Sales tax on invoices in Tennessee

In Tennessee, a contractor who improves real property is the consumer of its materials: you pay the tax on them yourself and can’t itemize it on your client’s bill, and labor on real property generally isn’t taxed.

Certificate of Registration and who owes the tax

Tennessee’s sales tax is imposed on the privilege of engaging in the business of selling tangible personal property, and it also reaches certain services. Anyone who sells, rents or leases tangible personal property or provides taxable services in Tennessee must register with the Tennessee Department of Revenue for a Certificate of Registration before doing business.

Contractors: consumers of the materials that become realty

Contractors and subcontractors who improve realty are the users and consumers of the materials they use or install as part of the real property. Pay sales tax to your vendor when you buy them; if you don’t, you owe use tax on their cost, which the Department’s manual covers as the contractor’s use tax.

• Real property work isn’t taxed to the owner. The sale, cleaning or repair of real property, and installing property that becomes a fixture, aren’t taxed to the real property owner; the installer pays tax on the property and materials instead. In general, labor on real property isn’t taxed.
• Personal property work is. Charges for installing, cleaning or repairing tangible personal property are taxable. Whether an installed item becomes a fixture, an integral part of the real property, or stays tangible personal property is decided case by case.
• Exempt clients don’t change it. You generally stay liable for the tax on your materials even when your client is exempt, such as a federal, state, county or city government or most exempt organizations.

The Department’s HVAC example shows the line. Central air conditioners and HVAC systems aren’t easily removed and become realty when installed, so on a new HVAC unit the contractor pays tax to its vendor and doesn’t charge the homeowner. A window air conditioner can be removed or replaced easily and stays tangible personal property, so the contractor may buy it with its resale certificate and collect sales tax on its price from the homeowner.

If you also sell building materials and supplies to other contractors, consumers or users, you’re a contractor-dealer. You may buy on a resale certificate, but you charge and remit sales tax on materials you sell without a resale certificate, and you report use tax on materials you use to improve real property. A supplier that delivers to your job site, or tags supplies for a particular job, must collect sales tax from you even if you give it a resale certificate.

Services: only those the law enumerates

Tennessee taxes a service only if the law enumerates it or it’s part of the sales price of a taxable product. The list includes repairing, installing and cleaning tangible personal property; installing it is taxable when the property stays tangible personal property after installation. Any charge for repairing tangible personal property is taxable, including a service call, a minimum charge, hourly or flat rates and mileage.

Work on real property is treated differently:

• Buildings, wiring, plumbing and fixtures: charges for maintenance or other work on buildings, electrical wiring, plumbing or fixtures that are part of real property aren’t taxed if you bill them separately from maintenance of tangible personal property. You pay tax on the property you install and the materials you use.
• What counts as real property: the Department names office buildings, houses, built-in appliances, HVAC units, sidewalks, roads, bridges and parking lots.
• Cleaning: cleaning real property, such as windows and carpeting in a building, isn’t taxed, but the equipment, utilities and cleaning agents you use are subject to sales or use tax. Cleaning tangible personal property is taxable.

Invoice rule: no tax on realty materials, otherwise show it

A Tennessee dealer must make clear whether it’s charging sales tax: show the tax on the invoice, or include it in the price and tell the purchaser, with a posted sign or a phrase such as “Prices Include Sales Tax” on the invoice or receipt. A dealer may advertise that it won’t charge sales tax, but it then owes the tax on the amount the customer paid.

For materials used in improving realty, sales or use tax can’t be itemized separately and collected from your client; you bear it. The exception is an item that stays tangible personal property, like the window air conditioner above, on which you collect sales tax.

Watch-out: one lump sum for realty and equipment

If one lump-sum charge covers maintenance on both real property and tangible personal property, Tennessee taxes the entire amount. When a job also services movable equipment, bill that work separately from the work on the building.

Local tax: every jurisdiction has one

Every local jurisdiction in Tennessee has a local sales and use tax rate, added to the state rate on this page. Counties and incorporated cities levy it, at 1.50% to 2.75%, in multiples of 0.25%.

A contractor that isn’t a contractor-dealer reports and pays use tax on the return for its own location, even when it improves realty outside that jurisdiction, and doesn’t have to register in every jurisdiction where it works.

Business tax: a second tax on contractors

Separately from sales tax, Tennessee’s business tax is a privilege tax on doing business by making sales of tangible personal property and services in the state and its local jurisdictions. Contractors are Classification 4 taxpayers, liable whether their contracts are lump sum or cost-plus. The Department has clarified that a contractor with no location or domicile in Tennessee and sales of $100,000 or less in a county is exempt from business tax in that jurisdiction.