Here are the most common scenarios our customers at TaxJar (particularly if you use Amazon’s Fulfillment by Amazon) need to understand when it comes to potentially having to pay sales tax in Tennessee.
You’re an out-of-state seller
If you operate your business in another state and your business has no ties to Tennessee, then you are not required to collect sales tax from customers that want taxable items shipped to Tennessee.
For example, you live in Vermont and run an eBay business out of your basement. You don’t need to collect sales tax when you sell a taxable item to a customer who wants that item shipped to Tennessee.
You live/operate your business in Tennessee
Now let’s say you’re a resident of Tennessee and you operate a business out of your home. The state says if you sell more than $400 gross each month then you’re required to register your business for sales tax (it’s free) and collect sales tax on orders of taxable items that are delivered to customers in Tennessee.
If you live/operate your business in Tennessee, how much you collect in sales tax depends on where your business is located (in sales tax lingo TN is known as an origin-based state). In general, the state sales and use tax rate is 7.00% and the local rate is 2.25%. The local rate, however, can vary from 1.00% to 2.75%.
Example time: let’s say you operate your business out of Adams, TN. You’d charge all of your orders shipped to a Tennessee address 7.00% state tax plus 2.75% for the local tax. But if you operated in Butler, TN then you’d charge 7.00% state tax plus 1.50% local tax. I’ve included a screenshot of TN’s Department of Revenue’s alphabetical list of Tennessee cities indicating applicable local sales tax rates.
You live out-of-state but sell through FBA
This is a question we get asked all the time. Let’s say you live in Alabama but use FBA. Amazon has multiple warehouse locations in Tennessee. At the time I’m writing this they have ones in Charleston, Chattanooga, Lebanon, and Murfreesboro. Just like if you lived in-state, you need to get a Tennessee Sales and Use Tax account and collect sales tax on orders delivered to Tennessee. In other words, you have nexus with Tennessee. If you want to see this for yourself, go to Page 16: Third Party Drop Shipments, [Sales or Use Tax Rule 1320-5-1-.96] of Tennessee’s Sales and Use Tax Guide (PDF).
The rate at which you collect sales tax on orders shipped to a Tennessee address is different than if you are an in-state seller. In this case, the state actually allows you to do one of two things:
- collect the sales tax rate at the buyer’s ship-to address for all orders shipped to Tennessee (i.e. destination-based sourcing)
- collect the 7% state rate and just add 2.25% to all purchases, meaning you would charge a flat 9.25% rate to all Tennessee buyers
It doesn’t matter which of the warehouses your items are shipped from. Charge the sales tax rate at the buyer’s ship to address or charge the 9.25% flat rate. It’s up to your discretion. At TaxJar, we recommend you charge the flat 9.25%.
Last point to make for FBA’ers: if you live in-state but also use FBA, use the rate of your home location. Do not use the rate of any of the warehouses.
Filing sales tax in Tennessee
If you need to file a sales tax return in Tennessee, you can file and pay online at the Tennessee Department of Revenue.
Summing it all up: your location matters
If you’re out-of-state with no ties to Tennessee, you’re life is easy – don’t collect sales tax from orders shipped to Tennessee. If your business is based in Tennessee, collect sales tax on taxable items shipped in-state based on the rate of your business location. If you are located out-of-state and have inventory in a TN warehouse, collect sales tax at the rate where your buyer’s ship to address is located. If you need more info, check out our sales tax guide to Tennessee.
Got questions? Feedback? Tell me about your experience selling in TN in the discussion section below.
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