While Tennessee has made great strides in cutting taxes, like the Hall Income Tax, the taxes that businesses are subject to are some of the highest in the nation. If looking at solely corporate taxes, Tennessee ranks 45 in the nation according to the Tax Foundation. Part of the corporate taxing structure in Tennessee includes the Business Tax, or a form of a gross receipts tax. Generally, someone that conducts business in Tennessee is subject to the Business Tax and may also be subject to a city business tax.
Gross receipts taxes create a pyramid effect, driving up the cost of goods and favoring large corporations with more vertical integration. Because the tax is on gross sales rather than profits, the tax punishes startups and entrepreneurs, who typically take several years to reach profitability.
Tennessee is one of only seven states with a gross receipts tax, and our version is an unusually onerous one from a compliance perspective. Each business is classified by its business activity, and each classification pays a different tax rate. Businesses must determine what their tax rate is – no small feat as the official guidance from the state is over 150 pages. Meanwhile, the tax only generates $540 million in state and local government revenue (roughly two percent of all state and local revenue). That amount that nowhere justifies the onerous compliance cost it places on businesses and the pressure it places on the price of goods in an era of high inflation.
The business tax should be eliminated immediately or phased out like the Hall Income Tax. The elimination of the business tax would have a significant impact on Tennesseans that are battling inflation and have the most positive impact on small businesses.
Status Update: In 2023, the General Assembly passed a series of tax cuts, including a cut to the Business Tax. The update to the Business Tax raises the exemption for having to file and pay from $10,000 to $100,000. After this change takes effect, tens of thousands of small businesses will no longer be subject to the Business Tax.