If you’re a business offering Software as a Service (SaaS) in Tennessee or planning to expand into the state, understanding the state’s sales tax laws is crucial for compliance and smooth operations. Tennessee has specific rules for taxing digital products, including SaaS, and staying informed about these regulations will help you avoid costly penalties. In this comprehensive sales tax guide, we’ll cover everything you need to know about the question, “Is SaaS taxable in Tennessee?” for the state’s tax requirements.
2025 SaaS Sales Tax Rates for Tennessee
Tennessee imposes a statewide base sales tax rate of 7%. Local jurisdictions can add up to 3%, resulting in total sales tax rates ranging from 7% to 10%, depending on the specific location within the state.
Is SaaS Taxable in Tennessee?
Yes, SaaS is taxable in Tennessee. The state considers Software as a Service (SaaS) to be a form of tangible personal property when delivered electronically. This means that SaaS offerings are subject to the state’s sales and use tax if accessed by customers within Tennessee.
Tennessee’s taxation of SaaS aligns with its broader approach to digital products, treating electronically delivered software similarly to physical software for tax purposes.
How Does Tennessee Define SaaS and Digital Products?
In Tennessee, SaaS is classified as “remotely accessed prewritten software.” This includes software provided through the cloud, application service providers (ASP), and hosted services. Such services are considered taxable as tangible personal property, regardless of delivery method.
Digital products in Tennessee encompass items like digital audio-visual works, digital audio works, and digital books.These are subject to the state’s sales tax when transferred electronically to or accessed by consumers within the state.
Sales Tax on Software in Tennessee
Here is a detailed look at the taxability on software in the state of Tennessee:
| Software Type | Taxable in Tennessee? | Notes |
| SaaS (Remotely Accessed Prewritten Software) | Yes | Subject to sales tax if accessed in Tennessee. |
| Prewritten Software | Yes | Taxable regardless of delivery method (boxed, hosted, downloaded). |
| Custom Software | No | Not taxable; includes charges for maintenance, support, or upgrades. |
| Subscription-Based Software | Yes | Treated as SaaS; subject to sales tax. |
| Digital Goods | Yes | Generally taxable; exceptions may apply for specific products. |
Note: Charges to modify or adapt prewritten software for a customer are non-taxable if separately stated and reasonable. However, if the charges include prewritten software, those charges are taxable.
How to Determine if Your Product is Taxable in Tennessee
To assess Tennessee SaaS software taxability, consider the following factors:
- Delivery Method: In Tennessee, the delivery method does not affect taxability. Whether the software is delivered physically, electronically, or accessed remotely, it is subject to sales tax if it is prewritten software.
- Licensing Model: License fees for remotely accessed prewritten software, including SaaS, are taxable if the software is used in Tennessee.
- Customization: Charges to modify or adapt prewritten software for a customer are non-taxable if separately stated and reasonable. However, if the charges include prewritten software, those charges are taxable.
- Bundled Services: If a taxable item is bundled with non-taxable services, the entire charge may be subject to tax unless the non-taxable services are separately stated.
For detailed guidance, refer to the Tennessee Department of Revenue‘s official publications.
Are Digital Goods Taxable in Tennessee?
Yes, digital goods are taxable in Tennessee. Products transferred electronically, such as e-books, digital music, and digital videos, are considered tangible personal property and are subject to sales tax if the physical form of the product would also be taxable.
However, there are exceptions. For instance, digital newspapers are exempt from sales tax.
This taxability is relevant to SaaS businesses, as the delivery method of software does not exempt it from sales tax in Tennessee.
Sales Tax Exemptions in Tennessee
Tennessee provides certain exemptions from sales tax, including:
- Resale Exemption: Sales for resale are exempt from sales tax. A resale certificate must be provided.
- Nonprofit Organizations: Sales to qualifying nonprofit organizations are exempt from sales tax. Documentation, such as a nonprofit exemption certificate, is required.
- Custom Software: Sales of custom software are not subject to sales tax. Custom software is defined as software written for the needs of a specific customer.
It’s important to maintain proper documentation, like a sales tax permit, to substantiate these exemptions.
Consequences of Non-Compliance with SaaS Tax Rules in Tennessee
Failure to comply with Tennessee SaaS service tax rules can result in:
- Penalties: Penalties for late filings range from 5% to 25% of the unpaid taxes, depending on how late the return is filed.
- Interest: Interest on unpaid taxes is charged at a rate of 12.25% after July 1, 2023.
- Audits: The Tennessee Department of Revenue may conduct audits to ensure compliance.
- Legal Consequences: Continued non-compliance can lead to legal actions.
To avoid these consequences or a sales tax audit, businesses should ensure the timely and accurate collection and remittance of sales tax and stay within the statute of limitations.
Filing and Remitting Tennessee Sales Tax
In Tennessee, businesses must file and remit sales tax based on their assigned filing frequency:
- Monthly Filing: Due on the 20th day of the month following the end of the reporting period.
- Quarterly Filing: Due on the 20th day of the month following the end of each quarter (e.g., January 20, April 20, July 20, October 20).
- Annual Filing: Due on January 20 of the following year.
Businesses are assigned a filing frequency based on their estimated annual sales tax liability. To file returns, businesses must use the Tennessee Department of Revenue’s online portal, the Tennessee Taxpayer Access Point (TNTAP). Returns can also be filed by mail using the appropriate forms.
Common Sales Tax Challenges for SaaS Companies in Tennessee
SaaS businesses in Tennessee often encounter several compliance challenges:
- Nexus Misunderstanding: Determining whether your business has a tax physical nexus in Tennessee can be complex. Nexus can be established through physical presence (e.g., office, employees) or economic presence (e.g., over $100,000 in sales or 200 transactions).
- Bundled Services: When taxable SaaS is bundled with non-taxable services, the entire charge may become taxable unless the non-taxable services are separately stated.
- Exemption Management: Managing exemptions requires careful documentation. Acceptable sales tax exemption certificate include TC-721 (Exemption Certificate) and TC-721G (Exemption Certificate for Governments & Schools).
- Multi-State Compliance: Operating in multiple states with varying tax laws can complicate compliance. Each state has its own rules regarding SaaS taxation, nexus thresholds, and filing requirements.
Simplify Tennessee SaaS Sales Tax Compliance with Commenda
Commenda offers a comprehensive solution for SaaS businesses to ensure full US sales tax compliance with Tennessee’s complex sales tax:
- Taxability Decisions: Automated determination of whether your SaaS offerings are taxable in Tennessee.
- Nexus Monitoring: Continuous tracking of your business activities to identify any changes in nexus status.
- Exemption Management: Efficient handling of exemption certificates and documentation to ensure compliance.
- Automated Filing: Streamlined preparation and submission of sales tax returns, reducing the risk of errors and penalties.
By leveraging a sales tax platform like Commenda’s tools, SaaS companies can simplify their Tennessee sales tax compliance, allowing them to focus on growth and innovation. Schedule a demo with us today!
FAQs About Tennessee SaaS Sales Tax
Q. Is SaaS taxable in Tennessee if my business doesn’t have a physical office there?
Yes, SaaS is taxable in Tennessee even if your business does not have a physical office in the state. If your business meets Tennessee’s economic nexus threshold, $100,000 in sales or 200 separate transactions, you are required to collect and remit sales tax on your SaaS products, regardless of physical presence.
Q. How does Tennessee classify SaaS products for sales tax purposes?
Under Tennessee tax rules for SaaS businesses, SaaS products are classified as “remotely accessed prewritten software.” This includes software provided through the cloud, application service providers (ASP), and hosted services. These products are subject to sales tax, similar to tangible personal property, when accessed in Tennessee.
Q. Do I need to collect sales tax in Tennessee if I only sell subscription-based SaaS?
Yes, subscription-based SaaS is taxable in Tennessee. Subscription-based services that involve remotely accessed prewritten software are subject to Tennessee sales tax, regardless of whether they are billed as a one-time fee or recurring charges.
Q. Are setup fees or bundled SaaS services taxable in Tennessee?
Yes, setup fees and bundled services that include taxable SaaS components are generally taxable in Tennessee. If the bundled services are not separately stated, the entire charge may be subject to sales tax. However, if you separately list exempt services, they may not be taxable.
Q. What are the penalties for not charging sales tax on SaaS in Tennessee?
Failure to charge and remit sales tax in Tennessee can result in penalties and interest. Late filing penalties can range from 5% to 25% of the unpaid taxes, depending on the delay. Additionally, interest on unpaid taxes is charged at a rate of 12.25% after July 1, 2023. Persistent non-compliance can lead to audits and legal actions.
Q. Does Tennessee provide exemptions for SaaS sold to nonprofit or government entities?
Yes, Tennessee provides exemptions for certain nonprofit organizations and government entities. Sales to these organizations are exempt from sales tax, but appropriate documentation, such as exemption certificates, must be provided to substantiate the exemption.
Q. How often do SaaS businesses need to file sales tax returns in Tennessee?
The frequency of sales tax filings in Tennessee depends on the business’s annual sales tax liability:
- Monthly filing: If the business has more than $50,000 in annual sales tax liability.
- Quarterly filing: If the business has between $250 and $1,000 in annual sales tax liability.
- Annual filing: If the business has less than $250 in annual sales tax liability.
Q. What’s the easiest way to automate SaaS sales tax compliance in Tennessee?
The easiest way to automate SaaS sales tax compliance in Tennessee is by using a sales tax automation platform like Commenda. Commenda offers tools to automatically determine taxability, track nexus, manage exemptions, and handle automated sales tax filing, ensuring that your business remains compliant with Tennessee’s sales tax laws.
