Tennessee tax revenue comes almost entirely from what residents and businesses spend and sell, not from what they earn. The state levies no personal income tax on wages or salaries, and the narrow Hall Income Tax on interest and dividends was fully repealed for tax periods beginning on or after January 1, 2021.1Tennessee Department of Revenue. Hall Income Tax In its place, Tennessee funds its budget through a high sales tax, two linked business taxes, motor fuel levies, excises on tobacco and alcohol, and locally collected property taxes.
Sales and Use Tax
Sales tax is the state’s single largest revenue source. The state rate is 7% on most retail sales of goods and taxable services.2FindLaw. Tennessee Code 67-6-202 – Tax Rate on Retail Sales Food and food ingredients bought at the grocery store carry a reduced state rate of 4%, but prepared meals are taxed at the full 7%.3Tennessee Department of Revenue. Due Dates and Tax Rates A 2.75% state surcharge applies to the portion of a single-item sale between $1,600 and $3,200. That surcharge is state-only; local jurisdictions cannot add to it.
A matching use tax applies to goods purchased outside Tennessee and brought into the state when no sales tax was paid at the point of sale. The rates mirror the sales tax, and the use tax covers everything from online orders to items carried across state lines.
Local Add-On Rates
Counties and cities layer their own sales tax on top of the state’s 7%. Local rates can reach 2.75% and must be set in 0.25% increments.4Tennessee Department of Revenue. Local Sales Tax Most jurisdictions sit between 2.25% and 2.75%, so combined rates for Tennessee shoppers typically fall between 9.25% and 9.75%. Local proceeds stay inside the taxing jurisdiction and fund schools, infrastructure, and community services.
Remote Sellers and Online Marketplaces
Out-of-state sellers with no physical presence in Tennessee have to register and collect sales tax once they make $100,000 or more in sales to Tennessee customers over the prior twelve months. That total includes exempt sales but not sales for resale, and there is no separate transaction-count trigger.5Tennessee Department of Revenue. Out of State Dealers Marketplace Facilitators
Online marketplaces have a parallel duty. Since October 2020, platforms that facilitate more than $100,000 in sales to Tennessee customers over the prior twelve months must collect and remit tax for their third-party sellers.5Tennessee Department of Revenue. Out of State Dealers Marketplace Facilitators If you sell through a marketplace that already collects the tax, you generally do not collect it again on those orders. If you also sell through your own site or a storefront and independently hit $100,000, you still need your own registration.
Franchise and Excise Taxes on Businesses
Tennessee runs two linked taxes on most business entities. The franchise tax hits the value of the business; the excise tax hits what it earns. Together they are Tennessee’s version of a corporate income tax, and they apply to corporations, LLCs, and partnerships that offer limited liability.
Franchise Tax
The franchise tax is $0.25 per $100 of net worth, with a $100 annual minimum. Until recently, the tax was calculated on the greater of the entity’s net worth or the book value of its real and tangible property in Tennessee. That property-based “minimum measure” was repealed for tax years ending on or after January 1, 2024, so the tax now rests solely on net worth.6Tennessee Department of Revenue. Franchise and Excise Tax Manual – June 2025
Multistate businesses face a second change. For tax years ending on or after December 31, 2025, Tennessee drops the property and payroll factors from its apportionment formula and moves to a single sales factor.6Tennessee Department of Revenue. Franchise and Excise Tax Manual – June 2025 Businesses with limited Tennessee sales but substantial Tennessee property or payroll can see a meaningful reduction under the new formula.
Excise Tax
The excise tax is a flat 6.5% on net earnings from business activity in Tennessee.7Justia Law. Tennessee Code 67-4-2007 – Tax Imposed The starting point is typically federal taxable income with Tennessee-specific adjustments. Any entity owing the franchise tax also owes the excise tax, and both are reported on the same annual return.8Tennessee Department of Revenue. Due Dates and Tax Rates Nonprofits are generally exempt, but unrelated business income taxable at the federal level is taxable in Tennessee too.
Motor Fuel Taxes
Tennessee taxes gasoline at 26 cents per gallon and diesel at 27 cents per gallon.9Tennessee Department of Revenue. Due Dates and Tax Rates These are flat per-unit levies, so the rate doesn’t move with the pump price. Revenue is predictable but doesn’t automatically track inflation or rising construction costs.
Electric vehicle owners pay a $200 annual registration surcharge in place of the fuel tax they never pay. That fee runs through 2026.10Alternative Fuels Data Center. Electric Vehicle (EV) Fee Fuel taxes and vehicle registration fees feed the state Highway Fund, a separate account that state law restricts to road construction, bridge maintenance, and related infrastructure.
Tobacco and Alcohol Excise Taxes
Tennessee collects excise taxes on tobacco and alcohol at several points in the supply chain. Cigarettes are taxed at $0.62 per pack of twenty, collected through tax stamps that wholesalers affix before product reaches the shelf.11Tennessee Department of Revenue. Tennessee Due Dates and Tax Rates
Alcohol taxes depend on the product. Distilled spirits carry a wholesale tax of $4.40 per gallon, and wine is taxed at $1.21 per gallon. On top of those, establishments selling mixed drinks or other alcoholic beverages for on-premises consumption pay a 15% tax on the sales price of each drink.12Justia Law. Tennessee Code 57-4-301 – Privilege Taxes Revenue arrives at both the wholesale distribution point and the final pour.
Property Taxes
Property tax in Tennessee is a local tax, not a state one. The state imposes no property tax of its own; counties and cities do, and property tax is the largest single revenue source for most local governments. In fiscal year 2023, property taxes generated roughly $5.8 billion for county governments statewide.
Tennessee uses an ad valorem system: tax is calculated as a dollar amount per $100 of assessed value. The county assessor sets the appraised value, the state constitution sets the assessment ratio that converts appraised value to assessed value, and the local tax rate is then applied to produce the bill. When a county reappraises, a truth-in-taxation law automatically lowers the rate so total collections stay roughly flat. Capturing any of the new value requires the local legislative body to vote the rate above that certified baseline.
No Tax on Personal Income
Tennessee does not tax wages, salaries, or self-employment income, and it no longer taxes investment income either. The Hall Income Tax, which once applied to interest from bonds and notes and dividends from stock, was phased out and fully repealed for tax periods beginning on or after January 1, 2021.1Tennessee Department of Revenue. Hall Income Tax No Tennessee resident owes it today, and no returns are filed for it.
What No Income Tax Means on Your Federal Return
Living in a no-income-tax state changes one line on your federal return. Taxpayers who itemize on Schedule A can deduct either state income taxes or state and local sales taxes, not both. In Tennessee there is no state income tax to deduct, so the sales tax election is the only option, and it can pay off if your itemized deductions exceed the standard deduction.13Internal Revenue Service. Use the Sales Tax Deduction Calculator
The IRS publishes optional sales tax tables that estimate your annual payments based on income, family size, and location. You can rely on the tables or add up actual receipts. Either way, you can add sales tax paid on large purchases such as a car or boat on top of the table amount. The combined deduction for state and local taxes, including property tax and either income or sales tax, is capped at $10,000 per return, or $5,000 if married filing separately.13Internal Revenue Service. Use the Sales Tax Deduction Calculator Given Tennessee’s combined sales tax rates near 9.75% in many places, homeowners who also deduct property taxes commonly reach that cap.