Tennessee Contractor Taxes and Licensing: Sales Tax, Business Tax and Licenses

Tennessee doesn't tax wages or business profit for individuals, but contractors still face taxes: a gross receipts business tax once sales reach $100,000, franchise and excise tax for LLCs and corporations, and sales tax as the consumer of materials. Labor to repair real property or install fixtures isn't taxable; repairing tangible personal property is.

What's distinctive about Tennessee for contractors?

"No income tax" doesn't mean no tax for a Tennessee contractor. Instead of an income tax, Tennessee leans on a gross receipts business tax, which hits revenue rather than profit, and on franchise and excise (F&E) tax for LLCs and corporations. A sole proprietor and a single-member LLC doing the same work can owe very different state taxes. Tennessee is also strict on workers' comp for construction: one employee is enough, and owners count.

This page summarizes the Tennessee Department of Revenue (DOR), the Board for Licensing Contractors and the Bureau of Workers' Compensation as of 2026-10-19. It isn't tax advice. Choosing an entity in Tennessee has real tax consequences, so make that call with a CPA.

Is labor taxable in Tennessee?

Not when it's on real property. DOR's contractor tax manual says "the sale, cleaning, or repair of real property or any installation of tangible personal property that becomes a fixture upon installation" is "not subject to sales and use tax to the real property owner." By contrast, "charges for installing, cleaning, or repairing tangible personal property are subject to sales tax." We found no residential vs. commercial split.

DOR's own example: a central HVAC system becomes part of the building, so the contractor pays tax on the unit and charges no tax. A window air conditioner stays personal property, so the contractor can buy it with a resale certificate and collect sales tax from the customer.

How are materials taxed for Tennessee contractors?

"Generally, contractors and subcontractors are considered the end-users/consumers of materials, supplies, and taxable services used in the performance of a contract to improve realty," says DOR. You pay sales tax to the vendor, or remit use tax if the vendor doesn't charge it, and "contractors should not charge sales tax to their customers on the materials used in a job where those materials become a part of real property."

If you also sell or repair personal property, you're a contractor-dealer: you must register with DOR "before performing any taxable services" and you'll receive a certificate of registration and a certificate of resale. More on accruing tax on untaxed purchases in use tax for contractors, and on state models in sales tax on labor vs. materials.

What's the sales tax rate in Tennessee?

"The general state tax rate is 7%. The local tax rate varies by county and/or city." The local option tax on a single item is limited to the first $1,600 of the price, per DOR's manual. Check the rate where your materials are delivered.

How does Tennessee's business tax work for contractors?

The business tax is a privilege tax on gross receipts. DOR says "if you conduct business within any county and/or incorporated municipality in Tennessee, and your business grosses $100,000 or more, then you should register for and remit business tax." Contractors are Classification 4 taxpayers and can deduct certain payments to subcontractors. Businesses grossing $3,000 to $100,000 need only a minimal activity license from the county clerk or city.

Which Tennessee contractor licenses do you need?

The Board for Licensing Contractors says "a contractor's license is required prior to contracting (bidding or negotiating a price) whenever the total cost of the project is $25,000 or more." Subcontractors need their own license at $25,000 or more for electrical, mechanical, plumbing, HVAC and roofing, and at $100,000 for masonry.

The home improvement license applies only in Bradley, Davidson, Hamilton, Haywood, Knox, Marion, Robertson, Rutherford and Shelby counties. It covers residential remodeling, roofing, landscaping, fences and similar work, and requires a $10,000 surety bond, general liability and workers' comp. Local licensing: cities and counties set their own electrical and plumbing licensing and permits; the board says "every jurisdiction is different." See our contractor license guide.

Does Tennessee have income tax or franchise tax for contractors?

No personal income tax. "The Hall Income tax was repealed for tax periods that begin on January 1, 2021, or later," and it only ever applied to interest and dividends. But LLCs (including single-member LLCs owned by individuals), corporations and limited partnerships pay F&E tax: excise tax of 6.5% of Tennessee taxable income and franchise tax of 0.25%, with a $100 minimum franchise tax. DOR's rates page describes the franchise base as Tennessee net worth, while some 2026 DOR training material mentions the higher of net worth or Tennessee property value, so confirm the base with DOR. "Individuals and general partnerships are not subject to franchise and excise tax."

F&E estimated payments are due if combined liability is $5,000 or more in both the prior and current years. Federal income and self-employment tax still apply to everyone, so plan quarterly estimated taxes and try the quarterly estimated tax calculator.

When do Tennessee contractors need workers' comp?

"All employers in the construction industry ... with one or more employees are required to obtain workers' compensation insurance coverage," including seasonal, part-time and family employees. Most other industries need it at five. "Owners of construction businesses are required to carry workers' compensation coverage on themselves, but owners can apply for an exemption." Out-of-state construction firms must carry a Tennessee policy from their first day working in the state. See workers' compensation for contractors.

Local taxes in Tennessee

• Local option sales tax set by counties and cities, on top of the 7% state rate.
• Business licenses: minimal activity license for $3,000 to $100,000 in gross receipts; standard license and business tax at $100,000 or more.
• Municipal business tax in cities that adopt it, in addition to the county.

Neighboring state guides

Tennessee borders eight states. See Kentucky, Georgia, Alabama, Mississippi, Arkansas and North Carolina.