Tennessee

Understanding Sales Tax for SaaS in Tennessee

Is SaaS Taxable in Tennessee?

Yes, SaaS is generally taxable in Tennessee, at a rate of 7%. The state considers SaaS to be a form of tangible personal property when delivered electronically. This distinction means most SaaS products are subject to the state’s sales tax regulations.

Business Use: SaaS tools designed for operational efficiency, such as CRM software, accounting programs, or project management platforms, are taxable in Tennessee.
Consumer Use: In general, SaaS sales for consumer use/personal use is taxable in TN.

Determining SaaS Taxability

Understanding if your SaaS product is taxable in Tennessee involves several key factors:

Service Classification: SaaS delivering functionality like financial reporting, workflow automation, or data management is usually taxable.
Exemptions: While most SaaS is taxable, exceptions may apply. For example, software purchased by qualifying educational institutions for instructional use may be exempt. Similarly, sales to non-taxable entities, such as government agencies, may qualify for exemption.
Legislative Updates: Tennessee’s tax framework for digital goods and SaaS is evolving. Businesses should stay informed about regulatory changes to ensure compliance.

Nexus Thresholds for Tennessee

Tennessee enforces both physical and economic nexus thresholds for determining sales tax obligations.

Physical Nexus: Businesses with an office, employees, or tangible operations within Tennessee must collect and remit sales tax.
Economic Nexus: Out-of-state businesses must comply if they exceed $100,000 in gross sales to Tennessee customers in the previous 12-month period. There is no transaction threshold.

These thresholds ensure that even remote sellers contribute to the state’s tax revenue, a policy influenced by the South Dakota v. Wayfair ruling.

Sales Tax Compliance Checklist

Tennessee businesses can follow this roadmap to ensure compliance with the state’s sales tax laws:

Register Your Business: Obtain a sales tax permit through the Tennessee Department of Revenue. This is a prerequisite for collecting and remitting sales tax.
Collect the Correct Tax Amount: Tennessee imposes a base sales tax rate of 7%, but local taxes can push the total rate higher depending on the jurisdiction. Ensure you apply the accurate total rate for every transaction.
File Regular Returns: Businesses must file monthly, quarterly, or annual sales tax returns based on their sales volume. Late filings can result in penalties.
Remit Tax Payments on Time: Collected taxes must be sent to the state promptly to avoid interest charges or other penalties.

Examples of Taxable vs. Non-Taxable SaaS in Tennessee

Taxable SaaS:
- Business productivity tools like invoicing software or enterprise resource planning (ERP) systems.
- Software used for data analytics or customer management in a corporate setting.
Potentially Exempt SaaS:
- Software purchased for academic instruction by schools or universities. However, this may depend on the type of school or university.
- SaaS sold to tax-exempt organizations such as charitable non-profits.

Local Tax Considerations in Tennessee

Tennessee’s base sales tax rate is 7%, but local jurisdictions often add additional taxes. The combined rate can vary across counties, with some areas exceeding 9%. Businesses must track the location of their customers to ensure they’re collecting the appropriate tax rate for each sale.

Penalties for Non-Compliance in Tennessee

Failing to comply with Tennessee’s sales tax laws can lead to costly consequences:

Late Filing Penalties: These accrue quickly if businesses fail to file sales tax returns by the due date.
Interest on Outstanding Tax: Unpaid taxes accrue interest until fully remitted, increasing the financial burden.
Audit Risks: Non-compliance may trigger audits, potentially resulting in back taxes, penalties, and interest charges.