Airbnb, Homeaway, and VRBO have changed the way vacationers travel. More and more guests are choosing to rent private homes over booking hotels. The opportunity for residents of Tennessee to take advantage of this has never been greater.
With a bounty of glorious destinations including Nashville, Memphis, and Pigeon Forge, the The Volunteer State offers prospective vacation rental hosts the opportunity to pad their income and meet new people.
But new income opportunities bring new tax implications. State and local tax authorities in Tennessee expect most vacation rental home hosts to properly collect and file sales tax on short-term rentals (also commonly referred to as lodging tax, occupancy tax, bed tax, or tourist tax).
To help you get compliant with Tennessee tax laws, Avalara has put together this guide covering the following key points:
- Understanding Tax Compliance
- Getting Started
- Due Dates and Penalties
- Local Laws and Regulations to Consider
- Commonly Asked Questions
Disclaimer: No vacation rental tax guide is a substitute for professional tax advice. Consider it an asset to help you understand and prioritize your vacation rental questions and concerns.
Understanding Tax Compliance
You might wonder why you have to consider sales tax when renting out your home (or other dwelling). For state and local governments, tax revenue represents a sizable portion of funding. The lodging industry’s movement toward more nontraditional rental options doesn’t excuse hosts from their tax obligations.
Much like hotel, motel, and B&B stays, short-term lodging in Tennessee is subject to sales tax. Whether you choose to rent your home through a marketplace like Airbnb or direct to the consumer, you open the door to tax liability at the state and local level.
Failure to comply with state and local tax laws may not catch up with homeowners in the short term. Increasingly, however, the sharing economy is being placed under the proverbial microscope. It’s recommended that you address compliance before tax authorities address it for you.
Take the time to understand when, where, and how you’re expected to collect, file, and remit sales tax to the Tennessee Department of Revenue. The sooner you understand your sales tax responsibilities, the better you can avoid potential late payment fines and interest penalties.
In its simplest form, sales tax management for your Tennessee rental home can be summarized in three key steps: Registration, Collection, and Filing.
We’ve described each step below to help you better understand what’s required. That being said, taxes can be complicated. Questions pertaining to specific situations or out-of-the-ordinary conditions are best solved with a certified tax professional familiar with Tennessee tax laws.
Step 1: Register with the appropriate government agencies
Prior to renting out a Tennessee home, short-term rental hosts may be required to register with state and local tax authorities. Exact requirements are specific to the location of your rental. For specific tax rate and licensing requirements, visit our Tennessee sales tax lookup tool. It should be noted that collecting sales tax in Tennessee prior to completing all necessary registrations is against the law.
For each completed registration you’ll be assigned a filing frequency. For the state, it’s typically annually, quarterly, or monthly. At the local level, it’s typically monthly, quarterly, annually, or a combination, depending on location.
Step 2: Collect sales tax from short-term renters
Before collecting any sales tax from your guest, find out whether state or local sales tax has already been collected on your behalf. Some vacation rental marketplaces collect Tennessee sales tax for their hosts.
Effective March 1, 2018, Airbnb collects and remits state and local sales tax on behalf of its Tennessee hosts. Airbnb has been collecting and remitting local tax on behalf of its Memphis hosts since June 1, 2017
Short-term rental owners and operators in Tennessee who rent out properties through other venues, such as their own website, will still be required to collect and remit applicable taxes on those transactions. Do not assume all taxes are collected on your behalf. If it turns out you have to collect sales tax from your guests, you’ll need to determine the appropriate tax rate to charge. This rate depends on the address of the vacation rental property. Avalara offers a tax rate lookup tool you can use to determine the appropriate taxes to collect and the correct rates to charge for your vacation rental home address.
Step 3: File sales tax returns
Now, it’s time to file your tax return with the Tennessee Department of Revenue and any local tax jurisdictions with which you have registered. If you have multiple returns to file, it’s important to remember their due dates may not be the same. Also, in Tennessee, registered vacation homeowners may be required to file state and local returns regardless of whether any sales tax has been collected. Such returns are commonly known as “zero dollar returns.”
Take the time to double check your returns prior to submitting. Simple mistakes such as typos, missing signatures, and incorrect tax information can lead to unwanted delays. It’s not uncommon for well-meaning taxpayers to overlook basic details that may result in filings being rejected.
Due Dates and Penalties
Failure to file Tennessee state and local sales tax returns on time may result in late fees, interest payments, and in extreme cases, legal action. This holds true regardless of whether any tax was collected during the filing period. Once you’re registered with the Tennessee Department of Revenue, it’s important to stay on top of your filing deadlines.
Due dates for Tennessee sales tax returns are as follows:
- Annual: Due the 20th of January (Example: sales tax collected in 2017 is due January 20, 2018)
- Quarterly: Due the 20th of the month following the close of the quarter (Example: sales tax collected in Q2 – April, May, and June – is due July 20)
- Monthly: Due the 20th of the month following the close of the filing period (Example: sales tax collected in April is due May 20)
In general, due dates for local sales tax returns in Tennessee are the same as the state filing due dates. However, it’s always best to confirm this with your local tax authority.
If you’re already renting your home but not collecting sales tax, understand you may be in violation of Tennessee tax laws. Take the time to review your legal responsibility (with a tax professional, if necessary) and understand the risk of continuing to not collect sales tax.
As tax revenue is a major source of state and local funding, tax authorities are becoming more aggressive in their efforts to identify individuals and businesses not in compliance with state and local tax laws.
Local Laws and Regulations to Consider
Business Licenses: Short-term rental hosts in Tennessee may be required to register for business and other licenses based on city, county and state requirements. Be sure to check with your state and local tax authorities for details.
Zoning Rules: Not all buildings are available for business, rental, or living usage. Most local governments have laws specifying how a home can be used. Before renting out your home, be sure to review city zoning and planning codes.
Building and Housing Standards: In most cities throughout the United States, minimal construction, design, and maintenance standards exist. Dwellings may need to meet stated criteria in order to operate legally. Contact your state and local governments for more details.
Special Permits: Check to see if your city or county requires any special permits in order to rent out your dwelling.
Homeowner Associations: Homeowner Associations (HOA) located in Tennessee may have specific rules regarding vacation rentals as dictated in Declaration of Covenants, Conditions, and Restrictions (CC&Rs). Additionally, the CC&Rs may include a provision allowing for amendments to add further restrictions on the property in the future. It’s important to review this information to understand any vacation rental limitations inherent to your HOA. As a member, it’s your responsibility to understand the association’s covenants and rules.
Other Rules to Consider: This list should not be considered exhaustive. Other rules and regulations associated with leases/subletting, and condo or co-op rules may apply to your situation. A good place to start is by reviewing your signed lease and speaking with your landlord or property manager.
Commonly Asked Questions
Let’s face it, managing vacation rental taxes in Tennessee can be complicated. As a vacation rental homeowner, you may encounter scenarios that leave you scratching your head. For example, who’s responsible for collecting sales tax if your long-term tenant subleases the room to a short-term guest?
To help you better understand your tax obligations, we’ve created a list of questions we frequently hear from vacation rental homeowners. Don’t see an answer to your question? Drop us a line and one of our tax experts will get in touch.
State and Local Taxes
What is the definition of “short-term rental” in Tennessee?
Short-term rentals are defined by the Tennessee Department of Revenue as periods of less than 90 consecutive days. Residents with a signed lease for continuous residence longer than this should not be charged sales tax.
Does the Tennessee Department of Revenue require vacation rental owners to register with the state?
Yes. For the purpose of collecting sales tax revenue, the Tennessee Department of Revenue requires all vacation rental homeowners to register with the state prior to collecting sales tax on vacation rental revenue.
What is the current sales tax rate in Tennessee for short-term rentals?
The current state sales tax rate in Tennessee is 9.45 percent (7 percent state and 2.45 percent local accommodations). City and county taxes may also apply.
Do local jurisdictions in Tennessee have vacation rental requirements?
Yes. Counties and some cities in Tennessee require vacation rental home owners to collect sales tax from transient occupants.
Need to look up a sales tax rate for a specific location? Choose from the list of cities in the right column or use our Tennessee tax rate lookup tool to determine the tax rate and licensing requirements for your specific address.
Are there local registration requirements in Tennessee?
Yes. Depending on location, vacation rental homeowners in Tennessee may be required to register their dwelling with city or county tax authorities.
Are there any other licenses or permits needed for Tennessee vacation rental property owners?
Tennessee is one of the more complicated states in which to manage short-term vacation rental taxes. Be sure to check with state and local tax authorities for specific details.
Collecting Sales Tax
Who is required to collect and file sales tax in Tennessee?
Whether you’re the property owner or not, if you collect payment from short-term guests who are not exempt from sales tax, you’re likely responsible for collecting, filing, and remitting sales tax to the Tennessee Department of Revenue and, depending on location, local tax authorities. You may be the property owner, a renter subleasing a room, a third-party property management firm, or other party.
What happens if I forget to collect sales tax from my guests?
Generally speaking, sales tax is collected from guests upon payment. However, the Tennessee Department of Revenue places the legal responsibility for this tax revenue squarely on the shoulders of the host. Failure to collect tax from guests means the host will need to pay the tax or recoup the tax revenue from the guests.
Furthermore, the Tennessee Department of Revenue has the authority to levy fines and charge interest on late payments and outstanding tax revenue.
Are there exemptions from sales tax in Tennessee?
It’s important to remember short-term guests have rights and you need to understand and respect those rights. Tax exemptions are a prime example. Although uncommon, there are several situations where guests may be exempt from paying sales tax in Tennessee. Examples include full-time students, active military personnel present in the community under official orders, and rental of accommodations in a migrant labor camp.
In most cases, substantiating documentation must be presented by the guest prior to payment. We encourage you to check with the Tennessee Department of Revenue for explicit details.
My guests are not from Tennessee. Do I need to collect sales tax?
Yes. sales tax is collected based on the location where it is applied and, with few exceptions, is applied to all short-term renters in Tennessee. As mentioned in the prior questions, there are some exemptions to this rule, but they are not predicated on the state or country a person calls home.
Are apartment or condo rentals taxable?
Apartment and condominium short-term rentals in Tennessee are treated the same as single-family home short-term rentals and taxed accordingly.
Sales Tax Due Dates and Filing
What are the due dates for sales tax returns in Tennessee?
Upon registering vacation rental properties with the Tennessee Department of Revenue, you’ll be assigned one of the following filing frequencies and due dates.
- Annual Filing Frequency: Due the 20th of January. As an example, sales tax collected in 2017 is due January 20, 2018. Annual filing frequencies are rarely assigned to vacation rental home owners.
- Quarterly Filing Frequency: Due the 20th of the month following the close of the quarter. As an example, sales tax collected in Q1 (January, February, and March) is due April 20th.
- Monthly Filing Frequency: Due the 20th of the month following the close of the filing period. As an example, sales tax collected in June is due July 20th.
Are there options for outsourcing sales tax filing?
Yes. Many vacation rental hosts in Tennessee file up to FILING_MAX state and local sales tax returns annually. For many, this time burden is alleviated with filing solutions such as MyLodgeTax.
I didn’t rent my property during this filing period. Am I still required to file a sales tax return with the Tennessee Department of Revenue?
Yes. Vacation rental owners registered with the Tennessee Department of Revenue are required to file returns each assigned filing period regardless of whether any sales tax revenue was collected.
What happens if my assigned due date is on a weekend or holiday?
If the sales tax return due date assigned by the Tennessee Department of Revenue falls on a Saturday, Sunday, or state/federal holiday, returns and payments will be timely if they are postmarked on the first business day following the assigned due date.
Does the Tennessee Department of Revenue offer a discount for on-time filing?
No. At this time, the Tennessee Department of Revenue is not offering a timely filing discount for sales tax returns.
Penalties and Interest Payments
Will I be assessed a penalty if my sales tax return is filed late?
Failure to file Tennessee sales tax returns by the assigned due date may result in a penalty of 5 percent of outstanding tax revenue accumulated daily from the due date until the date the taxes are paid.
The maximum penalty is 25 percent of the tax amount due; the minimum penalty is $15.
Does the Tennessee Department of Revenue charge interest on an outstanding sales tax balance?
The Tennessee Department of Revenue reserves the right to assess interest on outstanding sales tax revenue. The interest rate is determined annually on July 1.
What should I do if I am unable to file my return on time due to circumstances beyond my control.
Assessed penalties for late filing or paying of sales tax may be waived if hosts can show circumstances beyond their control prevented them from filing or paying sales tax returns on time. Examples include illness, natural disaster, accident, etc. Contact the Tennessee Department of Revenue for more information.
I have rented my home for years without collecting sales tax. What options do I have?
Vacation rental homeowners in Tennessee who have failed to collect sales tax in the past may be able to take advantage of a voluntary disclosure agreement (VDA). A VDA offers an opportunity for vacation rental homeowners to proactively disclose prior period tax liabilities in accordance with a binding agreement with the Tennessee Department of Revenue.
VDAs are offered to encourage cooperation with state tax laws and may result in some or all monetary penalty and interest payments being waived.
Other Common Questions
What is the difference between income tax and sales tax?
Income taxes are reported and paid annually to the federal and many state governments on “taxable” income, which is income after allowed expense deductions. A sales tax is a tax levied by state and city agencies (not federal) and requires you to collect tax on the gross amount collected from your guests renting your vacation property — there are no deductions.
Does the 14-day rule apply to Tennessee sales tax?
No, the 14-day rule applies to income tax and does not affect a vacation rental homeowner’s responsibility to collect and file sales tax in Tennessee.
This guide to Tennessee sales tax compliance should be considered an asset to help you understand and prioritize your vacation rental tax challenges. It should not be considered a substitute for professional tax advice.