Tennessee Income & Tax for eCommerce Businesses

💡 No Personal Income Tax ≠ No Business Tax: Tennessee eliminated its personal income tax on wages and most investment income. However, it still imposes a Franchise Tax and an Excise Tax on business entities — including out-of-state sellers that meet its substantial nexus thresholds. Both taxes can apply to the same entity simultaneously.

Part 1: Tennessee Franchise Tax & Excise Tax

Tennessee does not have a traditional corporate income tax. Instead, it levies two separate business taxes on entities with nexus in the state:

• Franchise Tax: Based on the greater of net worth apportioned to Tennessee or the book value of Tennessee real and tangible property. The rate is $0.25 per $100 of the apportioned tax base.

• Excise Tax: Applied to net earnings (similar to a net income tax) at a rate of 6.5%. The Tennessee Works Tax Act (2023) created a $50,000 deduction from net earnings, shielding the first $50K of income from the excise tax.

Who Has Franchise & Excise Tax Nexus?

Tennessee uses a bright-line substantial nexus test for franchise and excise taxes. An out-of-state business has nexus when any of the following thresholds are exceeded during a tax year:

• Tennessee receipts exceed the lesser of $500,000 OR 25% of total receipts everywhere

• Average Tennessee property exceeds the lesser of $50,000 OR 25% of total property value everywhere

• Compensation paid in Tennessee exceeds the lesser of $50,000 OR 25% of total compensation paid everywhere

Important: The 25% rule can capture smaller businesses whose Tennessee activity represents a disproportionate share of their total operations, even if the dollar amounts are relatively modest.

The Franchise Tax Net Worth Base

The franchise tax is now calculated solely on net worth apportioned to Tennessee, with a $500,000 exemption from the taxable base under the Tennessee Works Tax Act (2023). This means the first $500,000 of apportioned Tennessee net worth is not subject to the franchise tax — a significant relief for smaller businesses.

PL 86-272 and Tennessee

Federal Public Law 86-272 protects businesses from state income-based taxes. Tennessee's excise tax functions similarly to an income tax, so PL 86-272 may apply to protect C corporations from excise tax if their only Tennessee activity is soliciting orders for tangible goods shipped from outside Tennessee. However, it does not protect against the franchise tax, which is based on net worth, not income. And any activity beyond pure order solicitation — including FBA inventory in Tennessee — eliminates the protection.

Part 2: Tennessee Sales Tax

Economic Nexus — Prior 12 Months Only

Tennessee's sales tax economic nexus threshold is:

• $100,000 in retail sales to Tennessee customers during the previous 12 months (rolling lookback — not calendar year)

• Tennessee does not use a transaction count threshold — revenue only

• The $100,000 calculation includes all retail sales — taxable and exempt — but excludes wholesale/resale transactions

• Marketplace facilitators collect and remit sales tax on your behalf; those sales do not count toward your individual $100,000 threshold for direct sales obligations

Tennessee Sales Tax Rates

Tennessee has one of the highest state sales tax rates in the country: a flat 7% state rate on most tangible goods and taxable services. Local jurisdictions add between 1.5% and 2.75%, making combined rates typically 8.5% to 9.75% across most of the state. Tennessee is a destination-based state for remote sellers.

FBA Sellers: Memphis and Middle Tennessee

Tennessee is a major FBA logistics hub. Amazon operates large fulfillment centers in Memphis, Nashville, and Chattanooga — some of the company's most strategically important U.S. facilities. If you use FBA, your inventory almost certainly passes through or resides in Tennessee at various points, creating immediate physical nexus for both sales tax and potentially franchise & excise tax purposes.

The Tennessee Works Tax Act (2023)

The Tennessee Works Tax Act, signed in 2023, brought significant relief for smaller businesses:

• Raised the Business Tax filing threshold to $100,000 in gross receipts per jurisdiction

• Created a $50,000 net earnings deduction for excise tax

• Added a $500,000 franchise tax base exemption on net worth

These changes substantially reduced the compliance burden for smaller sellers, but businesses above these thresholds still have meaningful obligations.

What About Sales Tax?

Tennessee's 7% state rate — combined with local add-ons reaching 9.75% — makes it one of the highest-tax sales states for consumer goods. Its rolling 12-month nexus measurement (not calendar year) also creates a unique monitoring requirement.

At Tall Oak Advisors, we put together this guide as a resource for our eCommerce community. Tax rules vary significantly from state to state, and we want sellers to have the information they need to make informed decisions. More info at talloakadvisors.com

Disclaimer: The information in this article is for general informational purposes only and does not constitute legal or tax advice. Tax laws change frequently. Consult a qualified tax advisor or CPA regarding your specific situation.

Sources: T.C.A. § 67-4-2001 et seq. (Franchise & Excise Tax); T.C.A. § 67-6-501 (Sales Tax Nexus); Tennessee Works Tax Act (2023); TN Dept. of Revenue — Nexus for Out-of-State Sellers; Pub. L. No. 86-272.