Does operating in a Tennessee foreign trade zone exempt a contractor from Tennessee sales, use, and business tax — and how are goods imported only to re-export, or sold to and used for the federal government, taxed?

Plain-English summary

A contractor located in a Tennessee foreign trade zone (FTZ) does work for the U.S. federal government and corporate clients around the world. It buys tangible personal property from out-of-state vendors, brings it into Tennessee, and then exports it — for example, uniforms that are imported, briefly examined to confirm they're as ordered, and shipped back out of state, and other goods warehoused in Tennessee only long enough to apply asset tags, check them against shipping documents, and consolidate them into larger containers before export. It also performs a small share of its federal work inside the Tennessee FTZ, where it sells property to the U.S. government and then uses that property to perform the contract. It asked the Department five questions about how Tennessee's sales, use, and business taxes apply.

Question 1 — Does being in a foreign trade zone change any of these taxes? No. FTZ benefits reach only ad valorem (property) taxes. Federal law (19 U.S.C. § 81o) and Tenn. Code Ann. § 67-5-220 exempt qualifying property held in an FTZ from property taxation — and nothing more. Tennessee's business, sales, and use taxes are "privilege" taxes, not ad valorem taxes, so FTZ status doesn't touch them (Madison Suburban Util. Dist. v. Carson; Hooten v. Carson; for business tax, Tenn. Rev. Rul. 99-32). (Tennessee's Foreign Trade Zone Act is §§ 7-85-101 to -103; an FTZ is a federal zone under 19 U.S.C. §§ 81a-81u.)

Question 2 — Use tax on goods imported only to re-export? No. The use tax (§ 67-6-203(a)) reaches property "used, consumed, distributed, or stored for use" in Tennessee, and "use" is defined broadly. But § 67-6-313(a) says Tennessee does not intend to tax "articles … imported into this state … for export." So property the contractor buys outside Tennessee, imports, and merely stores for inspection, tagging, and repackaging before export is not subject to use tax. Important flip side (footnote): this shield is only for property bought outside Tennessee. Property purchased in Tennessee is taxed under § 67-6-202 even if bought exclusively to export (Jack Daniel Distillery v. Jackson).

Question 3 — Redacted. This question and its analysis are redacted from the published ruling.

Question 4 — Tax on property sold to the U.S. government but used by the contractor on the federal job? Yes — pay sales or use tax. Contractors working for the U.S. government get no exemption from Tennessee sales tax on their purchases (Tenn. Comp. R. & Regs. 1320-5-1-.58(2)). Two wrinkles: a contractor can't use a resale certificate to buy property it "contracts … to install … as an improvement to realty," because that transfer isn't a "sale" (§ 67-6-209(c)). And even where a resale certificate is valid, the "contractors' use tax" (§ 67-6-209(b)) makes a contractor who uses untaxed TPP to perform a contract a "dealer" (§ 67-6-102(23)(K)) who must accrue and remit use tax on it (measured by purchase price). The U.S. Supreme Court upheld this even though the economic burden ends up on the United States (U.S. v. Boyd). Practical upshot: the contractor either buys under a resale certificate and owes use tax, or pays sales tax up front and owes no use tax.

Question 5 — Which business tax classification? Either 3 or 4, by dominant activity. Tennessee's business tax classifies a taxpayer by its "dominant business activity" — the activity that is the largest proportion of taxable gross sales (§ 67-4-702(a)(5); Rule 1320-4-5-.15) — and a taxpayer gets only one classification, even if it does several kinds of work (Hermitage Memorial Gardens). This contractor does both Classification 3 (services, § 67-4-708(3)(C)) and Classification 4 (contracting, installing, constructing, etc., § 67-4-708(4)) work, so it must first decide which activity is the larger share of gross sales:

• If Classification 4, the rate is 0.1% of the compensation under the contract (§ 67-4-708(4)(A)).
• If Classification 3, it then runs a "more than half" test: if more than 50% of taxable gross sales are wholesale, it pays the wholesaler rate of 0.0375%; otherwise the retailer rate of 0.1875% (§ 67-4-709(3); § 67-4-702(a)(25), (a)(16)). For the business tax, "wholesale" includes sales to the federal government (§ 67-4-702(a)(24); Rule 1320-4-5-.50) — and here, only the contractor's sales of property to the federal government count as wholesale; everything else is retail.

(The ruling notes the 2013 Uniformity and Small Business Relief Act, effective for periods on or after January 1, 2014, didn't change this analysis.)

What this means for you

Businesses operating in a foreign trade zone

A Tennessee FTZ can cut your property tax on qualifying inventory, but it is not a sales-, use-, or business-tax shelter. Those are privilege taxes and apply inside the zone exactly as outside it. Don't assume "we're in the FTZ" answers any sales/use/business-tax question — analyze each transaction on its own terms.

Importers and exporters moving goods through Tennessee

If you buy goods out of state, bring them into Tennessee only to inspect, tag, repackage, or consolidate, and then export them, Tennessee use tax generally doesn't apply (§ 67-6-313(a)). But the moment you buy goods from a Tennessee vendor, Tennessee sales tax can apply even if you're buying them solely to export — the import-for-export shield doesn't cover in-state purchases.

Government contractors

Doing work for the U.S. government does not make your purchases tax-free in Tennessee. If you use tangible personal property to perform a federal contract and it hasn't already been taxed, expect to owe the contractors' use tax (§ 67-6-209(b)) — even on property titled to the government. Decide deliberately whether to pay sales tax at purchase or buy under a resale certificate and accrue use tax; you can't escape both.

Multi-line businesses and their accountants

If your company both sells/renders services and performs contracting/construction work, you don't split into two business-tax classifications — you pick the one that is your dominant (largest-gross-sales) activity, then apply that classification's rate. Re-test it as your mix shifts; a change of classification triggers a final return under the old classification within 15 days.

Common questions

Q: Does locating in a foreign trade zone make my Tennessee sales, use, or business taxes go away?
A: No. FTZ status only affects ad valorem (property) taxes. Tennessee's sales, use, and business taxes are privilege taxes and apply regardless of the zone.

Q: I import goods into Tennessee and ship them right back out — do I owe Tennessee use tax?
A: Generally no, if you bought them outside Tennessee and only store them here for steps like inspection, tagging, and repackaging before export (§ 67-6-313(a)). But goods you buy from a Tennessee seller are subject to Tennessee sales tax even if you're buying them just to export.

Q: I do work for the federal government — are my purchases tax-exempt?
A: No. U.S.-government contractors are not exempt from Tennessee sales/use tax on the property they buy and use to perform the contract. If it isn't taxed at purchase, the contractors' use tax (§ 67-6-209(b)) applies.

Q: My business does both services and construction — which business tax classification do I use?
A: Just one — the classification of your dominant business activity (the largest share of your taxable gross sales). Classification 4 (contracting) is taxed at 0.1% of contract compensation; Classification 3 (services) is taxed at 0.1875% (retailer) or 0.0375% (wholesaler) depending on whether more than half of your taxable gross sales are wholesale.

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified. Confirm your own situation with a tax professional.

Citations and references

Tennessee — foreign trade zones & property tax:

• § 7-85-102, Tenn. Code Ann. (Foreign Trade Zone Act; §§ 7-85-101 to -103); 19 U.S.C. §§ 81a-81u, § 81o (federal FTZ statute / property-tax exemption)
• § 67-5-220 (Tennessee ad valorem exemption for FTZ property)

Tennessee sales & use tax (Retailers' Sales Tax Act):

• § 67-6-203(a) (use tax); § 67-6-313(a) (import-for-export — no tax); § 67-6-102(94)(A) ("use")
• § 67-6-202 (sales tax on in-state purchases, even if bought to export)
• § 67-6-209(b) (contractors' use tax); § 67-6-209(c) (installation as improvement to realty is not a "sale"); § 67-6-102(23)(K) ("dealer")
• Tenn. Comp. R. & Regs. 1320-5-1-.58(2) (U.S.-government contractors not exempt)

Tennessee business tax (Business Tax Act, §§ 67-4-701 to -730):

• § 67-4-708 (classifications; (3)(C) services, (4)/(4)(A) contracting); § 67-4-702(a)(5) ("dominant business activity")
• § 67-4-709(3) (Classification 3 rates); § 67-4-702(a)(24) ("wholesale," incl. federal-government sales); § 67-4-702(a)(25), (a)(16) ("more than half" wholesale test)
• Tenn. Comp. R. & Regs. 1320-4-5-.15 (dominant-activity guidance); 1320-4-5-.50 (federal-government sales as wholesale)

Cases and prior ruling cited:

• Madison Suburban Util. Dist. v. Carson, 232 S.W.2d 277 (Tenn. 1950); Hooten v. Carson, 209 S.W.2d 273 (Tenn. 1948) (sales and use taxes are privilege taxes)
• Jack Daniel Distillery v. Jackson, 740 S.W.2d 413 (Tenn. 1987) (Tennessee may tax in-state purchases bought for export)
• U.S. v. Boyd, 378 U.S. 39 (1964) (contractors' use tax valid against U.S.-government contractors)
• Hermitage Memorial Gardens Mausoleum & Memorial Chapel v. Dunn, 541 S.W.2d 147 (Tenn. 1976) (dominant activity only selects the classification; the tax still applies)
• Tenn. Rev. Rul. 99-32 (Dec. 7, 1999) (an FTZ taxpayer is still subject to the business tax)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/13-20.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 13-20
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.
SUBJECT
The application of Tennessee’s sales, use, and business taxes to certain activities within foreign
trade zones.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed. This letter
ruling may be revoked or modified by the Commissioner at any time. Such revocation or
modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.
FACTS
[TAXPAYER] (the “Taxpayer”) is located in a foreign trade zone in Tennessee and operates as a
contractor providing services for the federal government and corporate clients in various parts of
the [WORLD]. As part of its operations, the Taxpayer purchases tangible personal property from
out-of-state vendors and imports the property into Tennessee prior to exporting the property for
use in other [LOCATIONS].
The Taxpayer purchases uniforms for use in its business. At times, uniforms are imported into
Tennessee, subjected to minor product examination to verify that products were as ordered, and
shipped out of state for use.

The Taxpayer also purchases [TANGIBLE PERSONAL PROPERTY], which are shipped to a
warehouse in Tennessee so that paperwork can be completed prior to exporting the [TANGIBLE
PERSONAL PROPERTY] to foreign countries. While the [TANGIBLE PERSONAL
PROPERTY] are in Tennessee, the Taxpayer might apply asset tags to [TANGIBLE
PERSONAL PROPERTY], check to verify that products correlate to shipment documents, and
consolidate [TANGIBLE PERSONAL PROPERTY] into larger shipping containers.
[REDACTED].
The Taxpayer also performs a small percentage of its services for the federal government within
the foreign trade zone located in Tennessee. As part of these services, the Taxpayer sells various
[TANGIBLE PERSONAL PROPERTY] without markup to the federal government, and after
the sale uses the [TANGIBLE PERSONAL PROPERTY] in the course of providing services to
the federal government.
RULINGS
1.

Does the fact that the Taxpayer operates within a foreign trade zone as defined in TENN.
CODE ANN. § 7-85-102 (2011) affect the application of the Tennessee sales, use, and
business taxes to the Taxpayer’s activities?
Ruling: No. Only Tennessee’s ad valorem taxes are affected by the laws applicable to
entities operating in foreign trade zones. As privilege taxes, the Tennessee business,
sales, and use taxes are all unaffected by the fact that the Taxpayer operates within a
foreign trade zone.

2.

Is the Taxpayer liable for the Tennessee use tax on [TANGIBLE PERSONAL
PROPERTY] that are imported into Tennessee but exported prior to use?
Ruling: No. The Taxpayer is not liable for the Tennessee use tax on any [TANGIBLE
PERSONAL PROPERTY] that the Taxpayer imports into Tennessee and stores for
inspection, tagging, and repackaging prior to export.

3.

[REDACTED].

4.

Does the Taxpayer owe Tennessee sales or use tax on property sold to the federal
government, but used by the Taxpayer in the performance of its contract with the federal
government?
Ruling: The Taxpayer must pay either the Tennessee sales tax or the Tennessee use tax
on such property. If the Taxpayer purchases such property under a resale certificate, the
Taxpayer will be liable for the Tennessee use tax. The Taxpayer may choose instead to
pay Tennessee sales tax upfront on its purchase of such property; in such cases, use tax
will not be owed.

5.

For Tennessee business tax purposes, which classification applies to the Taxpayer?

Ruling: The Taxpayer conducts the taxable activities of a Classification 3 and
Classification 4 business. However, the Taxpayer may only have one classification for
purposes of the Tennessee business tax. As discussed below, the Taxpayer should first
use the “largest proportion of gross sales” analysis to determine whether it is a
Classification 3 or Classification 4 taxable business. If the Taxpayer is a Classification 3
business, the Taxpayer should use the “more than half” analysis discussed below to
determine the applicable tax rate.
ANALYSIS

1. Tennessee sales, use, and business taxes apply to entities operating within foreign trade
   zones.
   The Taxpayer operates at certain times out of a foreign trade zone located within Tennessee. 1
   Federal law exempts certain tangible personal property held in foreign trade zones from “State
   and local ad valorem taxation,” 2 and TENN. CODE ANN. § 67-5-220 (2013) (relating to property
   taxes) also exempts certain tangible personal property held in foreign trade zones from
   “Tennessee ad valorem taxation.” However, Tennessee’s business tax, sales tax, and use tax are
   all privilege taxes, not ad valorem taxes, and are therefore unaffected by foreign trade zones. 3
   Accordingly, none of the taxes discussed in this letter ruling are affected by the Taxpayer
   operating in a foreign trade zone within Tennessee.
2. Tangible personal property imported for export is not subject to the Tennessee use tax.
   TENN. CODE ANN. § 67-6-203(a) (2013) levies a tax on tangible personal property that is “used,
   consumed, distributed, or stored for use or consumption in this state.” Although “use” is defined
   broadly to include “the exercise of any right or power over tangible personal property incident to
   the ownership thereof,” 4 TENN. CODE ANN. § 67-6-313(a) (2013) confirms that “[i]t is not the
   intention of this chapter to levy a tax upon articles of tangible personal property imported into
   this state or produced or manufactured in this state for export.”

1

Foreign trade zones are established in this state under Tennessee’s Foreign Trade Zone Act, TENN. CODE ANN.
§§ 7-85-101 to -103 (2011). Section 102(1) defines “foreign trade zone” to have the same meaning as the federal
“foreign trade zone established pursuant to 19 U.S.C. §§ 81a-81u.”
2

3

19 U.S.C.A. § 81o (West, Westlaw through P.L. 113-36).

For sales and use taxes, see Madison Suburban Util. Dist. v. Carson, 232 S.W. 2d 277, 280 (Tenn. 1950) (“The
Sales Tax and the Use Tax are both privilege taxes.”) and Hooten v. Carson, 209 S.W. 2d 273, 274 (Tenn. 1948).
For business tax, see Tenn. Rev. Rul. 99-32 (Dec. 7, 1999) (concluding that a taxpayer operating within a foreign
trade zone is nonetheless subject to the Tennessee business tax).
4
TENN. CODE ANN. § 67-6-102(94)(A) (2013).

Accordingly, based on the facts presented, the Taxpayer is not liable for use tax on any
[TANGIBLE PERSONAL PROPERTY] that the Taxpayer purchases outside Tennessee, 5 then
imports into Tennessee and stores for inspection, tagging, and repackaging prior to export.

3. [REDACTED].
4. Sales or use tax must be paid on items sold to the federal government but used by the
   Taxpayer in the performance of its contract with the federal government.
   Contractors doing work for the U.S. Government are not exempt from paying Tennessee sales
   tax on their purchases of tangible personal property, 6 and the Taxpayer must pay the Tennessee
   sales and use tax on tangible personal property it uses in performance of its contracts if a sales or
   use tax has not already been paid on the property.
   A contractor may not use a resale certificate to purchase property when the contractor “contracts
   for the installation of such tangible personal property as an improvement to realty.” 7 Even where
   use of a resale certificate may be valid, TENN. CODE ANN. § 67-6-209(b) (2013) requires a
   contractor to pay use tax on tangible personal property used in performance of a contract if sales
   or use taxes have not already been paid. The statute, commonly known as the “contractors’ use
   tax,” reads in pertinent part:
   Where a contractor or subcontractor defined in this chapter as a dealer uses
   tangible personal property in the performance of the contract, or to fulfill contract
   or subcontract obligations, whether the title to such property be in the contractor .
   . . or any other person, or whether the title holder of such property would be
   subject to pay the sales or use tax, . . . such contractor or subcontractor shall pay a
   tax at the rate prescribed by § 67-6-203 measured by the purchase price of such
   property, unless such property has been previously subjected to a sales or use tax,
   and the tax due thereon has been paid. 8
   The Supreme Court of the United States has upheld the constitutionality of this tax when applied
   to “contractors doing business with the United States, even though the economic burden of the
   tax, by contract or otherwise, is ultimately borne by the United States.” 9
   The term “dealer” is defined by TENN. CODE ANN. § 67-6-102(23)(K) to include any person who
   5

Property purchased in Tennessee is subject to the sales tax under TENN. CODE ANN. § 67-6-202 (2013), and TENN.
CODE ANN. § 67-6-313(a) does not prevent taxation of property that is purchased in Tennessee, even if purchased
exclusively for export. See Jack Daniel Distillery v. Jackson, 740 S.W.2d 413 (Tenn. 1987).
6

TENN. COMP. R. & REGS. 1320-5-1-.58(2) (1974).

7

TENN. CODE ANN. § 67-6-209(c) (2013) states that “the transfer of tangible personal property by a contractor who
contracts for the installation of such tangible personal property as an improvement to realty does not constitute a
sale.” Since such transfers from the contractor to someone else are not sales, the contractor is not reselling property
and is therefore not entitled to use a resale certificate.

8

TENN. CODE ANN. § 67-6-209(b) (2013) (emphasis added).

9

U.S. v Boyd, 378 U.S. 39, 44 (1964) (internal citations omitted).

Uses tangible personal property, whether the title to such property is in such
person or some other entity, and whether or not such other entity is required to
pay a sales or use tax, in the performance of such person’s contract or to fulfill
such person’s contract obligations, unless such property has previously been
subjected to a sales or use tax, and the tax due thereon has been paid.
To the extent that the Taxpayer uses tangible personal property in the performance of its contract
on which a sales or use tax has not been paid, the Taxpayer is a “dealer” as defined in TENN.
CODE ANN. § 67-6-102(23)(K) and is subject to the contractors’ use tax levied by TENN. CODE
ANN. § 67-6-209(b).
Based on the facts provided, the Taxpayer must pay the Tennessee sales and use tax on untaxed
tangible personal property owned by the federal government but used by the Taxpayer in the
performance of its contract. If the Taxpayer uses tangible personal property on which sales or use
tax has not already been paid, the Taxpayer must accrue and remit use tax on property so used.

5. The Taxpayer is subject to the Tennessee business tax as either a Classification 3 or
   Classification 4 taxable business, depending on the Taxpayer’s dominant business activity.
   The Tennessee Business Tax Act 10 is one component of Tennessee’s broader privilege and
   excise taxation statutes. The Act imposes, in certain instances, a tax on the privilege of making
   sales by engaging in any business activity described in TENN. CODE ANN. § 67-4-708(1)-(4)
   (2013).
   The Act was modified in several respects by the Uniformity and Small Business Relief Act of
   2013, 11 which is effective for tax periods beginning on or after January 1, 2014. 12 This ruling
   will address the issues by applying the law as it exists as of the date of this letter; the analysis
   will not differ under the applicable provisions of the Uniformity and Small Business Relief Act
   of 2013. 13
   A taxpayer is classified under TENN. CODE ANN. § 67-4-708 according to its “dominant business
   activity,” and this classification determines the rate of the business tax. 14 The term “dominant
   business activity” is defined for business tax purposes under TENN. CODE ANN. § 67-4-702(a)(5)
   (2013) as “the business activity that is the major and principal source of taxable gross sales of the
   business.” The Department has issued guidance interpreting “dominant business activity” to
   10

Tennessee Business Tax Act, ch. 387, §§ 1-27, 1971 Tenn. Pub. Acts 994, 994-1019 (codified as amended at
TENN. CODE ANN. §§ 67-4-701 to -730 (2013)).

11

Uniformity and Small Business Relief Act of 2013, ch. 313, §§ 1-23, 2013 Tenn. Pub. Acts __ (to be codified in
various sections of Part 7 of Chapter 4 of Title 67).
12

Id. at § 23.

13

More information about the Uniformity and Small Business Relief Act of 2013 may be found on the Department’s
website, available at http://tn.gov/revenue/legsumm/2013legsumm.shtml#bizpc313 (last visited Sept. 3, 2013).
14

TENN. CODE ANN. § 67-4-709 (2013).

mean “[t]he item comprising the largest proportion of gross sales of the business when compared
with other items sold.” 15
Businesses whose dominant business activity involves “making sales of services or engaging in
the business of furnishing or rendering services” fall under Classification 3. 16 Businesses whose
dominant business activity involves “contracting or performing a contract or . . . persons
receiving compensation from . . . installing personal property, [or] from constructing, building,
erecting, repairing, grading, excavating, drilling, exploring, testing, or adding to any building, . .
. or structure or part thereof,” fall under Classification 4. 17
Based on the facts provided, the Taxpayer engages in activities associated with both
Classifications 3 and 4. The Taxpayer must determine which kind of activity comprises the
largest portion of its gross sales. The classification in which that activity falls is the Taxpayer’s
proper business tax classification. If the Taxpayer’s classification ever changes, the Taxpayer
must file a final business tax return under its prior classification within fifteen days of the
change. 18
The rate of the business tax depends on the Taxpayer’s classification. For Classification 3
businesses, the business tax rate is three sixteenths of one percent (0.1875%) of all sales by a
retailer or three eightieths of one percent (0.0375%) of all sales by a wholesaler. 19 The Taxpayer
must pay the business tax rate of a “wholesaler” if more than 50% of the Taxpayer’s taxable
gross sales are wholesale sales, 20 otherwise the Taxpayer is taxed as a “retailer.” 21
For purposes of the business tax, Tennessee defines “retail sale” by exclusion as anything that is
not a wholesale sale, and TENN. CODE ANN. § 67-4-702(a)(24) defines “wholesale” to include
(A) sales to retailers for resale, (B) sales of certain component parts for manufacturing property
for resale, (C) sales by a wholesaler of tangible personal property to users exempt from paying

15

TENN. COMP. R. & REGS. 1320-4-5-.15 (1974). When a business engages in taxable activities enumerated in
TENN. CODE ANN. § 67-4-708(1)-(4) (2013), yet the item comprising the largest proportion of gross sales does not
fall within any of those classifications, the business is not exempt. Hermitage Memorial Gardens Mausoleum &
Memorial Chapel v. Dunn, 541 S.W.2d 147 (Tenn. 1976). Applying a previous version of the Tennessee Business
Tax Act, the Tennessee Supreme Court ruled that “[a]ll entities who make sales by engaging in any of the business
activities enumerated in § 67-5805 [now codified, as amended, at TENN. CODE ANN. § 67-4-708 (2013)] are subject
to the tax,” and that “[t]he dominant business activity of a taxpayer is relevant only in determining which of the
classifications in § 67-5805 applies to him.” Id. at 149.
16

See TENN. CODE ANN. § 67-4-708(3)(C) (2013).

17

TENN. CODE ANN. § 67-4-708(4) (2013).

18

DEP’T OF REVENUE, BUSINESS TAX GUIDE 11 (Oct. 2012).

19

TENN. CODE ANN. § 67-4-709(3) (2013).

20

TENN. CODE ANN. § 67-4-702(a)(25) (2013).

21

TENN. CODE ANN. § 67-4-702(a)(16).

other taxes including the federal government, 22 and (D) certain sales made by franchised motor
vehicle dealers.
Of the activities described in the facts, only the Taxpayer’s sales of [TANGIBLE PERSONAL
PROPERTY] to the federal government would constitute wholesale sales. Everything else
described in facts are retail sales.
Classification 4 businesses enumerated in § 67-4-708(4)(A) are taxed at one tenth of one percent
(0.1%) of “the compensation entitled to under the contract, whether in the form of a contract
price, commission, fee or wage.” If the Taxpayer is a Classification 4 business, this is the
appropriate rate of tax.
For purposes of the business tax, the Taxpayer should first use the “largest proportion of gross
sales” analysis to determine whether it is a Classification 3 or Classification 4 taxable business.
If the Taxpayer is a Classification 4 business, the proper tax rate is 0.1% of compensation
entitled to under contract. If the Taxpayer is a Classification 3 business, the Taxpayer should use
the “more than half” analysis to determine whether it qualifies for the reduced wholesaler rate of
0.0375% of sales, otherwise the proper rate is 0.1875% of sales.

Robert C. Guth
Assistant General Counsel
for Taxation

22

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

November 25, 2013

See TENN. COMP. R. & REGS. 1320-4-5-.50 (1974).