Are IT staffing/contract-employee services subject to Tennessee sales tax — including software development, help desk support, repairs, and reimbursed travel expenses?

Plain-English summary

An IT staffing ("staff augmentation") company places contract employees with client companies to fill IT roles — software development, help desk, database administration, business analysis — working side by side with and under the direction, supervision, and control of the client's own IT managers. The staffing company's only ongoing involvement is paying the contract employees, handling their taxes/benefits, and occasional check-ins; it doesn't direct the day-to-day work. Sometimes the staffing company also works through an intermediary "vendor manager," and sometimes contract employees incur travel or meal expenses the client reimburses. The company asked the Department several questions about how Tennessee sales and use tax applies. The Department's answers, in five parts:

1. What's taxable beyond software creation. Creating or programming software on a client's premises is already a taxable retail sale of computer software (§ 67-6-231(a)). On top of that, repair and installation of tangible personal property or computer software performed by contract employees is also taxable — those are specifically enumerated taxable services (§ 67-6-205(c)(4), (6)). Other services contract employees provide — like telephone assistance, general technical support, or business analysis — are not on Tennessee's enumerated-services list, so they're not taxable on their own.

2. Itemize or the whole thing is taxable. If a single contract employee does BOTH a taxable thing (software fabrication, repair, installation) AND nontaxable work for the same client, the staffing company must separately itemize the taxable and nontaxable charges on the invoice. If it doesn't, Tennessee's bundling rule pulls the entire charge into the taxable sales price (§ 67-6-102(81)(A); Penske Truck Leasing Co. v. Huddleston; TomKats Catering, Inc. v. Johnson).

3. Exempt entities. Software fabrication performed for an entity that's exempt from Tennessee sales tax (governments, certain nonprofits, etc.) stays exempt — but only if the sale is supported by a proper exemption certificate (Rule 1320-5-1-.78).

4. Vendor managers don't change the analysis. If the staffing company routes a placement through a pass-through "vendor manager" or workforce-management intermediary, the same rules apply to whatever that intermediary sells or performs — taxability turns on what's being sold, not which entity in the chain sells it.

5. Reimbursed expenses ride along with the sale. Travel, meals, and similar expenses a client reimburses the staffing company for are part of the total sales price (§ 67-6-102(81)(A) allows no deduction for the seller's own costs). So reimbursed expenses are taxable when tied to a taxable sale (like software fabrication or repair) and nontaxable when tied to a nontaxable sale — even if itemized separately on the invoice.

What this means for you

IT staffing / staff augmentation companies

Track what each contract placement actually does. If a placement ever touches software creation, repair, or installation work, you likely owe Tennessee sales tax on that portion — and if the same person also does nontaxable work (help desk, analysis, support) for the same client, itemize the invoice to keep the nontaxable piece out of the tax base. Reimbursed expenses follow whichever bucket the underlying work falls into.

Client companies that bring in contract IT staff

Expect a tax-bearing invoice line for any contractor work involving software development or system repair/installation; expect a tax-free line for pure staffing/support work, as long as your vendor itemizes correctly. If your vendor bundles everything into one undifferentiated charge, the whole thing can become taxable.

Workforce management / vendor manager intermediaries

You're treated the same as a direct staffing vendor for sales-tax purposes — the taxability of what you sell or arrange doesn't change just because you sit between the staffing company and the end client.

Accountants and tax professionals

This is a useful template for any bundled professional-services engagement that mixes enumerated taxable services (repair, installation, software creation) with non-enumerated nontaxable services: separate invoicing is the lever that keeps the nontaxable portion out of tax, per Penske Truck Leasing and TomKats Catering. Note § 67-6-387's separate, narrower exemption for software a company fabricates for its OWN use via a direct employee (not an agent) — distinct from this fact pattern, where the staffing company's contract employees fabricate software FOR the client.

Common questions

Q: Is hiring IT contract staff from a staffing company subject to Tennessee sales tax?
A: It depends on the work. Software creation/programming and repair/installation of property or software are taxable; other staffing services like help desk support and business analysis generally are not.

Q: What happens if a contractor does both taxable and nontaxable work for the same client?
A: The invoice must separately itemize the taxable and nontaxable charges, or the entire charge becomes taxable under Tennessee's bundling rule (§ 67-6-102(81)(A)).

Q: Is software created for a tax-exempt organization (like a government agency) taxable?
A: No, as long as the sale is supported by a proper exemption certificate (Rule 1320-5-1-.78).

Q: Does using a vendor manager/staffing intermediary change the tax treatment?
A: No — the same taxability rules apply regardless of whether the staffing company or an intermediary vendor manager makes the sale.

Q: Are reimbursed travel and meal expenses taxable?
A: They follow the underlying sale — taxable if the contractor's work was taxable, nontaxable if it wasn't, even when itemized separately on the invoice.

Q: Can I rely on this letter 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. Confirm your own situation with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.; 2011 codification):

• §§ 67-6-101 to -907 (Retailers' Sales Tax Act); § 67-6-202(a) (sales tax on sales price)
• § 67-6-102(78) (definition of "retail sale"); § 67-6-102(80)(K) (definition of "sale" of computer software — transfer/lease/license, incl. on-premises creation and programming/transferring/loading); § 67-6-231(a) (retail sale of computer software taxable regardless of where created)
• § 67-6-387 (exemption for software fabricated by a person or its direct employee for the person's own use; does not apply if fabricated by an agent who isn't also a direct employee)
• § 67-6-205(c)(1)-(10) (only specifically enumerated services taxable); § 67-6-205(c)(4) (repair services taxable); § 67-6-205(c)(6) (installation of TPP/software taxable)
• § 67-6-102(81)(A) (sales price = total consideration, no deduction for seller's costs/labor/travel; bundled taxable + nontaxable charges taxed on the full amount unless separately itemized)
• § 67-6-322 (exempt entities); § 67-6-102(25)(H) (definition of "dealer")

Tennessee rules:

• Tenn. Comp. R. & Regs. 1320-5-1-.78(1), (2) (1974) ("Rule 78") (exemption certificate required for tax-exempt sales; unsupported exemption claims treated as taxable retail sales, dealer liable)

Cases cited by the ruling:

• Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. Aug. 12, 1994) (only enumerated services taxable)
• Penske Truck Leasing Co. v. Huddleston, 795 S.W.2d 669 (Tenn. 1990); TomKats Catering, Inc. v. Johnson, 2001 WL 1090516 (Tenn. Ct. App. Sept. 19, 2001) (separately itemized nontaxable services escape the bundling rule)

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/12-19.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 12-19
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 certain information technology staffing
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] (the “Taxpayer”) provides staff augmentation services to a variety of client
companies located throughout the United States and the State of Tennessee. The workers
provided by the Taxpayer’s staff augmentation business supplement a client company’s existing
information technology (“IT”) and related needs workforce by providing services such as
software development, help desk operation, data base administration, and business analysis. The
Taxpayer’s staff augmentation business enables its client companies to add or remove workers to
their existing staffs as needed, thereby avoiding the costs associated with recruiting, training, and
hiring new employees with the specialized skill sets needed for a particular task, especially when
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the need for such supplemental IT staff is relatively short-term. To avoid those costs, the
Taxpayer’s staff augmentation business allows its client companies to supplement or augment
their existing IT and related workforces with temporary contract employees who work side-byside with and under the direction, supervision, and control of the client company’s own IT
managers and employees. On occasion, the Taxpayer’s contract employees will incur expenses
such as meal and travel costs that the client companies will reimburse to the Taxpayer.
Typically, a client company’s staff augmentation needs arise as a result of (i) scheduling
demands with respect to a specific, ongoing, long-term IT function, project, or support activity
with fluctuating human resource demands, (ii) insufficient in-house expertise when the current
project team of a client company’s internal employees would benefit from the assistance of an
individual who has been trained in some new information technology application or discipline,
or (iii) an intensive, short-term IT project requiring supplemental IT and related services staff.
In each of these circumstances, the hiring of internal employees for such relatively short-term or
temporary assignments with the client companies (with all the complexity associated with the
hiring and terminating of those individuals) is simply too costly, burdensome and inefficient for
the client companies. As a result, the client companies utilize the contract employees provided
by the Taxpayer’s staff augmentation business to fill their temporary IT and related needs.
Once contract employees provided by the Taxpayer’s staff augmentation business are assigned
to a client company, the day-to-day activities, the projects to be completed, the deadlines for
such projects, and other relevant information concerning the actual work to be performed by the
contract employees is controlled and directed solely by employees of the client companies,
typically a client company’s IT manager. The Taxpayer, on the other hand, has no involvement
in defining the scope of such activities or the manner in which such activities are carried out on a
day-to-day basis. The only contact the Taxpayer has with contract employees while they are
assigned to client companies is delivering the individuals a paycheck on a weekly basis and
casual and very general inquiries into how everything is going for the contract employee.
The staffing of a particular task or assignment is controlled entirely by the client companies. In
most instances, the client companies choose to rely on a team concept pursuant to which an
individual provided by the Taxpayer becomes part of a larger team of individuals working on a
specific IT or related project or task, at all times under the direction and control of one of the
client companies’ IT managers. The client company teams frequently consist of a combination
of client company internal employees and contract employees (some of whom may have been
provided by the Taxpayer and some of whom may have been provided by a competitor of the
Taxpayer). These client company project teams generally consist of no fewer than two
individuals and up to as many as forty individuals. In all cases, these project teams are under the
direction, supervision, and control of a client company’s IT manager who is responsible for
carrying out the specific IT or related project or task performed by the teams. The client
companies also provide contract employees with all of the hardware, software, materials, and
supplies needed to perform the various tasks and assignments the client companies’ IT project
managers assign to the contract employees.
Client company employees also oversee the contract employees’ work schedules. The contract
employees provided by the Taxpayer are required to maintain time records that are turned into a
client company’s IT manager for approval before being sent to the Taxpayer on Monday of each
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week. Vacation days, sick days, and personal days are typically worked out between a contract
employee and the client company’s IT manager to whom they are assigned, with notification
provided to the Taxpayer after the fact.
The length of a contract employee’s assignment with a client company is also controlled by the
client company to whom the individual has been assigned. Typically, the individuals are
contracted to be assigned to a client company for an estimated period of time, usually [TERM],
but those initial terms are commonly increased or extended at the request of the client company
for one or more additional estimated [TERMS]. Consequently, it is quite common to have
contract employees placed with a single client company for periods of eighteen months or
longer, depending on the scope and nature of a particular assignment, all as determined by the
client company.
To conduct its temporary staffing or staff augmentation business, the Taxpayer has, in addition
to its corporate offices in [CITY, STATE], more than [REDACTED] branch offices located in
[COUNTRIES]. The Taxpayer has full-time internal employees working in each of these offices
dedicated to the operation of its staff augmentation business. These employees are responsible
for locating contract employees to place with client companies and for meeting with the client
companies to discuss their needs for contract employees.
The Taxpayer’s internal employees are also responsible for the payment of the contract
employees’ hourly wages and for all tax reporting, workers compensation, and employee
benefits associated with those contract employees. The Taxpayer’s internal employees at no
time direct, supervise or control the contract employees in the performance of their day-to-day
activities. All such day-to-day direction, supervision and control is exercised exclusively by the
client companies’ IT managers.
RULINGS
1.

Apart from the fabrication of software, are any other services performed for a client
company by the Taxpayer’s contract employees subject to the Tennessee sales and use
tax?
Ruling: Yes. In addition to the fabrication of software for a client company, all repair
and installation of tangible personal property or computer software performed by the
Taxpayer’s contract employees for a client company are subject to the Tennessee sales
and use tax.

2.

When a contract employee of the Taxpayer fabricates software and performs nontaxable
services for a client company, must the Taxpayer separately itemize on invoices the
taxable fabrication of software and the nontaxable services in order for the amounts paid
for the nontaxable services to be exempt from sales and use taxes?
Ruling: Yes. If a contract employee of the Taxpayer fabricates software or performs a
taxable service and also performs nontaxable services for a client company, the Taxpayer
must separately itemize on invoices the taxable fabrication of software or taxable service

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and the nontaxable services in order for the amounts paid for the nontaxable services to
be exempt from sales and use taxes.
3.

Are the amounts paid for computer software fabrication by the Taxpayer’s contract
employees, when performed for an exempt entity, exempt from Tennessee sales and use
taxes?
Ruling: Yes. Amounts paid for computer software fabrication by the Taxpayer’s
contract employees, when performed for an exempt entity, are exempt from Tennessee
sales and use taxes. However, such sales must be accompanied by the appropriate
exemption certificate.

4.

If the Taxpayer uses a passthrough or intermediary staff augmentation company,
commonly referred to in the industry as a vendor manager or workforce management
company, to provide a client company with contract employees, which charges will be
taxable?
Ruling: The retail sale of tangible personal property, including the fabrication of
computer software, and the retail sale of taxable services are subject to the Tennessee
sales and use tax, regardless of whether sold or performed by the Taxpayer or a vendor
manager.

5.

Are travel costs, meal costs and other similar reimbursable expenses that are paid by a
client company with respect to a contract employee subject to the Tennessee sales and
use taxes?
Ruling: Travel costs, meal costs and other similar expenses incurred by the Taxpayer’s
contract employees in the course of providing services to the client company and
reimbursed to the Taxpayer by the client company, are part of the total sales price. Thus,
if the sale is taxable, the reimbursements are taxable as part of the sales price, and if the
sale is nontaxable, the reimbursements are nontaxable.
ANALYSIS

Under the Retailers’ Sales Tax Act, TENN. CODE ANN. §§ 67-6-101 to -907 (2011), retail sales of
tangible personal property in Tennessee are subject to sales and use tax. TENN. CODE ANN. § 676-102(78) (2011) 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, lease or licensing, in any
manner or by any means whatsoever of computer software for consideration, and includes the
creation of computer software on the premises of the consumer and any programming,
transferring or loading of computer software into a computer.” TENN. CODE ANN. § 67-6102(80)(K). TENN. CODE ANN. § 67-6-231(a) (2011) specifically provides that the retail sale of
computer software is subject to the Tennessee sales and use tax “regardless of whether the
software is … created on the premises of the consumer.”
However, “the fabrication of computer software by a person, or its direct employee, for the
person’s own use and consumption” is exempt from the Tennessee use tax. TENN. CODE ANN.
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§ 67-6-387 (2011). TENN. CODE ANN. §67-6-387 provides that the exemption does not apply if
the computer software “is fabricated by any agent of the person using the computer software
unless the agent is also a direct employee of the person.”1
The Retailers’ Sales Tax Act also imposes the sales tax on certain services. 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, No. 91-3382-III, 1994 WL
420911 (Tenn. Ct. App. Aug. 12, 1994). These specifically taxable services include the
installation and repair of tangible personal property, including computer software. TENN. CODE
ANN. § 67-6-205(c)(4)&(6) (2011).
Even if a service is not specifically enumerated by the statute, 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(81)(A) (2011) provides that the sales price
of a good or service equals the “total amount of consideration . . . for which personal property or
services are sold,” without any deduction for such things as the seller’s cost of the property, the
cost of the materials, the seller’s travel costs, and other such expenses of the seller. 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.

1. Computer software fabrication and staffing service sales
   In addition to the fabrication of software for a client company, all repair and installation of
   tangible personal property or computer software performed by the Taxpayer’s contract
   employees for a client company are subject to the Tennessee sales and use tax.
   In general, the retail sale or use of computer software, regardless of whether it is created on the
   premises of the consumer, is subject to the Tennessee sales and use tax. TENN. CODE ANN. § 676-231(a) (2011). A retail sale is any sale that is not for resale. TENN. CODE ANN. § 67-6-102(78)
   (2011). A sale is defined in pertinent part as “any transfer of title or possession, or both, lease or
   licensing, in any manner or by any means whatsoever of computer software for consideration,
   and includes the creation of computer software on the premises of the consumer and any
   programming, transferring or loading of computer software into a computer.” TENN. CODE ANN.
   § 67-6-102(80)(K). (Emphasis added.) Thus, if the Taxpayer creates computer software on the
   premises of its customers and receives a consideration, then such creation is subject to the
   Tennessee sales tax as a retail sale of computer software.
   The contract employees of the Taxpayer work on the premises of the Taxpayer’s client
   companies. Many of these contract employees create software for the client companies. This
   creation of software is considered a retail sale of software and is subject to the Tennessee sales
   tax, and the Taxpayer must collect the tax from its customers. The taxable creation of software
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TENN. CODE ANN. § 67-6-387 provides that for purposes of this exemption, “direct employee” is defined as “an
employee to whom the person is obligated to issue a federal form W-2, wage and tax statement, and with respect to
whom the person has responsibility for withholding taxes under the Federal Insurance Contributions Act, compiled
in 26 U.S.C. §§ 3101-3126, or such other entity or affiliate that upon petition to the commissioner has been
approved as having that responsibility under this section.”
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also includes any programming software and any transferring or loading of computer software
onto the client companies’ computers.
However, some of the Taxpayer’s contract employees provide services other than the creation or
programming of computer software or the loading of such software onto computers. Such
services include but are not limited to telephone assistance services, technical services,
installation services, and repair services. In Tennessee, generally, the provision of services for a
consideration is not subject to the sales tax unless specifically enumerated in the statute. TENN.
CODE ANN. § 67-6-205(c)(1)-(10) (2011).
Retail sales of “[t]he performing, for a consideration, of any repair services with respect to any
kind of tangible personal property or computer software” and “[t]he installing of tangible
personal property that remains tangible personal property after installation and the installing of
computer software, where a charge is made for the installation” are subject to sales tax. TENN.
CODE ANN. § 67-6-205(c)(4)&(6). Thus, the installing and repairing of tangible personal
property, including computer software, by the Taxpayer’s contract employees is taxable.
However, according to the facts provided by the Taxpayer, none of the additional services
provided by the Taxpayer’s contract employees for its client companies are specifically
enumerated by the statute and thus generally are not subject to the Tennessee sales tax. If,
however, the charges for the nontaxable services are included in the sales price of the creation or
programming of computer software, the loading of such software onto computers, or the repair or
installation of any tangible personal property or software, then the entire sales price will be
subject to the sales tax. See TENN. CODE ANN. § 67-6-102(81)(A).

2. Separate itemization on invoices
   If a contract employee of the Taxpayer fabricates software or performs a taxable service and also
   performs nontaxable services for a client company, the Taxpayer must separately itemize on
   invoices the taxable fabrication of software or taxable service and the nontaxable services in
   order for the amounts paid for the nontaxable services to be exempt from sales and use tax.
   As stated previously, if the sale for a nontaxable service is included in the sale of a taxable good
   or service, then the entire sales price will be subject to the Tennessee sales tax. TENN. CODE
   ANN. § 67-6-102(81)(A) (2011). Thus, when the sale of a service that is not enumerated by the
   statute 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.
   However, if the nontaxable service is separate and optional from sale of the taxable good or
   service, and the two are separately itemized on the invoice, then the nontaxable service will not
   be subject to the Tennessee sales tax. See Penske Truck Leasing Co. v. Huddleston, 795 S.W.2d
   669, 671 (Tenn. 1990); TomKats Catering, Inc. v. Johnson, No. M2000-03107-COA-R3-CV,
   2001WL 1090516, at *2-3 (Tenn. Ct. App. Sept. 19, 2001).
3. Sales to exempt entities
   Amounts paid for computer software fabrication by the Taxpayer’s contract employees, when
   performed for an exempt entity, are exempt from Tennessee sales and use taxes.
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As explained in the analysis to Ruling #1, the retail sale of computer software generally is
subject to the Tennessee sales and use tax. TENN. CODE ANN. § 67-6-231(a). However, certain
entities are exempt from paying the Tennessee sales and use tax. See TENN. CODE ANN. § 67-6322 (2011). If the Taxpayer fabricates and sells computer software to an exempt entity, such sale
will not be subject to the Tennessee sales and use tax. However, such sales must be
accompanied by the appropriate exemption certificate. TENN. COMP. R. & REGS. 1320-5-1-.78(1)
(1974) (“Rule 78”) provides that dealers making otherwise taxable sales to purchasers on a taxexempt basis must obtain and keep appropriate exemption certificates. Rule 78(2) states that “all
sales where an exemption has been claimed, but which are not supported by exemption
certificates, will be deemed retail sales, and the dealer will be held liable” for any sales and use
tax due.

4. Use of a vendor manager
   The retail sale of tangible personal property, including the fabrication of computer software, and
   the retail sale of taxable services are subject to the Tennessee sales and use tax, regardless of
   whether sold or performed by the Taxpayer or a vendor manager.
   Generally, the taxability of a sale is not determined by what entity is making that sale.
   Therefore, if a vendor manager is selling the same tangible personal property or performing the
   same services as the Taxpayer’s contract employees, then the same analysis for Ruling #1 will
   apply to the sales of the vendor manager.
5. Reimbursed expenses
   Travel costs, meal costs and other similar expenses incurred by the Taxpayer’s contract
   employees in the course of providing services to the client company, and reimbursed to the
   Taxpayer by the client company, are part of the total sales price. Thus, if the sale is taxable, the
   reimbursements are taxable as part of the sales price, and if the sale is nontaxable, the
   reimbursements are nontaxable.
   When a taxable sale is made, the sales tax is imposed upon the sales price. TENN. CODE ANN.
   §67-6-202. “Sales price” is defined in pertinent part as “the total amount of consideration…, for
   which personal property or services are sold,” with no deduction for expenses of the seller in
   making the sale, including labor costs. TENN. CODE ANN. §67-6-102(81)(A). Thus, if a taxable
   sale is made, the total amount paid to the seller, including amounts covering any expenses
   incurred by the seller in making the sale, is subject to the sales tax. This is true even if the
   different amounts are separately stated on the invoice. However, if a sale is not a taxable sale,
   then the amount charged for reimbursable expenses also would not be taxable.
   As discussed previously, the Taxpayer’s taxable services include the fabrication of software as
   well as the repair and installation of tangible personal property. The reimbursed expenses
   incurred in making these sales are included in the sales price and are subject to the sales tax.
   However, the reimbursed expenses incurred in making sales of the Taxpayer’s nontaxable
   services are not subject to the sales tax.

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Elizabeth Henderson
Tax Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

10-15-12

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