Tennessee expands sales tax holiday to restaurant food and drink

Updated 7.10.2020: The economic nexus threshold changes from $500,000 to $100,000 effective October 1, 2020. There is no transactions threshold. Additionally, Tennessee is providing a sales tax holiday for restaurants August 7–9, 2020.

Restaurant food and drink will be exempt from Tennessee sales tax during a newly created restaurant sales tax holiday, which begins at 12:01 a.m. on August 7 and concludes August 9 at 11:59 p.m. This new tax-free period is in addititon to Tennessee’s annual sales tax holiday, which runs July 31 through August 2.

Early today, the Tennessee General Assembly approved a budget shaving $1 billion from the budget proposed by Governor Bill Lee back in February — before nonessential businesses were temporarily shuttered or restricted to help contain the coronavirus (COVID-19). Like other brick-and-mortar stores, restaurants were particularly hard hit; they were limited to takeout and delivery service for almost a month, until the governor eased restrictions on in-house dining in late April. Capacity restrictions were lifted in mid-May.

Sales tax collections in April and May were down year-over-year in Tennessee, as in most other states. Recent months have also seen drops in business tax, franchise and excise tax, gasoline and motor fuel tax, mixed drinks tax, and tobacco tax revenues, among others.

With less money coming in, the government has less money to spend. Proposed pay increases for state employees and teachers were therefore scrubbed. Why, then, would lawmakers creat a sales tax holiday for restaurant food and drink? The annual sales tax holiday typically takes a $10 million bite out of sales tax collections.

In fact, cutting the annual holiday was considered. But consumers like it. With Tennessee experiencing the “highest unemployment rate in a generation” because of COVID-19, eliminating the popular sales tax holiday would have been an unpopular move.

So instead of eliminating the tax-free period, they added a new sales tax holiday for restaurant food and increased the thresholds for the original holiday. The $100 threshold for general apparel and school supplies was increased to $200, and the $1,500 threshold for electronic devices was increased to $3,000.

Proposed sales tax holidays that didn’t make the final cut

Lawmakers originally sought to exempt sales of restaurant food and drink during the July 31–August 2 sales tax holiday. They also proposed a new sales tax holiday for motor vehicles over Labor Day weekend.

And back when the state was feeling flush (before the outbreak of the coronavirus), there was strong support in the Tennessee House for a lengthy “Food Tax Holiday.” HB 1697 sought to exempt the retail sale of food and food ingredients from state sales tax during the months of June and July 2020.

These proposals didn't make it into the final budget (SB 2932 and SB 2931).

Proposed change to economic nexus threshold

Update 7.6.2020: The economic nexus threshold changes from $500,000 to $100,000 effective October 1, 2020. There is no transactions threshold.

Another change proposed in SB 2932 would increase sales tax collections by requiring more out-of-state sellers to collect and remit sales tax.

Under current law, out-of-state sellers must register to collect Tennessee sales tax if they had more than $500,000 in taxable or exempt sales of goods or services for delivery into the state during the previous 12-month period. The $500,000 threshold is among the highest in the country, shared only by the large states of California, New York, and Texas.

SB 2932 would lower that sales threshold considerably and add a transactions threshold, so that remote retailers with more than $100,000 in sales or at least 200 transactions would have a sales tax collection requirement.

As of June 24, 2020, the proposed change to the economic nexus threshold has not been signed into law. A similar proposal introduced in 2019 (SB 82/HB 733) failed to make it out of committee.

Think you may have an obligation to collect and remit sales tax in Tennessee under the current economic nexus law? This free sales tax risk assessment can help you find out.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.