Navigating Tennessee sales tax on services can be surprisingly complex. While most services in the state are exempt, there are critical exceptions—ranging from lodging and telecom to repairs and installation—that can easily trip up businesses. Misclassifying your service could lead to penalties, interest, or a failed audit.
This guide breaks down which services are taxable, how sourcing rules work, and what records you need to stay compliant. If you’re unsure how the rules apply to your business, Hands Off Sales Tax (HOST) can help you classify services correctly, apply the right tax rates, and stay fully audit-ready.
Are Services Generally Taxed in Tennessee?
Tennessee does not generally tax services, but there are important exceptions that businesses must watch for. The state’s sales tax code primarily applies to tangible personal property, yet several categories of services are specifically called out as taxable under Tennessee law.
Key Taxable Service Categories Include:
- Repair, installation, and maintenance services for tangible personal property
- Telecommunications and ancillary services
- Lodging and short-term accommodations
- Cleaning and laundry services (limited scope)
- Admissions, amusements, and digital goods/services
- Leases and rentals of tangible goods with accompanying services
- Certain fabrication and processing services
Each of these categories has sub-rules and caveats. For example, while cleaning services for homes may be exempt, janitorial services for commercial property are taxable Tenn. Code Ann. § 67-6-205.
Understanding which services are taxed requires parsing both Tenn. Code Ann. § 67-6 and DOR interpretations. HOST helps business owners decode these complex rules and avoid costly mistakes by determining whether their services fall within taxable exceptions or remain exempt.
Service Categories: What’s Taxable & Why?
Tennessee law defines a limited but specific set of taxable services. These are often tied to the use, enjoyment, or physical handling of tangible personal property or involve regulated services like telecom and lodging. Below are key categories and examples.
Lodging & Short-Term Rentals
Stays at hotels, motels, inns, and vacation rentals are subject to state and local sales tax, regardless of booking platform. Tennessee also applies tax to campground fees and overnight accommodations provided by any business entity.
Repairs, Cleaning & Alterations (Including Software)
Sales tax applies to labor charges for:
- Repairing or maintaining tangible goods (e.g., electronics, machinery)
- Computer software installation, repair, or customization
- Clothing alterations and dry cleaning services
Installation of Tangible Property
Charges for installing tangible items—such as carpeting, appliances, or security systems—are taxable if the goods being installed are also taxable. This includes both parts and labor.
Telecom, Parking & Amusement Services
These regulated service areas are clearly taxable:
- Telecommunication and ancillary services (e.g., VoIP, paging)
- Parking services, valet fees, and storage facilities
- Amusements, including ticket sales for shows, games, and recreational events
Additional Taxable Examples
- Animal grooming/bathing (if provided as a stand-alone service)
- Short-term space rentals (e.g., event booths or vendor spaces)
- Coin-operated services (e.g., car washes, laundromats)
Understanding these categories is essential for compliance. HOST can help businesses interpret Tennessee’s evolving rules and avoid misclassifying services.
Pro Taxability Gray Areas
Not all service tax rules in Tennessee are black and white. Certain industries operate in legal gray zones where taxability depends on how the service is structured or delivered. Missteps here are a major source of audit risk.
IT Services, SaaS & Digital Access
Tennessee does not tax most stand-alone custom software, IT consulting, or remote access services (RAS). However, prewritten software—whether downloaded or accessed remotely—is taxable under Tenn. Code Ann. § 67-6-231. This means:
- Custom software = exempt
- Prewritten software (delivered electronically or via cloud) = taxable
- Software as a Service (SaaS) is taxable if it includes access to prewritten software
Bundled Services
If a non-taxable service is sold in a bundle with tangible personal property (TPP), the entire bundle becomes taxable, unless charges are itemized. For example an analytics consultation + report in a printed binder = taxable unless priced separately.
Professional & Consulting Services
Standalone legal, accounting, marketing, and engineering services remain exempt. But if they result in or involve delivery of software, printed materials, or digital goods, partial taxability may apply.
Clear documentation and careful invoicing are essential. HOST helps clients navigate these nuances for bulletproof compliance.
Sourcing & Nexus Rules for Services
Tennessee applies destination-based sourcing for services, meaning taxability is determined by where the service is received or used, not where it’s performed. This affects both in-state and out-of-state providers and creates unique compliance obligations.
Destination-Based Sourcing Explained
If a business provides a taxable service to a Tennessee customer, sales tax must be charged based on the customer’s location, regardless of where the provider is based. For example a website developer in Georgia selling templated sites to Tennessee businesses must charge Tennessee sales tax if the software is prewritten and accessed by customers in Tennessee.
Physical vs. Economic Nexus
Tennessee enforces both:
- Physical Nexus: Having an office, employees, or property in the state triggers tax obligations.
- Economic Nexus: Remote sellers with over $100,000 in sales to Tennessee customers in the previous 12 months must collect and remit sales tax.
This applies to services too, if taxable.
Marketplace Facilitators
Marketplace facilitators (e.g., Amazon, Etsy) must collect and remit sales tax on behalf of third-party sellers, including any taxable services they sell to Tennessee customers. This relieves individual sellers of that responsibility but still requires them to track thresholds and validate facilitator compliance.
Understanding these rules is critical, especially for multistate service providers or SaaS businesses.
Compliance Workflow: Service Tax Readiness
Navigating service tax obligations in Tennessee requires a structured, proactive workflow. Whether you’re a local contractor, SaaS provider, or national service business, this six-step process will help you stay compliant with Tennessee’s evolving rules.
1. Identify the Service Type
Begin by categorizing your service. Is it:
- Tangible (e.g., cleaning, repair)?
- Digital (e.g., SaaS)?
- Professional/consulting?
Cross-check against Tennessee’s taxable service categories:
2. Determine Taxability
Consult the Tennessee Sales Tax Manual and rulings to confirm if the service is taxable. Note that bundling taxable services with exempt ones may change the outcome.
3. Assess Nexus
Check whether you have:
- Physical nexus (office, employee, or property)
- Economic nexus (over $100K in sales)
4. Register for Sales Tax
Apply via the TNTAP portal to receive a sales tax account number.
5. Collect Sales Tax
Set up your POS or invoicing system to collect based on destination sourcing.
6. File Returns
File returns monthly, quarterly, or annually depending on volume.
A clear workflow prevents missed liabilities, audits, or penalties.
Audit Protection & Service Documentation
Service-based businesses in Tennessee are not exempt from scrutiny. When the Department of Revenue audits your sales tax filings, proper documentation is your best defense. Misclassification of services or inadequate records can trigger assessments, penalties, and interest.
What Auditors Will Examine
Tennessee auditors typically look for:
- Detailed Service Descriptions: Vague terms like “labor” or “consulting” raise red flags. Instead, clearly specify whether the service was repair, installation, software setup, etc.
- Invoices with Tax Treatment Noted: Each line item should clearly show if sales tax was collected or not, along with the reason.
- Taxability Justifications: If you didn’t charge tax, be prepared to cite the exemption. For example, custom software is exempt; canned software is not.
Best Practices for Documentation
- Retention Period: Maintain records for a minimum of three years, as per audit guidelines.
- Digital Filing Systems: Store digital copies of quotes, invoices, and correspondence to back up tax decisions.
- Audit Trail Notes: If taxability was based on a ruling or legal opinion, keep that reference linked to the transaction.
Proper documentation not only protects you during audits but also enables confident, compliant scaling across services and locations.
Real-World Service Business Examples
To better understand how Tennessee sales tax rules apply in practice, let’s look at how different service businesses navigate compliance. These scenarios highlight where taxability can get tricky—and why proper classification is essential.
1. Boutique Hotel Offering Lodging and Events
A small hotel in Nashville charges for overnight stays (taxable) and also rents out its event hall.
- Lodging is taxable.
- Short-term venue rentals are also taxable if under 30 days.
- If meals or entertainment are bundled into packages, those components are taxable too unless separated clearly on invoices.
2. SaaS & Installation by a Tech Firm
A Tennessee-based IT firm sells:
- Custom software (exempt) and
- Canned software (taxable)
It also offers on-site installation services for network equipment—taxable as tangible property installation.
3. Janitorial Service for Residential & Commercial Spaces
- Cleaning real property (e.g., homes, offices) is not taxable.
- But cleaning tangible personal property (e.g., drapes, rugs, equipment) is taxable.
Correctly classifying services prevents audits and ensures smooth filing.
How HOST Simplifies Service Sales Tax Compliance
Navigating Tennessee’s nuanced service tax rules can overwhelm even seasoned business owners. That’s where Hands Off Sales Tax (HOST) steps in—with end-to-end solutions that take the complexity off your plate.
Service Classification & Nexus Analysis
HOST begins by helping you correctly classify the services you offer—whether you’re in tech, hospitality, maintenance, or consulting. Their team performs thorough nexus analysis to determine whether you’re required to collect Tennessee sales tax, especially if you’re an out-of-state service provider with remote clients or economic nexus triggers.
Accurate Registration & Return Filing
Once obligations are confirmed, HOST handles your sales tax registration with the Tennessee Department of Revenue, ensuring accurate details like NAICS codes and business addresses are submitted. They also file returns on your behalf, with monthly, quarterly, or annual cadence as required by state law.
Audit Defense & Documentation
In case of a sales tax audit, HOST provides defense support by preparing records, invoices, exemption certificates, and service taxability documentation that align with state standards. Their proactive compliance systems reduce risk exposure by ensuring audit-readiness from day one.
From setup to filings and audit resolution, HOST helps service businesses stay compliant with confidence—without drowning in tax code.
Conclusion: Service Clarity Starts with Smart Compliance
Tennessee’s sales tax on services isn’t a flat yes or no—it’s a complex landscape of exemptions, exceptions, and edge cases. From lodging and cleaning to software installs and bundled packages, businesses must assess taxability carefully, apply correct sourcing, and maintain airtight documentation.
That’s where HOST proves invaluable. Whether you’re a startup SaaS firm, a multi-location hospitality provider, or a local repair shop, HOST ensures your service tax obligations are clear, your filings are timely, and your audit risks are minimized.
Get in touch with HOST to streamline your Tennessee sales tax compliance—so you can focus on growing your business, not decoding tax law.
Frequently Asked Questions (FAQs)
1. Are professional services like legal or accounting taxable in Tennessee?
No, most professional services such as legal, accounting, and medical services are exempt from Tennessee sales tax unless bundled with taxable tangible goods or installation services. Always document the service scope clearly.
2. Is software installation taxable even if the software itself isn’t?
Yes. Tennessee taxes the installation of tangible personal property—including software installed on a customer’s device—even if the software is downloaded or custom-built.
3. Do out-of-state service providers need to collect Tennessee sales tax?
Yes, if they have economic nexus (e.g., over $100,000 in Tennessee sales), they must register, collect, and remit sales tax—even if they lack a physical presence.
4. How does Tennessee treat SaaS and cloud-based access?
Remotely accessed software (RAS) is generally taxable, while custom software and standalone consulting are usually exempt. Clarify use-case and delivery method.
5. What documentation should service providers retain for audits?
Maintain detailed invoices, service descriptions, exemption certificates (if applicable), and tax treatment rationale. Retain records for at least 3–7 years.
