10.3 Tennessee State Taxes: Sales & Use, Business Tax, SUTA, and Franchise & Excise Tax

Tennessee's state tax system differs fundamentally from most other states. Tennessee does NOT levy a state personal income tax on earned wages, salaries, or sole proprietorship labor income—and the former Hall Income Tax on interest and dividends was completely repealed effective January 1, 2021. Consequently, Tennessee construction employers never withhold state income tax from employee paychecks. Instead, Tennessee funds state and local government through four major tax regimes administered by the Tennessee Department of Revenue (electronically through TNTAP — Tennessee Taxpayer Access Point) and the Tennessee Department of Labor and Workforce Development (TDLWD):

1. Tennessee Sales and Use Tax (T.C.A. Title 67, Chapter 6)
2. Tennessee Business Tax (T.C.A. § 67-4-701 et seq.)
3. Tennessee Unemployment Tax — SUTA (T.C.A. § 50-7-101 et seq.)
4. Tennessee Franchise and Excise Tax (T.C.A. Title 67, Chapter 4, Parts 20 & 21)

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1. Tennessee Sales and Use Tax: The "Contractor as Consumer" Rule (T.C.A. § 67-6-209)

Tennessee imposes a 7.0% state base sales and use tax rate on tangible personal property, plus a mandatory Local Option Sales Tax ranging from 1.5% to 2.75% depending on the county or municipality (for a combined rate of 8.5% to 9.75% across most of Tennessee). Under the single-article cap, the local option sales tax applies only to the first $1,600 of the price of any single item of tangible personal property, while an additional 2.75% state single-article tax applies to the portion of a single item's price between $1,600.01 and $3,200.00. Returns and payments are due monthly via TNTAP by the 20th day of the following month.

Why Construction Contractors Are Taxed as the "User and Consumer" (T.C.A. § 67-6-209)

One of the most important concepts on the Tennessee Business and Law exam is how sales and use tax applies to construction materials. Unlike a retail store that buys merchandise tax-free using a resale certificate and collects sales tax from the customer at the cash register, a construction contractor who purchases materials, supplies, and equipment to install into or improve real property is legally classified under T.C.A. § 67-6-209 as the USER and CONSUMER of those materials:

• Rule 1 — Contractor Pays Sales Tax When Buying Materials (or Self-Assesses Contractor's Use Tax): A contractor MUST pay Tennessee Sales Tax to the supply house when purchasing lumber, concrete, brick, roofing, drywall, pipe, wire, or HVAC units to install on a real property construction contract. If the contractor buys materials from an out-of-state vendor that did not collect Tennessee sales tax (or withdraws materials from a tax-free retail inventory to install on a construction job), the contractor must self-assess and remit Tennessee Contractor's Use Tax directly to the Department of Revenue by the 20th day of the following month on the purchase price.
• Rule 2 — Contractor Does NOT Charge Separate Sales Tax to the Property Owner: Because the contractor has already paid sales or use tax as the statutory consumer of the materials—and because building, remodeling, or repairing a structure is a real property improvement rather than a retail sale of tangible personal property—the contractor does NOT charge a separate sales tax line item to the property owner on a lump-sum or progress billing for real property construction.
• Rule 3 — Tax-Exempt Entity Projects: Even when performing a contract for a church, 501(c)(3) nonprofit, or government agency, a contractor remains liable for sales/use tax on its own tools, machinery, and jobsite consumables (such as concrete forms, fuel, sandpaper, and blades), and may purchase permanent construction materials tax-free only when authorized by a specific statutory exemption certificate issued by the Tennessee Department of Revenue for that qualified tax-exempt entity.

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2. Tennessee Business Tax (T.C.A. § 67-4-701 et seq. — Classification 4 Gross Receipts Tax)

The Tennessee Business Tax is a privilege tax based on a business's annual taxable gross receipts within a Tennessee county or incorporated municipality:

• The $100,000 Gross Receipts Threshold (Tennessee Works Tax Act of 2023): Any contractor with $100,000 or more in annual taxable gross receipts within a county or incorporated municipality must obtain a Standard Business License from the county clerk (and city official, if applicable) and pay the annual Tennessee Business Tax via TNTAP. Contractors with gross receipts between $3,000 and $99,999 in a jurisdiction obtain a Minimal Activity License from the county/city clerk for a $15 annual fee and do not file a state Business Tax return for that jurisdiction.
• Classification 4 Rate (0.10%) and the Subcontractor Deduction (T.C.A. § 67-4-711(a)(5)): Construction contractors fall under Classification 4 (T.C.A. § 67-4-708(4)), which is taxed at 0.10% ($1/10\text{ of }1\%$, or $0.001$) of taxable gross receipts, with a minimum tax of $22 per return. Crucially, under T.C.A. § 67-4-711(a)(5), a prime contractor computing its Classification 4 taxable gross receipts may deduct amounts actually paid during the tax period to subcontractors for construction work, provided the prime contractor lists each subcontractor's name, address, and business tax license/account number on the return so the same receipts are not taxed twice.
• Filing Deadline & Domicile vs. Outside-Jurisdiction Rule (T.C.A. § 67-4-706, .715): The annual Tennessee Business Tax return is due on the 15th day of the 4th month following the end of the taxpayer's fiscal year (April 15 for calendar-year contractors). A Tennessee contractor reports its in-state receipts in the home county/city where its permanent place of business is domiciled, and is required to obtain an additional local Standard Business License and file a separate Business Tax return in another Tennessee county or city only if its gross receipts from construction contracts performed in that outside county or city exceed $100,000 during the tax year.

$$\text{Classification 4 TN Business Tax} = \max\Big(\text{\textdollar}22,\; 0.001 \times \big(\text{Gross Construction Receipts} - \text{Verified Subcontractor Payments}\big)\Big)$$

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3. Tennessee Unemployment Tax — SUTA (T.C.A. § 50-7-101 et seq.)

Administered by the Tennessee Department of Labor and Workforce Development (TDLWD), Division of Employment Security, SUTA funds state unemployment insurance benefits:

• Employer Liability Trigger (T.C.A. § 50-7-205): An employer becomes liable for Tennessee SUTA if it pays $1,500 or more in total gross wages in any calendar quarter during the current or preceding calendar year, OR employs 1 or more individuals for some portion of a day in 20 different calendar weeks during the current or preceding calendar year (or is liable for federal FUTA).
• 2026 wage base and new-employer rate: Tennessee SUTA applies to the first $7,000 per employee in 2026 and is paid by the employer. TDLWD’s status-application instructions, updated February 26, 2026, state that all industries have had a 2.7% new-employer rate since July 1, 2021. Historical construction-specific higher rates should not be taught as the current default. New-employer and experienced-employer rates are different; use the actual assigned rate notice and the applicable premium table.
• Quarterly Filing Deadlines: Employers must file quarterly Wage and Premium Reports and pay SUTA premiums by April 30, July 31, October 31, and January 31.

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4. Tennessee Franchise and Excise Tax (T.C.A. Title 67, Chapter 4, Parts 20 & 21)

The Tennessee Franchise and Excise Tax (Form FAE170) is a dual privilege tax imposed on entities that enjoy limited personal liability in Tennessee:

• Who Must Pay vs. Who Is Exempt: Every Corporation (C-Corp and S-Corp), Limited Liability Company (LLC—including single-member LLCs!), Limited Partnership (LP), and Limited Liability Partnership (LLP) doing business in Tennessee or registered with the Tennessee Secretary of State must file and pay Franchise and Excise Tax. Sole Proprietorships and General Partnerships are completely EXEMPT because they do not afford their owners limited personal liability.
• Excise Tax (6.5% After \$50,000 Standard Deduction — T.C.A. § 67-4-2007): Levied at 6.5% of the entity's Tennessee net earnings (net taxable income) for the fiscal year, after subtracting the $50,000 standard excise tax deduction enacted by the Tennessee Works Tax Act for tax years ending on or after December 31, 2024.
• Franchise Tax (0.25% of Net Worth, \$100 Minimum, and 2024 Property Measure Repeal — T.C.A. § 67-4-2106): Levied at 0.25% ($0.25 per $100, or $0.0025$) of the entity's apportioned Net Worth, with an absolute minimum Franchise Tax of $100 per year (owed even if the LLC or corporation had zero revenue or a net loss, so long as its Secretary of State charter/registration remains active). Effective for tax years ending on or after January 1, 2024 (Public Chapter 950, Acts of 2024), Tennessee repealed the alternative real and tangible personal property measure (Schedule G), so the Franchise Tax is now calculated solely on Net Worth.
• Filing Deadline: Due on the 15th day of the 4th month following the close of the entity's fiscal year (April 15 for calendar-year entities) via TNTAP.

Worked Numeric Example: Tennessee Contractor Business Tax and Franchise & Excise Tax

Suppose Volunteer Structural, LLC (a calendar-year Tennessee LLC domiciled in Knox County) has $1,500,000 in gross construction receipts (all in Knox County), pays $600,000 to properly documented subcontractors, ends the year with $400,000 in Net Worth, and earns $150,000 in Tennessee net taxable income:

1. Classification 4 Tennessee Business Tax: Taxable gross receipts after the subcontractor deduction equal $\text{\textdollar}1,500,000 - \text{\textdollar}600,000 = \text{\textdollar}900,000$. At the 0.10% ($0.001$) Classification 4 rate, Business Tax due on April 15 is $\text{\textdollar}900,000 \times 0.001 = \text{\textdollar}900.00$.
2. Tennessee Franchise Tax: $\text{\textdollar}400,000 \text{ Net Worth} \times 0.25\% (0.0025) = \text{\textdollar}1,000.00$ (which exceeds the $100 minimum).
3. Tennessee Excise Tax: After subtracting the $50,000 standard excise deduction, taxable net earnings are $\text{\textdollar}150,000 - \text{\textdollar}50,000 = \text{\textdollar}100,000$. At 6.5%, Excise Tax is $\text{\textdollar}100,000 \times 6.5\% = \text{\textdollar}6,500.00$.
4. Total Combined Form FAE170 Liability Due April 15: $\text{\textdollar}1,000.00 + \text{\textdollar}6,500.00 = \text{\textdollar}7,500.00$.

Franchise and excise generally apply to corporations, LLCs, and limited partnerships, but statutory exemptions can apply, including qualifying obligated-member entities. The formulas assume a taxable entity with no exemption and the stated deductions. County and city business-tax obligations can both apply; a single-jurisdiction worked calculation is not necessarily the contractor’s total bill. Use the official local rate for the transaction and jurisdiction. A new construction employer’s unemployment rate comes from the assigned industry/rate notice, not a universal construction percentage.