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Sales and Use Tax

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  1. What do consumers need to know about Tennessee's sales tax holiday?
  2. What do retailers need to know about Tennessee's sales tax holiday?
  3. Can sales and use tax be filed electronically?
  4. Where do I mail my tax payment?
  5. What is the filing deadline for sales and use returns?
  6. If I have no sales, should I file a sales tax return?
  7. How do I register my business for collection of sales tax?
  8. What is the cost to register for a sales and use tax account number?
  9. What are the registration requirements for a sales tax number?
  10. Where can I obtain a Federal Employee Identification Number (FEIN)?
  11. How do I inform the department on any change to my account?
  12. How do I close my business?
  13. Should I notify your office if I change the type of products that I sell?
  14. What are the state and local sales tax rates in Tennessee?
  15. What is use tax?
  16. Are sales made on the Internet subject to sales or use tax?
  17. Why does a catalog company or an online seller located in another state charge Tennessee sales or use tax?
  18. Should a Tennessee dealer selling merchandise through the Internet collect sales tax?
  19. What items are exempt when sold to farmers?
  20. What is a "single article," and how is sales tax on a single article calculated?
  21. What is nexus?
  22. Is labor (on real property or tangible property) taxable?
  23. When can a business use a resale certificate?
  24. Are organizations exempt from the sales tax liable for tax on sales?
  25. Are computer consulting services subject to sales/use tax?
  26. Should a Tennessee software developer callect Tennessee sales tax on software it installs on a server located in Tennessee if the customer buying the software is located outside Tennessee and only accesses the software via the Internet?
  27. What are the sales and use tax benefits for manufacturers?
  28. Can a commercial dry cleaner qualify for Tennessee manufacturing exemptions?
  29. How does sales/use tax apply to contractors?
  30. Where can I find the sales and use tax laws in the Tennessee Code?
  31. When must an aircraft dealer charge sales tax on his proceeds? And when may this dealer purchase an aircraft exempt from sales/use tax?
  32. What is the correct treatment for capital leases for sales and use tax?


  1. What do consumers need to know about Tennessee's sales tax holiday?

    • When is the sales tax holiday? Tenn. Code Ann. Section 67-6-393 establishes annual sales tax holidays in Tennessee. The holiday starts each year at 12:01 a.m. on the first Friday in August and ends at 11:59 p.m. on the following Sunday.
    • What items qualify for the sales tax holiday? During the holiday, the following items are exempt from sales and use tax: 1) clothing with a price of $100 or less per item; 2) school and school art supplies with a price of $100 or less per item; and 3) computers with a price of $1,500 or less per item.
    • How do I claim the exemption? The exemption is based on the purchase of items that qualify for the holiday. No identification or exemption certificate is required. As long as you purchase an item that qualifies to be sold tax exempt, you should not pay sales tax on the item sold.
    • What merchants are participating in the sales tax holiday? Merchants who sell the items listed above must participate in the sales tax holiday. If a merchant sells only to other businesses (purchases for a business do not qualify for the holiday), or does not sell items that qualify for the holiday (example: a car dealer) then the merchant is NOT required to participate in the holiday.
    • Can I buy items out of town or out of state and still qualify for the holiday? Purchases can be made from Tennessee retailers, including retailers that sell through the Internet or catalog if those items are to be delivered into Tennessee.
    • Does the $100 exemption apply to the first $100 of a school supply or an item of clothing being purchased? In other words, if the selling price of a book or a clothing item is $105, is the first $100 exempt from sales tax? No. The exemption applies to items selling for $100 or less. If an item sells for more than $100 ($105 in this example), tax is due on the entire selling price.
    • What if I buy a pair of shoes for $125, could I split the pair of shoes to fall below the threshold? No. A retailer MAY NOT split items that are normally sold together in order to fall under the sales price threshold.
    • What items of clothing qualify? Clothing is defined as human wearing apparel suitable for general use. This includes shirts, dresses, pants, coats, gloves and mittens, hats and caps, hosiery, neckties, belts, sneakers, shoes, uniforms whether athletic or non-athletic, and scarves. Clothing DOES NOT include belt buckles sold separately, patches and emblems sold separately, sewing equipment and supplies or sewing materials that become part of "clothing" such as thread, fabric, yarns and zippers.

      While clothing is eligible for the holiday, clothing accessories, protective equipment and sport or recreational equipment are NOT eligible for the holiday and are subject to tax during the holiday period. Clothing accessories include briefcases, cosmetics, hair notions, handbags, jewelry, wallets, umbrellas, sunglasses and watches. Protective equipment includes breathing masks, hard hats, face shields, helmets, paint or dust respirators, hearing protectors, safety glasses and goggles, tool belts, protective gloves, and welders' gloves. Sports or recreational equipment includes ballet and tap shoes, cleated or spiked athletic shoes, gloves such as baseball, boxing and golf, goggles, hand and elbow guards, life preservers and vests, mouth guards, roller and ice skates, shin guards, shoulder pads, ski boots, and wetsuits and fins.
    • What types of items qualify as school and school art supplies? A school supply is defined as an item used by a student in a course of study. The definition contains an all-inclusive list of school supplies. Examples are binders, book bags, calculators, tape, chalk, crayons, erasers, folders, glue, pens, pencils, lunch boxes, notebooks, paper, rulers, and scissors. School art supplies are defined as clay and glazes; acrylic, tempera and oil paints; paintbrushes for artwork; sketch and drawing pads; and watercolors.

      Excluded from the holiday (and therefore subject to sales tax) are school instructional material and school computer supplies consisting of computer storage media, diskettes, compact disks, handheld electronic schedulers, personal digital assistants, computer printers, and printer supplies for computers (including printer paper and printer ink), house paint and paintbrushes to be used for house painting, spray paint, and easels.
    • What qualifies as a computer? A computer is defined as a central processing unit (CPU), along with various other components including monitor, keyboard, mouse, cables to connect components, and preloaded software. While the CPU may be purchased separately, other items must be part of a bundled computer package in order to be eligible.

      Excluded from the holiday are individual computer parts, such as monitors, keyboards, speakers, and scanners when not sold in conjunction with a CPU; individually purchases software or other software not part of a preloaded software package on the initial purchase of a computer; storage media, such as diskettes and compact disks; handheld electronic schedulers; personal digital assistants (PDAs); video game consoles; and computer printers and supplies for printers, such as paper and ink.
    • Do school textbooks or workbooks qualify for the holiday? School textbooks and workbooks are exempt from sales tax. They do not qualify for the holiday because they fall within the school instructional material exception. However, because they are already exempt from tax, no holiday is necessary on these items.

      A textbook is defined as a printed book that contains systematically organized educational information that covers the primary objectives of a course of study. A textbook may contain stories and excerpts of popular fiction and nonfiction writings, but does not include a book primarily published and distributed for sale to the general public. A workbook means a printed booklet that contains problems and exercises in which a student may directly write answers or responses to the problems and exercises. Neither the term textbook nor workbook include a computer or computer software.
    • Does computer software qualify for the holiday? No. While computers with a price of $1,500 or less may be purchased exempt from tax during the holiday, purchases of computer software are excluded from the holiday and are subject to tax.
    • Is there a limit to the number of items that may be purchased? There is no limit to the quantity of items that may be purchased as long as the purchase price of each of those items is below the threshold provided in the law.
    • My school requires the purchase of a computer with a cost of more than $1,500. Will I have to pay sales tax if I buy it during the holiday? Yes. The sales tax holiday legislation only exempts computers with a sales price of $1,500 or less. For those that cost more than $1,500, there is no provision to exempt a portion of the sales price and tax the remainder. Computers with a sales price in excess of $1,500 are taxable on the total sales price.
    • If I place an order for a computer on Aug. 1 and pay for it with my credit card, but it is delivered during the holiday, will it be exempt? No. Qualified items sold to purchasers by mail, telephone, e-mail, or Internet shall qualify for the sales tax exemption if the customer orders and pays for the item and the retailer accepts the order during the holiday period for immediate shipment, even if delivery is made after the exemption period. In the example question, the order and payment were made before the holiday and therefore do not qualify. However, if the computer was ordered and the credit card was charged during the holiday period, and delivery was scheduled to take place after the holiday, the sale would qualify for the exemption.
    • How are extended warranties and discounts handled on computers when they bring the purchase price over $1,500? The purchase of a computer will be exempt if the sales price is $1,500 or less, but any extended warranty purchased would not be exempt. Extended warranties are considered taxable services, and services are not exempt under the sales tax holiday. Also, if the vendor offers any kind of incentive that is reimbursed by a third party, such as a manufacturer's rebate, that brings the price you pay to under $1,500, the original sales price of the computer before application of the reimbursable incentive will be the price that determines tax application.

      In other words, if you purchase a computer that normally sells for $1,800 but the vendor offers a $300 manufacturer's rebate that brings the price you pay to $1,500, the $1,800 original sales price will be the price that determines taxability. In this case, because the actual sales price exceeds $1,500 (the $1,800 sales price with the reimbursable rebate), the computer will remain subject to tax.

      However, if the seller offers a store discount that is not reimbursed by any third party, then the discounted sales price will determine sales tax application.
    • Will items purchased for a business be eligible for the tax exemption during the sales tax holiday? No. The exemption does not apply to items used in a trade or business or to items that are rented. If you make a purchase for an item that is to be used in a trade or business and the retailer does not collect sales tax from you, you are obligated to report this purchase and pay use tax on the item. You may report and pay this on your regularly filed return, or if you do not have a sales tax account, you may report and pay this on a consumer use tax return available on the department's Web site.
  2. What do retailers need to know about Tennessee's sales tax holiday?

    • When is the sales tax holiday? Tenn. Code Ann. Section 67-6-393 establishes annual sales tax holidays in Tennessee. The holiday starts each year at 12:01 a.m. on the first Friday in August and ends at 11:59 p.m. on the following Sunday.
    • What items qualify for the sales tax holiday? During the holiday, the following items are exempt from sales and use tax:

      1. clothing with a price of $100 or less per item;
      2. school and school art supplies with a price of $100 or less per item; and
      3. computers with a price of $1,500 or less per item.

    • What items of clothing qualify? Clothing is defined as human wearing apparel suitable for general use. This includes shirts, dresses, pants, coats, gloves and mittens, hats and caps, hosiery, neckties, belts, sneakers, shoes, uniforms whether athletic or non-athletic, and scarves. Clothing DOES NOT include belt buckles sold separately, patches and emblems sold separately, sewing equipment and supplies or sewing materials that become part of "clothing" such as thread, fabric, yarns and zippers.

      While clothing is eligible for the holiday, clothing accessories, protective equipment and sport or recreational equipment are NOT eligible for the holiday and are subject to tax during the holiday period. Clothing accessories include briefcases, cosmetics, hair notions, handbags, jewelry, wallets, umbrellas, sunglasses and watches. Protective equipment includes breathing masks, hard hats, face shields, helmets, paint or dust respirators, hearing protectors, safety glasses and goggles, tool belts, protective gloves, and welders' gloves. Sports or recreational equipment includes ballet and tap shoes, cleated or spiked athletic shoes, gloves such as baseball, boxing and golf, goggles, hand and elbow guards, life preservers and vests, mouth guards, roller and ice skates, shin guards, shoulder pads, ski boots, and wetsuits and fins.
    • What types of items qualify as school and school art supplies? A school supply is defined as an item used by a student in a course of study. The definition contains an all-inclusive list of school supplies. Examples are binders, book bags, calculators, tape, chalk, crayons, erasers, folders, glue, pens, pencils, lunch boxes, notebooks, paper, rulers, and scissors. School art supplies are defined as clay and glazes; acrylic, tempera and oil paints; paintbrushes for artwork; sketch and drawing pads; and watercolors.

      Excluded from the holiday (and therefore subject to sales tax) are school instructional material and school computer supplies consisting of computer storage media, diskettes, compact disks, handheld electronic schedulers, personal digital assistants, computer printers, and printer supplies for computers (including printer paper and printer ink), house paint and paintbrushes to be used for house painting, spray paint, and easels.
    • What qualifies as a computer? A computer is defined as a central processing unit (CPU), along with various other components including monitor, keyboard, mouse, cables to connect components, and preloaded software. While the CPU may be purchased separately, other items must be part of a bundled computer package in order to be eligible.

      Excluded from the holiday are individual computer parts, such as monitors, keyboards, speakers, and scanners when not sold in conjunction with a CPU; individually purchases software or other software not part of a preloaded software package on the initial purchase of a computer; storage media, such as diskettes and compact disks; handheld electronic schedulers; personal digital assistants (PDAs); video game consoles; and computer printers and supplies for printers, such as paper and ink.
    • Do school textbooks or workbooks qualify for the holiday? School textbooks and workbooks are exempt from sales tax. They do not qualify for the holiday because they fall within the school instructional material exception. However, because they are already exempt from tax, no holiday is necessary on these items.

      A textbook is defined as a printed book that contains systematically organized educational information that covers the primary objectives of a course of study. A textbook may contain stories and excerpts of popular fiction and nonfiction writings, but does not include a book primarily published and distributed for sale to the general public. A workbook means a printed booklet that contains problems and exercises in which a student may directly write answers or responses to the problems and exercises. Neither the term textbook nor workbook include a computer or computer software.
    • Does computer software qualify for the holiday? No. While computers with a price of $1,500 or less may be purchased exempt from tax during the holiday, purchases of computer software are excluded from the holiday and are subject to tax.
    • Does the $100 exemption apply to the first $100 of a school supply or an item of clothing being purchased? In other words, if the selling price of a book or a clothing item is $105, is the first $100 exempt from sales tax? No. The exemption applies to items selling for $100 or less. If an item sells for more than $100 ($105 in this example), tax is due on the entire selling price.
    • What if I buy a pair of shoes for $125, could I split the pair of shoes to fall below the threshold? No. A retailer MAY NOT split items that are normally sold together in order to fall under the sales price threshold.
    • Will items purchased for my business be eligible for the tax exemption during the sales tax holiday? No. The exemption does not apply to items used in a trade or business or to items that are rented. If you make a purchase for an item that is to be used in a trade or business and the retailer does not collect sales tax from you, you are obligated to report this purchase and pay use tax on the item. You may report and pay this on your regularly filed return, or if you do not have a sales tax account, you may report and pay this on a consumer use tax return available on the department's Web site.
  3. Can sales and use tax be filed electronically?
    Yes. Click here for more information about filing Sales and Use Tax online. For more information about filing Consumer Use Tax online, click here.
  4. Where do I mail my tax payment?
    Mail your payment to:

    Tennessee Department of Revenue
    Andrew Jackson Building
    500 Deaderick St.
    Nashville, TN 37242
  5. What is the filing deadline for sales and use returns?
    Sales and use tax returns must be filed by the 20th (or the first work day after the 20th, if the 20th falls on a weekend or holiday) of the month following the period for which the tax is due. For example, a January return for a monthly filer would be due February 20. A return for January through March for a quarterly filer would be due April 20. There are special filing requirements for accounts filing payments in excess of $1,000.
  6. If I have no sales, should I file a sales tax return?
    Yes. You are required to file a tax return whether or not you have any sales to report. For your convenience, you may telefile your tax return by dialing (800) 342-1003 (in-state) or (615) 253-0600 (local or out-of-state). There is no charge for telefiling your sales tax return.
  7. How do I register my business for collection of sales tax?
    Registration for sales or other taxes requires the completion of a no-cost application, available on this Web site or upon request from the Taxpayer Services Division. When completed properly and received by the department, a registration number will be issued to qualified applicants.
  8. What is the cost to register for a sales and use tax account number?
    There is no charge to register your business for sales and use tax.
  9. What are the registration requirements for a sales tax number?
    Any person who sells, leases or rents tangible personal property or provides a taxable service in Tennessee is required to register for sales or use tax purposes, even though the product sold may be tax exempt. Persons that sell, on the average, less than $400 per month and pay tax to their suppliers do not need to register until their average monthly sales exceed that amount. Persons that do not sell tangible personal property or taxable services, but buy untaxed merchandise from out-of-state for use and consumption in Tennessee must register and pay the use tax directly to the Department of Revenue. Returns are due monthly, quarterly or annually dependent upon the filing status.
  10. Where can I obtain a Federal Employee Identification Number (FEIN)?
    Federal Employee Identification Numbers are issued by the Internal Revenue Service. You can obtain an application (SS4) form by dialing (800) 829-1040 or by logging onto the IRS's Web site at www.irs.gov.
  11. How do I inform the department on any change to my account?
    The best method to update your account is by writing the Department of Revenue, giving the account name, address, and registration number, and the desired change. However, many simple changes may be made by calling the Taxpayer Services Division for assistance. The telephone number is (615) 253-0600 or in-state (800) 342-1003. You may also update your account by using the Online Business Tax Registration.
  12. How do I close my business?
    The business should return the registration certificate and complete the reverse side, giving the closure date and other necessary information. If the registration certificate is unavailable, a letter giving the business name, address, registration number, date of closing, and other pertinent information should be mailed to the Taxpayer Services Division. Additional information. You may also close your business by using the Online Business Tax Registration.
  13. Should I notify your office if I change the type of products that I sell?
    Yes, you should notify the department, and we will determine what classification codes need to be updated. Normally your sales tax account number would not change.
  14. What are the state and local sales tax rates in Tennessee?
    Generally, the state sales and use tax rate is 7% and the local rate is 2.25%. However, the local rate will vary from 1% to 2.75%. Certain circumstances may create exemptions from one or both of the taxes, while qualified consumer types may enjoy reduced rates of tax.

    Certain food items are taxed at 5.25%. (Please refer to Sales and Use Tax important notice #12-04 for more detailed information.)
  15. What is use tax?
    Use tax, at the same rates as sales tax, becomes due when the user and consumer of taxable merchandise does not pay tax to the supplier. Examples include purchases of tangible personal property for use from an out-of-state vendor who does not collect the tax, extractions from inventory purchased on a resale certificate for personal use and consumption. Generally, contractors become liable for a use tax on materials used in realty construction even when the contractee first purchases the materials on an exemption certificate. Use tax is due even on purchases made by citizens from another state which are not taxed by the seller.
  16. Are sales made on the Internet subject to sales or use tax?
    Yes. Even if a seller does not collect Tennessee sales tax from you, when you ask a dealer to deliver an item to you in Tennessee, you are responsible for paying use tax at the same rate as sales tax. Click here to download the return.
  17. Why does a catalog company or an online seller located in another state charge Tennessee sales or use tax?
    If an out-of-state business, such as a catalog company, has a physical presence, or nexus, in Tennessee (a business, warehouse, sales representative or agency relationship), then that business is required to register to collect sales or use tax on merchandise delivered to a Tennessee customer.

    If the out-of-state business does not have nexus in Tennessee, the business is not required to collect Tennessee taxes.

    Many Tennessee businesses and consumers are unaware that use tax is owed on items they have imported into this state without paying sales tax to the seller. The use tax has been in effect since 1947 and is the counterpart to the sales tax. When someone buys merchandise online or through a catalog and the seller of the merchandise does not collect sales tax, the consumer who bought the item has a legal obligation to file and pay use tax on the merchandise. The use tax is levied at the same rate as the sales tax.

    Some businesses located in other states voluntarily register to collect Tennessee sales or use tax to eliminate the customers obligation to file a consumer use tax return. Consumer use tax returns are available on the department's Web site, www.Tennessee.gov/revenue.
  18. Should a Tennessee dealer selling merchandise through the Internet collect sales tax?
    When a Tennessee dealer accepts an order through the Internet and delivers a product to a Tennessee customer, the charge is subject to sales or use tax. If the Tennessee dealer delivers a product to a consumer located in another state, the sale is not subject to Tennessee sales or use tax.
  19. What items are exempt when sold to farmers?
    Generally, farmers are exempt on machinery and equipment, including parts and labor when purchased for use in the production of a farm commodity. Livestock, seeds, plants, fertilizer, etc. used to grow the farm product are also exempt. A booklet on sales and use tax as applied to farmers and nuserymen is available from the Department of Revenue. Call us to request a copy.
  20. What is a "single article," and how is sales tax on a single article calculated?
    A single article is defined as one item of tangible personal property in the form that it is delivered from the seller. The 7% state tax applies to the entire purchase price of the item. The applicable local sales tax rate applies the first $1,600 of the sale of a single article. There is an additional state tax of 2.75% applied to the amount in excess of $1,600 but less than or equal to $3,200.
  21. What is nexus?
    Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into Tennessee is liable for collecting the tax on sales in Tennessee. Nexus may be established by a corporate presence, ownership of real or tangible personal property in this state, the lease or rental of tangible personal property in this state, resident employees, or similar other types of existence.
  22. Is labor (on real property or tangible property) taxable?
    All labor inherent to the creation, installation, or repair of tangible personal property, as well as the parts or materials are subject to the tax. Labor to install or repair real property is not subject to the sales tax.
  23. When can a business use a resale certificate?
    A business, registered for sales and use tax can use a resale certificate only when the merchandise being purchased is to be resold by the business. A business cannot use a resale certificate to purchase merchandise that they will use and consume in the conduct of business. Any merchandise obtained upon resale certificate is subject to the Sales and Use Tax if it is used or consumed by the vendee in any manner, and must be reported and the tax paid thereon direct to the Department of Revenue.
  24. Are organizations exempt from the sales tax liable for tax on sales?
    Qualified organizations, with a user and consumer exemption from sales and use tax, are generally required to register as dealers when selling tangible personal property or taxable services. The exemption of the organization cannot be used to buy goods or services free of tax which the organization will sell.
  25. Are computer consulting services subject to sales/use tax?
    In many instances, yes. Consulting services alone are not taxable. However, such services are frequently sold in conjunction with the transfer of software and taxable services. Software is currently taxed as tangible personal property (Tenn. Code Ann. Section 67-6-102(30)(B)). The "sales price" of software and other tangible personal property includes the total amount for which it is sold, including any services that are a part of the sale (Tenn. Code Ann. Section 67-6-102(26)). Thus, any charges for services that are performed as part of the sale of software are subject to tax. For example, in Creasy Systems Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986), the Tennessee Supreme Court held that hourly consulting charges for determining the needs of a client, designing a software program to meet those needs, and then writing the software program were all subject to sales tax. Thus, if consulting services are not provided as additional services separate and optional from the sale of software or taxable services, they are subject to tax in Tennessee.
  26. Should a Tennessee software developer collect Tennessee sales tax on software it installs on a server located in Tennessee if the customer buying the software is located outside Tennessee and only accesses the software via the Internet?
    Yes. The software is located on a server in Tennessee and is used by the out-of-state customer on a server in Tennessee. Thus, title and/or possession of the software have transferred to the customer in Tennessee. This is a taxable sale of software, and the developer should collect Tennessee sales tax on the transaction.
  27. What are the sales and use tax benefits for manufacturers?
    Preauthorized manufacturers are eligible for complete exemption from sales and use tax on qualified industrial machinery equipment, including repair parts and labor, that are necessary for product creation for sale. Pollution control facilities required of manufacturers are included in the exemption. Substantially reduced rates of sales and use tax are available for energy and water used by manufacturers.
  28. Can a commercial dry cleaner qualify for Tennessee manufacturing exemptions?
    No. The Tennessee law provides certain exemptions from sales and use tax to manufacturers. Industrial machinery is exempt from sales and use tax, and utilities used by manufacturers are subject to tax at reduced rates (Tenn. Code Ann. Section 67-6-206). To qualify for these exemptions, a taxpayer must be principally engaged in the fabrication or processing of tangible personal property for resale. Dry-cleaning and laundry services do not constitute " fabricating or processing tangible personal property for resale." The purpose of laundry and dry-cleaning services is to restore an item to its original state, not to change it into a new state or form. Additionally, cleaning services are addressed by Tenn. Code Ann. Section 67-6-102(25)(F), which clearly states that the laundering or dry-cleaning of any kind of tangible personal property constitutes a taxable service. Thus, a commercial dry cleaner cannot qualify for Tennessee manufacturing exemptions.
  29. How does sales/use tax apply to contractors?
    Contractors generally owe sales or use tax on material cost even when contracted by agencies or organizations that qualify for sales or use tax exemption. Contractors are not resellers; they are considered users and consumers of materials purchased for a job.
  30. Where can I find the sales and use tax laws in the Tennessee Code?
    These laws are in Tenn. Code Ann. Section 67-6-101 et seq.
  31. When must an aircraft dealer charge sales tax on his proceeds? And when may this dealer purchase an aircraft exempt from sales/use tax?
    If an aircraft dealer leases the aircraft without an operator or crew, then the dealer is leasing tangible personal property. The dealer should collect sales tax from his customers on the lease payments, provided that his customer is not otherwise exempt under Tennessee sales and use tax statutes. Under these circumstances, the dealer may purchase the aircraft on a properly executed Certificate of Resale.

    If an aircraft dealer purchases an aircraft and uses it to provide flight training, then the dealer is rendering a non-taxable service and should not collect sales tax from his customers. The dealer also is exempt from paying sales/use tax on his purchase of the aircraft or other property that will be used in providing the training (Tenn. Code Ann. Section 67-6-204(b)).

    If an aircraft dealer purchases an aircraft and leases it with an operator or crew, then the dealer is rendering a non-taxable service and should not collect sales tax from his customers. However, the dealer would owe sales and use tax on his purchase price of the plane and any repairs and repair/replacement parts, provided that the dealer is not otherwise statutorily exempt from paying sales and use tax on his purchase.

    If the aircraft dealer uses the plane for both taxable and non-taxable activities, then the primary use of the plane determines the taxability at the time of purchase.
  32. What is the correct treatment for capital leases for sales and use tax?
    Pursuant to Tenn. Code Ann. Section 67-6-204, sales or use tax is imposed on the gross proceeds of all leases and rentals of tangible personal property in this state where the lease or rental is a part of the regularly established business. Tennessee's sales and use tax statutes do not reference GAAP or federal law and make no distinction between types of leases.

    According to Rule 1320-5-1-.32, sales tax is assessed for leases on a billing basis whether it is all collected at the time of the execution of the lease or collected with each payment. The tax may be based on either the lump sum payment at the time of execution of the contract, or on a monthly or periodic basis if the contract provides for monthly or periodic payments. In either case, the sales tax should be assessed in accordance with the lease payment plan.