Tennessee Adopts New Sourcing Provisions

House Bill 323 (H.B. 323), the Tennessee Works Tax Act, enacted on May 11, 2023, introduced significant changes to Tennessee’s sales and use tax laws. Key points included a sales tax holiday on food from August 1 to October 31, 2023, as well as the adoption of certain sourcing provisions and definitions consistent with Streamlined Sales and Use Tax Agreement (SSUTA) effective July 1, 2024.

Effective July 1, 2024, the Tennessee adopted Streamlined Sales Tax sourcing rules for a retail sale of a product from outside of Tennessee into Tennessee including the following:

1. Sales are sourced to the seller’s business location if the purchaser receives the product there.
2. If the purchaser or purchaser’s designee receives the product elsewhere, the sale is sourced to that location of receipt, which may be the location as indicated by delivery instructions known to the seller.
3. If neither option above applies, the sale is sourced to the purchaser’s address in the seller’s business records or the address obtained during the sale, provided using these addresses does not constitute bad faith.
4. If none of the above apply, the sale is sourced to the address of the purchaser as obtained during the sale or payment address assuming no bad faith.

If none of the above apply, the sales is sourced to the ship from location, digital good or electronically delivered software transmission point by the seller, or the service provided location.

Destination sourcing is adopted for sales of services performed on tangible personal property and computer software. Even though the service is performed in Tennessee, if the serviced property or software is shipped or delivered by the seller to the purchaser outside of Tennessee, then the sale is no longer sourced to Tennessee but is rather reported as an exempt interstate sale. This does not impact sales of services performed on tangible personal property and computer software where the serviced property or software is received by the purchaser or the purchaser’s designed in Tennessee, which continue to be subject to tax.

Sales and services made through a marketplace facilitator’s marketplace are sourced to where the product is received by the purchaser.

Sourcing for leased property follows destination sourcing. If the goods move outside of Tennessee during the lease period, then the recurring periodic payments from that point forward are no longer sourced to Tennessee and are considered exempt interstate sales. This provision does not apply to certain sales such as leased transportation equipment, trucks, trailers, locomotives, aircraft, shipping containers, and large vessels used in interstate commerce. The sourcing address in Tennessee for leases moved into Tennessee is the primary property location, which is defined as the address for the property as provided by the lessee to the lessor. Leases of property, licensed computer software, and specified digital products in Tennessee where the primary property location stays in Tennessee are not impacted by the new sourcing rules and are subject to tax.

Origin sourcing remains intact for intrastate sales and leases.

The bill also provides detailed sourcing rules for leases, rentals, transportation equipment sales, repair services, laundering, installation services, direct mail, and calling services. These changes aim to simplify tax compliance and align Tennessee’s tax laws with Streamlined Sales Tax (SST) guidelines. (H.B. 323 Tennessee Works Act, May 11, 2023)