commonly requested records; the auditor may request any other financial records or documents to verify your compliance. Be ready to supply purchase journals, bank statements, sales invoices, federal and state tax returns, sales tax returns, general ledgers, vendor invoices, cash register tapes, and exemption certificates.

Once the auditor has your documents in hand, they will cross-check and compare documentation to ensure accuracy. If they find any discrepancies, they will examine those further and try to find the source of the discrepancy.

In addition to looking for discrepancies, the auditor will comb through records to verify that you have paid taxes on all necessary transactions.

After the auditor has concluded their investigation, you will be notified of the results of the audit.

What Happens After an Audit

Depending on what the auditor uncovered during their investigation, you will have one of two outcomes. First, the auditor may decide that you are fully compliant and all records are accurate and complete. If no changes are required, you do not need to make any adjustments or pay any fees or penalties.

If the auditor finds any issues or discrepancies, they will present those to you and explain how the necessary changes will affect your taxes. Once they have accounted for the necessary adjustments, you will find out what you owe to the Department of Revenue. You can either accept their decision and pay what you owe or you can appeal their assessment.

Consequences of Failing to Collect or Pay Sales Tax

The Department of Revenue reserves the right to impose penalties on businesses that fail to abide by sales and use tax requirements. Here are the consequences of not paying your sales tax.

Penalties

The Department of Revenue assesses three types of penalties:

• Delinquency penalty: This is applied when taxpayers do not file returns at all, file returns late, or do not pay taxes on time. The penalty is 5% of the amount owed per month, up to a maximum of 25% of the initial tax amount. The minimum penalty is $15.
• Negligence penalty: The negligence penalty comes into play when taxpayers do not file returns with the required schedules and disclosures. The Department of Revenue considers it negligence when a taxpayer does not make a reasonable effort to comply with the law. This results in a penalty of 10% of the underpayment.
• Fraud penalty: When a taxpayer intentionally and willfully evades sales tax via deceitful practices, the Department of Revenue may impose a fraud penalty. The penalty is 100% of the underpayment.

Note that the Department of Revenue does have the right to waive penalties that are not caused by willful disregard of tax law or negligence. Those who believe their business may qualify for a penalty waiver must provide a good and reasonable cause.

Interest

When a business does not pay sales tax on time, interest is applied to the amount due. Legally, the Department of Revenue cannot waive interest. The interest rate is set on an annual basis. For the fiscal year ending June 30, 2025, the interest rate is 12.5%. This can rapidly drive up your sales tax bill.

Liens and Levies

Should a business fail to pay sales and use tax, the Department of Revenue generally goes to significant lengths to collect the balance owed before taking more drastic action. If other efforts fail, they may use levies and liens on business assets to collect what they are owed.

How to Address Sales Tax Issues in Tennessee

If you are charged additional taxes and penalties due to an audit, you can take steps to minimize your financial losses and protect your business’s financial stability.

Appealing Penalties and Audits

If an audit results in a proposed assessment that leaves you with a sizable tax bill, you have just 30 days to request an appeal with the Department of Revenue. You may also appeal penalties if you can prove that the reason for the penalty was not applicable. For example, if you were charged a penalty for failing to pay on time but you have proof of timely payment, the Department of Revenue may remove the penalty.

Payment Plan Options

Taxpayers with unpaid tax liabilities can request a payment plan online via TNTAP. You can use the “Request a Payment Plan” button to select a due date, choose either a payment amount or a number of monthly payments, and choose a down payment amount. In some cases, you may be required to make a down payment. TNTAP will lay out the details of your payment plan, including the amount of payments, the payment amount, and the due date, so you can review the details before agreeing. 

You can then provide banking details for automatic withdrawals. The Department of Revenue will notify you of their decision.

Penalty Abatement

The Department of Revenue may waive penalties if a taxpayer has good and reasonable cause to request penalty abatement. Examples of good and reasonable causes include:

• Good faith misinterpretation of the law or relevant regulations, resulting in unpaid sales taxes
• Good faith reliance on misrepresentations made by a business associate whom the taxpayer had no reason to question
• Penalties resulting in factual mistakes that the taxpayer then addressed with the Department of Revenue by paying past-due taxes and interest

Voluntary Disclosure Agreement

The Department of Revenue offers a Voluntary Disclosure Agreement program to qualifying taxpayers. It can be used for any taxes administered by the Department of Revenue, including sales tax. When you apply, you can resolve previous tax liabilities and make a plan to pay taxes on time in the future. The program offers a limited look-back period, limiting the amount you owe. 

Those accepted into the program can also have their penalties abated or reduced. To apply, the taxpayer can email a request to the voluntary disclosure program or submit their request in writing to the Discovery Unit. They must include:

• Activities the company has in Tennessee
• Statement of taxes registered with the Department
• The company’s fiscal year-end or calendar year
• Information on any contact made by the Department of Revenue
• Whether or not sales tax was previously collected
• If the company is requesting to remit sales tax on tangible personal property

Upon receiving this information, the Department will generally reach out within 20 days. To qualify for this program, you must not have already been the subject of a sales tax audit or have been contacted by the Department of Revenue for a previous tax liability.

Ensuring Future Compliance

After addressing any current sales tax issues, it’s crucial to set up a plan for future compliance to avoid future discrepancies, penalties, or other issues. Keeping thorough, detailed sales records can make any subsequent audits go much more smoothly while ensuring that you are collecting and paying the correct amount in taxes. 

Businesses also benefit from using separate accounts to differentiate between business revenue and sales tax funds that must be passed through to the government. Finally, rather than relying on manual calculations, many business owners avoid errors and penalties by calculating and tracking sales taxes with accounting software.

It’s also important to stay up-to-date on Tennessee tax laws and requirements. Working with a tax attorney or CPA can help you stay on top of these changes and make any necessary changes in your business’s operations.

Why You Should Choose Damiens Law for Your Sales Tax Issues

At Damiens Law, we offer our clients extensive expertise in Tennessee tax laws. Our in-depth knowledge of sales tax rules, protocols, and regulations helps our clients avoid penalties and unexpected tax bills. Whether you need help addressing a basic sales tax issue or you need to tackle complex industry-specific sales tax requirements, our experience in Tennessee tax law is unmatched. We also have extensive experience with Mississippi taxes including MS sales tax as well as experience in other states.

If you are the subject of an audit, we can help you prepare for an audit by gathering documentation, looking for discrepancies, and preparing for meetings with Department representatives. Should you face unexpected tax bills or penalties, we can help you negotiate agreements that help you keep your business financially stable.

As a Tennessee business owner, resolving sales tax issues as quickly as possible is essential for avoiding excessive penalties and interest. The team at Damiens Law is here to learn more about your case and provide the targeted, personalized assistance you need. Schedule a consultation with Damiens Law to protect your business and achieve compliance with Tennessee sales tax laws. Call us at 601-476-1361 or get in touch online to take the first step.