Is Labor Taxable in Tennessee? Repairs, Fabrication, and Contracts

Labor is taxable in Tennessee when the work involves repairing, installing, or fabricating tangible personal property, and it is generally exempt when the work improves real property or qualifies as a professional or personal service. The state charges 7% on taxable labor, and local jurisdictions add another 1.50% to 2.75% on top.¹² Which category a job falls into depends on what the labor is being performed on, not on who performs it or where.

Repair and Installation of Tangible Personal Property

Any work that repairs or installs movable goods is a taxable service in Tennessee. That includes vehicles, appliances, electronics, furniture, and industrial equipment. Installation is taxable whether or not the installer also sells you parts, and whether or not the installation accompanies a purchase.³

The tax applies to the full charge, not just a stripped-down “labor” line. Service call fees, hourly rates, flat rates, mileage, and minimum charges are all part of the taxable amount.⁴ Any shipping or delivery the provider adds to the invoice is also taxable.⁵ A $1,000 labor-only repair in a county with a 2.75% local rate produces $97.50 in sales tax: $70 state, $27.50 local.

The location of the work does not matter. A mobile technician working in your driveway owes the same tax as a shop working on the same item at its own bay.⁶

Fabrication and Custom Production

When someone builds a new piece of tangible personal property for you — custom furniture, a fabricated metal part, a made-to-order sign — sales tax applies to the entire price. Tennessee’s definition of “sales price” folds the seller’s labor and service costs into the taxable amount alongside materials and transportation.⁶ A $2,500 custom table is taxed on $2,500, not on the wood and hardware alone.

Computer Software Work

Tennessee treats both packaged and custom software as tangible personal property. Charges to create, design, develop, or modify software are taxable when tied to a software sale, so a consultant you hire to build or alter software for your business bills sales tax on the full amount, programming labor included.⁷

One narrow exception: when your own employees write or modify software for your company’s internal use, that labor is not taxed.⁷ Software licenses are treated as leases of tangible personal property, so the recurring payments and any services bundled into them are taxable. Virus scanning and similar upkeep is treated as a repair or cleaning service on tangible personal property.⁸

Warranty and Service Contracts

Buying a warranty or service contract that covers future repairs on tangible personal property is itself a taxable purchase. You pay sales tax when you buy the contract, and in return you owe no additional sales tax on the parts and labor for repairs the contract covers.²

A few conditions ride along with that treatment. Any part of a repair that falls outside the contract, including deductibles, is taxed as an ordinary repair. The $1,600 single-article local tax cap does not apply to warranty or service contracts, so the full local rate hits the entire contract price.⁹ A warranty covering only real property, such as a structural home warranty, is not taxed at all, but if a single contract bundles real property coverage with tangible personal property coverage, the whole contract becomes taxable.²

Construction and Real Property Improvements

Labor to improve land or buildings works differently. Tennessee treats contractors as the end users of the materials they install, so the contractor pays sales tax when buying lumber, roofing, concrete, and the like. The labor charged to the property owner to install those materials into real property is not subject to sales tax.⁶ On a job with $10,000 in materials, the contractor pays roughly $700 in state tax on those materials at purchase, plus local tax, and no sales tax is added to the labor line on the owner’s bill.

That covers home building, roof replacement, driveway pouring, and office renovations. It also covers repair work on things that are part of a building: electrical wiring, plumbing, and fixtures attached to real property fall outside the taxable repair rules for tangible personal property.⁴

The test is whether the item stays movable or becomes part of the building. Swapping out a portable window air conditioner is a taxable repair of tangible personal property. Installing a central HVAC system that becomes part of the structure is a real property improvement, so the labor is exempt even though the contractor still owes tax on the equipment and materials.

Landscaping

Mowing, tilling, watering, and installing plants, shrubs, or trees are treated as services to real property and are not subject to sales tax.¹⁰ Landscapers, like contractors, pay tax on the soil, mulch, and plants they buy, but the service charge to the customer is exempt.

Professional and Personal Services

Services that do not modify physical property are generally exempt. Unless the legislature has specifically named a service as taxable, it falls outside the sales tax base.² Legal advice, accounting, medical care, and physical therapy are exempt, as are personal services like haircuts, cosmetology, and fitness coaching.¹¹

The line blurs when a professional service is bundled with a taxable product. If the advice is delivered as part of selling something like custom software, the Department of Revenue may tax the whole transaction. A standalone consultation with no tangible product changing hands stays exempt.

How the Rates Apply to Service Charges

Combined rates on taxable labor run from 8.50% to 9.75% depending on the local jurisdiction. The $1,600 local tax cap that applies to single items of tangible personal property does not apply to taxable services, and the state single-article tax of 2.75% on the portion of a sale between $1,600 and $3,200 does not apply either.⁹ The full local rate applies to the entire service charge, however large.

Out-of-State Providers and Destination Sourcing

Businesses based outside Tennessee that sell taxable services to Tennessee customers must register and collect Tennessee sales tax once their annual sales into the state exceed $100,000.² Since July 2024, Tennessee sources interstate sales of services performed on tangible personal property and computer software to the destination.¹²

What matters is where the serviced property ends up. Ship an item out of state for repair and have it returned to you in Tennessee, and the sale is sourced to your Tennessee location at your local combined rate. A Tennessee shop that repairs an item and ships it to a customer in another state reports the sale as an exempt interstate sale.¹²

Penalties for Failing to Collect

Tennessee charges a delinquency penalty of 5% of the unpaid tax per month or partial month, capped at 25%, with a minimum of $15.² If the Department of Revenue finds that the underpayment was due to negligence, it can add another 10%. A fraudulent failure to report and pay carries a penalty of 100% of the underpaid amount. Interest accrues on unpaid tax from the original due date at a rate the Department resets each July 1.

The cleanest way to stay out of that territory is to classify each labor charge correctly on the invoice — taxable repair, taxable installation, taxable fabrication, exempt construction, exempt landscaping — and itemize the work so the classification is visible if the Department ever audits the file.⁶

1
TN.gov: Revenue. Due Dates and Tax Rates
2
TN.gov. Sales and Use Tax Guide
3
Justia Law. Tennessee Code 67-6-205 – Services
4
Cornell Law Institute. Tennessee Comp. R. and Regs. 1320-05-01-.54 – Repair Services Tax
5
Tennessee Department of Revenue. SUT-23 – Sales Price – Shipping Charges
6
TN.gov. Sales Tax Issues for Contractors
7
TN.gov. Computer Software Services Subject to Sales and Use Tax
8
TN.gov. Services Subject to Sales Tax in Tennessee
9
TN.gov: Revenue. Single Article Special Tax Rates
10
Tennessee Department of Revenue. SUT-117 – Services – Landscaping Services
11
Tennessee Department of Revenue. SUT-116 – Services – Non-Taxable Services in Tennessee
12
TN.gov. Tennessee Works Tax Act Updates – Sourcing