Tennessee cuts sales tax on groceries, raises tax on gas

A bag of groceries in Tennessee will get a little less expensive on July 1, 2017, when the sales tax rate on food and food ingredients will drop from 5 to 4 percent. However, alcoholic beverages, candy, prepared food, and dietary supplements will continue to be taxed at the general state sales and use tax rate of 7 percent.

The rate decrease on food is part of the IMPROVE Act, Gov. Bill Haslam’s plan to cut taxes and fund transportation improvements. The legislation — “Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy” — also gradually increases taxes on gas and diesel and increases user fees for electric vehicles that use less fuel. Nearly 1,000 bridge and road projects, already planned, will be funded by the fuel tax increases.

Reducing the tax on food and food ingredients has long been a priority for Gov. Haslam. When he took office in 2011, the tax on food was 5.5 percent. Tennessee is one of only 13 states (of the 45 that have sales tax) to tax food at either the general or a reduced rate; in all other states, sales of food and food ingredients are exempt. Additional information about the sales tax rate change for food and food ingredients is available from the Tennessee Department of Revenue.

All businesses that sell food and food ingredients or fuel in Tennessee will need to adjust their point-of-sale systems to account for the rate changes. Tax automation software facilitates tax compliance, making it easier for companies to adjust to changes in rates and product taxability. Learn more.