Understanding taxation in Tennessee is critical for businesses that operate within the state or have a substantial nexus here. Tennessee’s tax framework is a mix of franchise and excise taxes along with state and local business taxes. Each carries its own set of rules, rates, filing requirements, and penalties, making compliance essential for businesses of all sizes.
This blog breaks down the key aspects of taxation in Tennessee, covering the franchise and excise tax system, business tax classifications, tax rates, filing obligations, and penalties. Whether you are a corporation, partnership, LLC, or a sole proprietor, this guide will help you navigate Tennessee’s tax structure and stay on the right side of compliance.
Franchise and Excise Tax
Corporations, limited partnerships, LLCs, and business trusts that are chartered, qualified, registered, or doing business in Tennessee must register for and pay franchise and excise taxes.
The franchise tax is calculated on the greater of two bases:
- Net worth, or
- The book value of real or tangible personal property owned or used in Tennessee.
The franchise tax rate is 0.25% on this base, with a minimum tax of USD 100 payable by any entity registered in the state, regardless of whether the entity is active or inactive.
The excise tax is based on net earnings or income for the year, calculated at a flat rate of 6.5% of Tennessee taxable income.
Due Date: Franchise and excise tax returns are due on the 15th day of the fourth month after the close of the accounting year.
Filing Requirements: Businesses must file using Form FAE 170 – Franchise, Excise Tax Return.
Extension of Time: Tennessee allows a seven-month extension for filing franchise and excise returns.
Estimated Tax Payments: If a business has a tax liability of USD 5,000 or more in the current or prior year, it must make estimated quarterly payments. Payments are due on the 15th day of the fourth, sixth, and ninth months of the current year, and the 15th day of the first month of the following year.
Compliance doesn’t end with filing. Delays come with financial consequences.
Penalties: For delinquent returns, Tennessee imposes a 5% penalty for every 30-day period (or part thereof) that the return is late. The penalty is capped at 25% of the unpaid tax but comes with a minimum penalty of USD 15.
Interest: Any unpaid tax accrues interest from the statutory due date until payment is made. For the period July 1, 2023 to June 30, 2024, the annual interest rate is 12.25%.
Business Tax
The Tennessee business tax applies broadly to corporations, partnerships, LLCs, sole proprietorships, and other entities operating in the state. Businesses with a substantial nexus in Tennessee are subject to this tax, even if they don’t maintain a physical location in the state.
Almost all businesses selling goods or services must pay the state business tax. Additionally, businesses located in a city that has enacted a local business tax must pay the city’s tax as well.
Out-of-State Businesses: Businesses from outside Tennessee with a substantial nexus are also subject to the tax. Nexus can be established through factors such as:
- Being organized or domiciled in Tennessee
- Owning or using capital in Tennessee
- Systematic and continuous business activity producing receipts from Tennessee customers
- A bright-line presence in the state
Bright-line presence applies when:
- Receipts exceed USD 500,000 or 25% of total receipts in Tennessee
- Property exceeds USD 50,000 or 25% of total property value in Tennessee
- Payroll exceeds USD 50,000 or 25% of total compensation in Tennessee
Taxpayers are classified based on their dominant business activity, meaning the activity generating the largest portion of taxable sales at each business location. Each classification carries a different rate.
The five main classifications are:
- Class 1A: Food and beer for home consumption (excluding delicatessens and candy), and services by food brokers.
- Class 1B: Traders of building materials, hardware, electrical supplies, farm equipment, plumbing, roofing materials, tools, and similar products.
- Class 1C: Sellers of farm, nursery, and related products such as grain, seeds, fertilizer, and hay.
- Class 1D: Retail sales of gasoline, diesel fuel, and motor oils.
- Class 1E: Wholesale sales of gasoline and diesel fuel.
- Class 2: Covers sales of tangible personal property not specified elsewhere, including clothing, home furnishings, prescription drugs, vehicles, and restaurant food and beverages.
- Class 3: Includes service businesses (with certain exemptions) and sellers of specific goods like coins, leather goods, and office supplies. If a business sells both goods and services, taxes are applied to the dominant taxable activity.
- Class 4: Contractors and those engaged in construction, repair, installation, or sales of farm products. Direct producers and sellers of farm products are excluded.
- Class 5A: Industrial loan and thrift companies requiring a license under state law.
- Class 5B: Natural gas marketers not regulated by the Tennessee Regulatory Authority.
Business tax rates differ based on classification and whether the entity is a retailer or wholesaler.
| Classification | Retailer Rate | Wholesaler Rate |
| Class 1A | 0.001 | 0.00025 |
| Class 1B & 1C | 0.001 | 0.000375 |
| Class 1D | 0.0005 | Not applicable |
| Class 1E | Not applicable | 0.0003125 |
| Class 2 | 0.0015 | 0.000375 |
| Class 3 | 0.001875 | 0.000375 |
| Class 4 | 0.001 | 0.001 |
| Class 5A | 0.001* | 0.001* |
| Class 5B | 0.0002 | 0.0002 |
* The rate for Class 5A was reduced from 0.003 to 0.001 effective for tax years beginning on or after December 31, 2023.
Minimum Taxes:
- Classes 1–4 and 5B: Minimum of USD 22 per location
- Out-of-state Classes 1–4 and 5B: Single USD 22 minimum tax
- Class 5A: USD 450 minimum per location, capped at USD 1,500 per location
Once a business is categorized as either retailer or wholesaler, the rate applies to all taxable gross sales at that location.
Filing Requirements: Businesses must file Form BUS 428 – Business Tax Return.
Penalties: A penalty of 5% for every 30-day period a return is late applies, up to a maximum of 25%, with a minimum penalty of USD 15.
Interest: Any late tax payment accrues interest at 12.25% annually for the period July 1, 2023, through June 30, 2024.
Due Date: Business tax returns are due on the 15th day of the fourth month following the end of the tax year.
Conclusion
Tennessee’s tax structure is layered and detailed, blending franchise, excise, and business taxes with varying classifications, rates, and filing obligations. The complexity lies in understanding which taxes apply, how businesses are classified, and the exact filing timelines.
For businesses, timely compliance isn’t optional—it’s critical to avoid penalties and interest charges. Whether you’re a local enterprise or an out-of-state entity with significant operations in Tennessee, knowing your obligations under the state’s tax framework ensures smoother operations and financial security.
