Is a document-management/e-discovery service -- collecting, processing, hosting, and storing client data, plus consulting and file delivery -- taxable in Tennessee, and does it matter whether the finished files are delivered electronically or on a hard drive?

Plain-English summary

A services provider offers a document-management package that looks a lot like e-discovery/litigation-support work, broken into several separately billed pieces:

• Data Service -- a team collects electronic data from the client's hard drives, servers, phones, etc., loads it into the provider's own software to de-duplicate and filter it ("cull"), and puts the result into a database.
• Hosting Service -- the client can review and tag files in that database for a monthly hosting fee; no physical media changes hands.
• Storage Service -- after hosting ends, if the client wants the database kept rather than deleted, the provider keeps it on its own servers (still without transferring a copy to the client).
• Project Management Service -- separate hourly consulting fees for help setting up and searching the database.
• File delivery at the end -- the client can get selected final files either electronically (e.g., FTP download) or on a physical medium (external hard drive, printed paper), billed separately, or choose to receive nothing at all.

The Department worked through all six pieces using the same basic test: is there (1) a sale of tangible personal property, (2) a specifically enumerated taxable service, or (3) a nontaxable service bundled into a taxable sale? Here's how each piece landed:

• Data Service, Hosting Service, Storage Service, and Project Management Service: all NOT taxable. None involves selling or transferring any tangible personal property (the provider's internal software is used by the provider, not licensed to the client) or a taxable service enumerated in the statute -- these are "document management services" (collection, sorting, hosting, storage) and "consulting," neither of which Tennessee's Retailers' Sales Tax Act taxes. The ruling separately confirmed this isn't a taxable "telecommunications service" either, since the client's whole purpose is obtaining the processed data itself -- squarely inside the statute's data-processing exclusion.
• Electronic delivery of final files: NOT taxable. Sending files by FTP or similar electronic means doesn't transfer any tangible personal property, so no taxable sale occurs -- even after the client prints or copies the files for its own later use.
• Delivery on a tangible medium: TAXABLE. Handing over an external hard drive, printed paper, or similar physical media IS a transfer of tangible personal property for consideration, which is squarely a taxable sale.

The upshot: the exact same underlying data, processed the exact same way, is taxed or not purely based on how it's finally handed to the client.

What this means for you

E-discovery, litigation support, and document/data management providers

Structure your billing to separate the processing/hosting/storage/consulting work (generally nontaxable) from any physical-media deliverable (taxable) -- the way this taxpayer already invoiced separately for each service made the analysis clean. If you never touch physical media and deliver everything electronically, none of your Tennessee sales tax exposure comes from this side of the business at all.

Accountants and tax professionals

This ruling is a useful confirmation that Tennessee's telecommunications-service tax doesn't reach data-processing/hosting businesses whose customers are buying the processed data itself (the § 67-6-102(93)(B)(i) exclusion) -- distinguishable from a pure electronic-transmission service (like an EDGAR filing service) where the customer's purpose is the transmission itself, not new processed data.

Common questions

Q: Is hosting or storing a client's data on my servers taxable in Tennessee?
A: Not under this ruling's facts -- data collection, processing/culling, hosting, and storage services are not specifically enumerated taxable services and don't involve a sale of tangible personal property to the client.

Q: Does it matter whether I deliver finished files by download or on a hard drive?
A: Yes, significantly. Electronic delivery is not a taxable sale (no tangible personal property transfers). Delivery on a physical medium like a hard drive or printed paper IS a taxable sale of tangible personal property.

Q: Are hourly consulting/project-management fees for this kind of work taxable?
A: Not under this ruling -- consulting services aren't among Tennessee's specifically enumerated taxable services.

Q: Can another data/document management company rely on this ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified by the Commissioner. Confirm your own service structure and delivery methods with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-101 et seq., § 67-6-102(79), § 67-6-102(81)(A), (D) (Supp. 2010) (Retailers' Sales Tax Act; "retail sale"; "sale" -- tangible personal property transfer and furnishing of taxable services)
• § 67-6-102(82)(A) (Supp. 2010) ("sales price" -- non-enumerated services bundled with a taxable sale become taxable)
• § 67-6-102(92)(A) ("tangible personal property," including prewritten software)
• § 67-6-205(c)(3), § 67-6-102(93)(A), (B)(i) (Supp. 2010) (telecommunications service definition and data-processing exclusion -- found not applicable here)
• § 67-6-233(a) (Supp. 2010) (specified digital products taxable when electronically transferred); § 67-6-102(89) ("specified digital products" -- digital audio-visual works, audio works, books)
• § 67-6-231(a) (Supp. 2010) (computer software taxable however delivered)
• § 67-6-523 (2006) (general recordkeeping requirements; 3-year retention)

Other sources cited by the ruling:

• Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994) (sales tax on services applies only to specifically enumerated services)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/11-38.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 11-38

WARNING

Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This presentation of the ruling in a redacted form is
informational only. Rulings are made in response to particular facts presented and are not
intended necessarily as statements of Department policy.

SUBJECT
The application of the Tennessee sales and use tax to document management services.
SCOPE

This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon
the Department, and are applicable only to the individual taxpayer being addressed.

This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation
or modification shall be effective retroactively unless the following conditions are met, in which
case the revocation shall be prospective only:

(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;

(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;

(C) The applicable law must not have been changed or amended;

(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and

(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.

FACTS

[TAXPAYER] is a [BUSINESS ENTITY TYPE] that provides a wide range of traditional and
technology-driven services to [TYPE OF BUSINESSES].

The Taxpayer provides a service (the “Data Service”) by which it obtains a collection of
electronic data from the client. [REDACTED]. The Taxpayer sends a [REDACTED] team to the
client’s location to collect all relevant electronic information contained on the client’s computer
hard drives, servers, telephone systems, and so on. Once the Taxpayer has retrieved the relevant
information, the Taxpayer loads the data into a software program housed on the Taxpayer’s
servers. The software program eliminates duplicate data and applies data filters and key word
searches to “cull” any irrelevant information. The Taxpayer then loads the resulting data and
information into a database on its servers. The client may review the database and tag the
particular items that the client wishes to have produced as .pdf or .tiff files.

The Taxpayer then loads the processed files into a secondary database, which the Taxpayer hosts
on a monthly basis (the “Hosting Service’). The client is able to access the database throughout
the term of the Hosting Service. No physical media are delivered to the client in conjunction with
the Data Service or the Hosting Service.

After the term of the Hosting Service ends, the Taxpayer will remove the database from its
servers unless the client requests otherwise. In the event the client requests that the Taxpayer not
delete the database, the Taxpayer will maintain the data files on its servers (the “Storage
Service”). The Taxpayer does not transfer a copy of the documents to the client as part of the
Storage Service.

Upon completion of the particular [REDACTED] project, the client may choose to have the
Taxpayer deliver certain files to it via a physical medium (i.e., an external hard drive, printed
paper, etc.) Alternatively, the client may choose to have the Taxpayer deliver a copy of the final
selected documents to it electronically (for example, as an ftp download). In some cases, the
client does not wish to receive copies of documents at all. The Taxpayer bills the client
separately for any transfer of files via tangible medium.

The Taxpayer may also charge the client a separate project management fee, which is billed on
an hourly basis for consulting help and assistance in setting up and searching the information
database (the “Project Management Service”).

The Taxpayer invoices and charges separately for each of the services described above.

QUESTIONS

1. Is the Taxpayer’s Data Service subject to the Tennessee sales and use tax?
2. Is the Taxpayer’s Hosting Service subject to the Tennessee sales and use tax?
3. Is the Taxpayer’s Storage Service subject to the Tennessee sales and use tax?
4. Is the fee for the Taxpayer’s Project Management Service subject to the Tennessee sales
   and use tax?
5. Is Taxpayer’s transfer of copies of documents via electronic means at the completion of

the Hosting Service subject to the Tennessee sales and use tax?

6. Is the Taxpayer’s transfer of copies of data and/or documents via a tangible medium at
   the completion of the Hosting Service subject to the Tennessee sales and use tax?

RULINGS

1. No. The Taxpayer’s Data Service is not subject to the Tennessee sales and use tax.
2. No. The Taxpayer’s Hosting Service is not subject to the Tennessee sales and use tax.
3. No. The Taxpayer’s Storage Service is not subject to the Tennessee sales and use tax.
4. No. The fee for the Taxpayer’s Project Management Service is not subject to the
   Tennessee sales and use tax.
5. No. The Taxpayer’s transfer of copies of documents via electronic means at the

completion of the Hosting Service is not subject to the Tennessee sales and use tax.

6. Yes. The Taxpayer’s transfer of copies of data and/or documents via a tangible medium
   at the completion of the Hosting Service is subject to the Tennessee sales and use tax.

ANALYSIS

Under the Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et seq., the retail sale in
Tennessee of tangible personal property is subject to the sales and use tax. TENN. CODE ANN.
§ 67-6-102(79) (Supp. 2010) provides that the term “retail sale” means “any sale, lease, or rental
for any purpose other than for resale, sublease, or subrent.” TENN. CODE ANN. § 67-6-102(81)(A)
defines the term “sale” in pertinent part to mean “any transfer of title or possession, or both,
exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means
whatsoever of tangible personal property for a consideration.”'

Additionally, TENN. CODE ANN. § 67-6-102(81)(D) defines the term “sale” to include “the
furnishing of any of the things or services taxable” under the Retailers’ Sales Tax Act. The sales
tax does not apply to all services; rather, it only applies to retail sales of those services
specifically enumerated by the statute. Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911
(Tenn. Ct. App. Aug. 12, 1994). Even if a service is not specifically enumerated by the statute,
however, the service may be subject to the sales tax where charges for the service are included in
the sales price of a taxable good or service. Specifically, TENN. CODE ANN. § 67-6-102(82)(A)
provides that the sales price of a good or service equals the “total amount of consideration . . . for
which personal property or services are sold,” with no deduction for the seller’s costs or charges
by the seller for services necessary to complete the sale. Thus, when the sale of a non-
enumerated service is part of the sale of a taxable good or service, the charges for the non-
enumerated service are included in the sales price of the taxable good or service and as such are
subject to taxation.

' TENN. CODE ANN. § 67-6-102(92)(A) defines “tangible personal property” to include prewritten computer
software.

Accordingly, the transactions described herein will be subject to the Tennessee sales and use tax
if the particular transaction constitutes 1) the sale of tangible personal property in Tennessee;
2) the furnishing of a taxable service; and/or 3) the furnishing of an otherwise nontaxable service
that is sold as part of the sale of a taxable good or service.

1-3. Data Service, Hosting Service, and Storage Service

Charges for the Taxpayer’s Data Service, Hosting Service, and Storage Service are not subject to
the Tennessee sales and use tax.

As noted above, the Taxpayer’s Data Service, Hosting Service, and Storage Service will be
subject to the Tennessee sales and use tax if the particular transaction constitutes 1) the sale of
tangible personal property in Tennessee; 2) the furnishing of a taxable service; and/or 3) the
furnishing of an otherwise nontaxable service that is sold as part of the sale of a taxable good or
service.

First, no sale or transfer of tangible personal property, including prewritten software, occurs in
conjunction with the Taxpayer’s furnishing of the Data Service, Hosting Service, or Storage
Service. Additionally, the Taxpayer does not sell, lease, license, or otherwise provide the use of
computer software to its client in conjunction with these services.”

Second, the Taxpayer’s Data Service, Hosting Service, and Storage Service do not constitute
taxable services for Tennessee sales and use tax purposes. As noted above, only specifically
enumerated services are subject to the Tennessee sales and use tax. The Taxpayer’s Data Service,
Hosting Service, and Storage Service are most properly characterized as document management
services that involve the capture, sorting, hosting, and storage of data related to [REDACTED];
such services are not among the services enumerated under the Retailers’ Sales Tax Act.”

Third, because the Taxpayer does not make sales of tangible personal property in conjunction
with the Data Service, Hosting Service, or Storage Service, and does not provide a taxable
service, no part of the transaction can be described as the furnishing of an otherwise nontaxable
service that is sold as part of the sale of a taxable good or service.

• While software may be used by the Taxpayer to sort data for the client, the Taxpayer’s client does not itself use the
  software.

° Note that the facts indicate that the Taxpayer is not providing a telecommunications service, which is subject to
taxation under TENN. CODE ANN. § 67-6-205(c)(3). The term “telecommunications service” is defined under TENN.
CODE ANN. § 67-6-102(93)(A) in pertinent part as the “electronic transmission, conveyance, or routing of voice,
data, audio, video, or any other information or signals to a point, or between or among points.” Apart from the fact
that the Taxpayer does not sell a service by which it routes data from one point to another, TENN. CODE ANN. 8 67-
6-102(93)(B)(i) specifically excludes from the definition of “telecommunications service” data processing and
information services “that allow data to be generated, acquired, stored, processed, or retrieved and delivered by
electronic transmission to a purchaser, where such purchaser’s primary purpose for the underlying transaction is the
processed data or information.” Here, the client’s primary purpose is to obtain the underlying processed data and
information.

Accordingly, charges for the Taxpayer’s Data Service, Hosting Service, and Storage Service are
not subject to the Tennessee sales and use tax."

4. Project Management Service

The fee for the Taxpayer’s Project Management Service is not subject to the Tennessee sales and
use tax.

As noted above, the Project Management Service will be subject to the Tennessee sales and use
tax if the particular transaction constitutes 1) the sale of tangible personal property in Tennessee;
2) the furnishing of a taxable service; and/or 3) the furnishing of an otherwise nontaxable service
that is sold as part of the sale of a taxable good or service.

First, no sale or transfer of tangible personal property, including prewritten software, occurs in
conjunction with the Taxpayer’s furnishing of the Project Management Service. Additionally, the
Taxpayer does not sell, lease, license, or otherwise provide the use of computer software to its
client in conjunction with this service.

Second, the Taxpayer’s Project Management Service is not properly considered a taxable service
for Tennessee sales and use tax purposes. As noted above, only specifically enumerated services
are subject to the Tennessee sales and use tax. The Taxpayer’s Project Management Service
involves the furnishing of consulting help and assistance in setting up and searching an
information database; consulting services are not among the services enumerated under the
Retailers’ Sales Tax Act.

Third, because the Taxpayer does not make sales of tangible personal property and does not
provide a taxable service, no part of the transaction can be described as the furnishing of an
otherwise nontaxable service that is sold as part of the sale of a taxable good or service.

Accordingly, the fee for the Taxpayer’s Project Management Service is not subject to the
Tennessee sales and use tax.

5. Transfer of documents by electronic means

The Taxpayer’s transfer of copies of documents via electronic means at the completion of the
Hosting Service is not subject to the Tennessee sales and use tax.

As noted above, the Tennessee sales and use tax is imposed on the retail sale of tangible personal
property in Tennessee. TENN. CODE ANN. § 67-6-102(81)(A) (Supp. 2010) defines the term
“sale” in part as “any transfer of title or possession, or both, exchange, barter, lease or rental,
conditional or otherwise, in any manner or by any means whatsoever of tangible personal

“ Note that the Retailer’s Sales Tax Act does not require that the Taxpayer maintain specific documentation with
respect to its sales of nontaxable services. However, there is a general requirement that each dealer keep records of
its sales and purchases. TENN. CODE ANN. § 67-6-523 (2006) generally requires all taxpayers to establish and
maintain records that are adequate for auditors to use in determining the correct amount of the taxpayer’s tax
liability. The Taxpayer should therefore keep records of its sales and purchases, including copies of invoices and
purchase orders. Records of business transactions must be retained for a minimum of three years from December 31
of the year in which the associated Tennessee sales and use tax return was filed.

property for a consideration.” (Emphasis added.) In the case of the electronic transmission of
documents or data,” no transfer of tangible personal property occurs between the Taxpayer and
its client. Additionally, no transfer of tangible personal property takes place when the client
subsequently prints out or otherwise creates tangible copies of the transferred documents for its
own use.

Accordingly, no taxable sale takes place for purposes of the Tennessee sales and use tax when
the Taxpayer transfers documents or data via electronic means.

6. Transfer of documents via physical medium

The Taxpayer’s transfer of copies of data and/or documents via a tangible medium at the
completion of the Hosting Service is subject to the Tennessee sales and use tax.

Under the Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et seq., retail sales of tangible
personal property in Tennessee are subject to sales and use tax. TENN. CODE ANN. § 67-6-
102(79) (Supp. 2010) defines a “retail sale” as a “sale, lease, or rental for any purpose other than
for resale, sublease, or subrent.” The term “sale” is defined under the Tennessee sales and use tax
laws in pertinent part as “any transfer of title or possession, or both ... of tangible personal
property for a consideration.” TENN. CODE ANN. § 67-6-102(81)(A) (emphasis added).

At the end of the Hosting Service, the client may choose to have the Taxpayer deliver selected
files to it via a tangible medium (i.e., an external hard drive, printed paper, and so on) for a fee.
Such activity constitutes the transfer of title or possession of tangible personal property for a
consideration. Accordingly, Taxpayer’s transfer of copies of data and/or documents via a
tangible medium at the completion of the Hosting Service is subject to the Tennessee sales and
use tax.

Kristin Husat
Senior Tax Counsel

APPROVED: Richard H. Roberts
Commissioner of Revenue

DATE: 07/29/11

° Note that the transfer of certain items via electronic means is subject to the sales and use tax. For example, the
“retail sale, lease, licensing or use of specified digital products transferred to or accessed by subscribers or
consumers” in Tennessee is subject to the sales and use tax. TENN. CODE ANN. § 67-6-233(a) (Supp. 2010).
“Specified digital products” is defined as “electronically transferred digital audio-visual works, digital audio works
and digital books.” TENN. CODE ANN. § 67-6-102(89). Additionally, TENN. CODE ANN. § 67-6-231(a) (Supp. 2010)
provides that the retail sale, lease, licensing or use of computer software in Tennessee is subject to the sales and use
tax, regardless of whether the software is delivered electronically or via a tangible storage medium.