Tennessee is one of only nine states in the U.S. that do not levy an income tax on wages. This feature is a contributing factor to the state’s placement on lists of “tax-competitive states”.
In place of a tax on earned wages, however, Tennessee opts to levy a statewide sales tax on most goods sold throughout the state.
Despite boasting a relatively low overall tax burden, Tennessee has one of the country’s highest sales tax rates. In fact, Tax Foundation ranks Tennessee as having the second-highest sales tax rate.
Tennessee Sales Tax Rate
At the core of Tennessee’s sales tax system is a 7 percent state tax, which applies uniformly across the state.
On top of that, counties and municipalities are allowed to impose a local option sales tax, which must be approved by voters. These local rates vary by location. The total sales tax rate a consumer pays depends on where the purchase is made.
Most counties in Tennessee levy a local sales tax between 2.25 percent and 2.75 percent, pushing the combined rate in many areas to 9.25 percent or higher.
While the state portion applies to the full price of most items, the local portion is capped on the first $1,600 of a single item. For purchases exceeding that amount, local tax stops accruing once the cap is reached, though the state tax continues to apply to the full purchase price.
Not all purchases are taxed at the same rate.
Groceries intended for home consumption have a reduced state tax rate of 4 percent, though local sales taxes still apply. Prepared food, such as meals purchased at restaurants or hot food sold for immediate consumption, does not qualify for the reduced grocery rate and is taxed at the full combined rate.
Where the Money Goes
Sales tax revenue collected by retailers is remitted to the Tennessee Department of Revenue, which distributes the local portion back to counties and cities based on where the sale occurred. These funds are generally split between funding government operations and education, with roughly half earmarked for education under state law.
Most counties have just one school district, to which 50 percent of the local option sales tax revenue goes.
In Carroll County, specifically, there are six school districts that split this educational portion: Carroll County Schools, Hollow Rock-Bruceton Special School District, Huntingdon Special School District, McKenzie Special School District, South Carroll Special School District, and West Carroll Special School District.
The funds are disbursed to each district based on student enrollment numbers.
Additional Considerations
Not all goods and services are subject to sales tax.
Certain prescription medications, some medical devices, and specific agricultural products are exempt under state law.
Tennessee also periodically offers sales tax holidays on items such as clothing, school supplies, and computers, during which qualifying purchases can be made tax-free. These exemptions are narrowly defined, and eligibility often depends on how an item is sold or used.
Sales tax is also not limited to in-store purchases. Many online retailers are required to collect Tennessee sales tax based on their level of economic activity in the state. In cases where sales tax is not collected at the time of purchase, buyers are technically responsible for paying a use tax at the same rate as the sales tax. While often overlooked, use tax is part of the state’s tax system and is intended to ensure equal treatment between in-state and out-of-state purchases.
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Editor’s note: This article is a primer of sorts, to help explain sales tax distribution in Tennessee. Subsequent articles that speak about possible changes in sales tax rates or distributions, either locally or throughout the state, will refer to this piece.
