A company leases equipment to contractors and bundles in services (training, bookkeeping, advertising) and a trade-name license under one contract. Are the services and license taxable, or only the equipment lease?

Plain-English summary

A company leases equipment and other tangible personal property to independent contractors under a single contract. That same contract also bundles in a package of services (training, bookkeeping, recordkeeping, accounting, marketing/advertising, coupons and promotions) and a license to use the company's goodwill and trade name (e.g., on business cards). Leasing tangible property is clearly taxable in Tennessee — but services and a trade-name license generally are not, on their own. So the company asked: are the services and license taxable too, or can they be separated out?

The Department said they are taxable, because they're folded into one indivisible lease of taxable equipment. The starting rule is old and broad: Tennessee taxes the entire "sales price" of a lease or rental of tangible personal property, with no deduction for service charges baked into the price (Tenn. Code Ann. § 67-6-204(a); "sales price" defined in § 67-6-102(79)(A)(ii)-(iii) to exclude any deduction for the seller's service costs). That traces to the 1948 Tennessee Supreme Court case Saverio v. Carson, a diaper-rental dispute where the Court held the tax applies to the full rental price "even though this price includes service charges," no matter how small the actual return on the rented property.

There is one narrow exception, from Penske Truck Leasing Co. v. Huddleston (1990): if a single contract actually contains two separate and divisible agreements, the non-taxable part can be carved out. In Penske, a vehicle lease let the customer buy fuel from the lessor or from anyone else; the fuel deal was "readily distinguishable," not dependent on the lease, and separately terminable, so fuel receipts stayed out of the taxable lease price.

Applying that test, the Department found this contract was not divisible:

• No standalone option. Nothing let a party take just the equipment lease or just the services/license.
• Services tied to the leased property. It was effectively impossible to lease the equipment without the services; most service and license provisions referred to the party as "LESSEE" and were keyed to the leased property.
• One cancellation clause. Unlike Penske's separately terminable fuel agreement, a single cancellation provision ended the entire contract at once, with a right to repossess the leased property.
• Practical reality. The company never said it would lease equipment without requiring its services and license — and it wouldn't put its brand on contractors who hadn't been trained or insured. The lease and the services/license were "intertwined."

Because the agreements were indivisible, the otherwise non-enumerated services and the license are bundled with a taxable lease of tangible personal property and are therefore subject to Tennessee sales and use tax. (The Department also rejected the idea that a taxpayer can control the tax base by careful drafting that splits out service charges — the Saverio court warned that such separation would make the law "unworkable.")

What this means for you

Equipment lessors, franchisors, and dealers who bundle services with a lease

If you lease tangible property and wrap services or a license into the same deal, expect Tennessee to tax the whole price — services included — unless the service/license piece is genuinely a separate and divisible agreement. Merely itemizing or labeling something an "option" isn't enough. To stand a chance of separating a non-taxable service, it generally needs to be independently available, independently priced, not dependent on the lease, and separately terminable (the Penske factors). When the services only make sense because of the leased property and the whole thing lives or dies under one cancellation clause, it's one taxable transaction.

Accountants and tax professionals

This is the lease-side companion to Tennessee's bundling analysis: the default (Saverio; § 67-6-204(a); § 67-6-102(79)(A)(ii)-(iii)) is that lease "sales price" includes accompanying service charges, and the only escape is the Penske "separate and divisible / readily distinguishable / separately terminable" exception. Watch the installment rule (§ 67-6-204(a)(2)) and Rule 1320-5-1-.32, under which the contract terms set whether tax is computed on a lump sum or each periodic payment. Drafting alone won't carve out service charges that are functionally part of the lease.

Common questions

Q: Are services and licenses taxable in Tennessee?
A: Standing alone, many services and a trade-name license are not taxable. But when they're bundled into a single, indivisible lease of taxable tangible personal property, the full lease "sales price" — including those services — is taxable (Tenn. Code Ann. § 67-6-204(a); § 67-6-102(79)(A)(ii)-(iii)).

Q: How can a non-taxable service be separated from a taxable lease?
A: Under Penske Truck Leasing, the service must be a genuinely separate and divisible agreement — readily distinguishable from the lease, not dependent on it, independently available, and separately terminable. If those factors aren't met, it's treated as part of the taxable lease.

Q: Can we just itemize the services on the invoice to make them non-taxable?
A: No. Labeling or separately stating service charges doesn't carve them out if they're functionally part of the lease. The Department, following Saverio, rejected the idea that careful drafting can control the tax base.

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 and can be revoked or modified. Confirm your own contracts with a tax professional.

Citations and references

Tennessee statutes and rules (Tenn. Code Ann.):

• § 67-6-204(a) (sales tax on the sales price of leases/rentals of tangible personal property); § 67-6-204(a)(1) (sales price from the lease/rental); § 67-6-204(a)(2) (installment leases — tax on each payment as due)
• § 67-6-102(79)(A)(ii)-(iii) ("sales price" = total consideration, no deduction for the seller's service costs or charges to complete the sale)
• § 67-6-102(89)(A) (definition of "tangible personal property"); § 67-6-102(78)(A) (definition of "sale," including lease or rental)
• Tenn. Comp. R. & Regs. 1320-5-1-.32(1)-(2) (tax on gross receipts/proceeds/rental without deduction; contract terms set the lump-sum or periodic basis)

Tennessee cases cited by the ruling:

• Saverio v. Carson, 208 S.W.2d 1018 (Tenn. 1948) (the lease tax is measured by the full rental price even where it includes service charges; separating out service charges would make the Act unworkable)
• Penske Truck Leasing Co. v. Huddleston, 795 S.W.2d 669 (Tenn. 1990) (a separate and divisible, readily distinguishable, and separately terminable agreement embodied in the same contract can be carved out of the taxable lease)

Subject

The application of the Tennessee sales and use tax to services and licensing rendered to [LESSEES OF TANGIBLE PERSONAL PROPERTY]

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/13-09.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 13-09
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.
SUBJECT
The application of the Tennessee sales and use tax to services and licensing rendered to
[LESSEES OF TANGIBLE PERSONAL PROPERTY].
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”) is a Tennessee [BUSINESS] that operates a [REDACTED]
company. As part of its operations, the Taxpayer utilizes independent [CONTRACTING
PARTIES] that are not employees of the Taxpayer.

1

The Taxpayer enters into a contract (the “Contract”)1 with each independent [CONTRACTING
PARTY]. This Contract includes the Taxpayer’s agreements with the [CONTRACTING
PARTIES] regarding the lease of [TANGIBLE PERSONAL PROPERTY] and [REDACTED]
equipment to [CONTRACTING PARTIES] in Tennessee, found in a portion of the Contract
labeled “LEASE OF [TANGIBLE PERSONAL PROPERTY].” The Contract also provides
for certain services and other benefits for the [CONTRACTING PARTIES] under the heading
[REDACTED] (the “Services and the License”). The Taxpayer states that it does not require a
[CONTRACTING PARTY] to lease the Taxpayer’s [TANGIBLE PERSONAL PROPERTY],
and will furnish the Services and License to individuals owning their own [TANGIBLE
PERSONAL PROPERTY].
The Services, found in section [REDACTED] of the Contract titled [REDACTED], include
training, [REDACTED], [REDACTED], bookkeeping, record keeping,2 and accounting services.
The Taxpayer also provides “marketing” and “advertising” services.3 The Taxpayer has stated
that although it handles the advertising, the [CONTRACTING PARTIES] are allowed to
advertise on their own and are allowed to customize some of the materials provided by the
Taxpayer. In addition, the Taxpayer has stated that it provides “coupons or promotions” to the
[CONTRACTING PARTIES] as part of its advertising efforts.
The License includes the use of the Taxpayer’s “goodwill and trade name.” Towards this end,
section [REDACTED] of the Contract permits the [CONTRACTING PARTIES] to use the
Taxpayer’s name on business cards. [CONTRACTING PARTIES] are restricted, however, from
infringing on the Taxpayer’s trademark, despite sometimes being allowed to customize the
advertising materials.
RULING
Is the Taxpayer’s sale of Services and the License subject to Tennessee sales and use tax?
Ruling: Yes. The Taxpayer’s sale of Services and the License is subject to the Tennessee
sales and use tax when provided with [TANGIBLE PERSONAL PROPERTY] and/or
[REDACTED] equipment.

ANALYSIS
When the Retailers’ Sales Tax Act was first passed in 1947, it proclaimed that the legislative
intent was “that every person is exercising a taxable privilege who . . . rents or furnishes any of

1

[REDACTED]

2

[REDACTED]

3

Section [REDACTED] of the Contract states: “ [REDACTED].”

2

the things or services taxable under this Act.”4 One of the things taxable under the Act was the
“lease or rental of tangible personal property” by or incidental to an established business.5
Shortly after the Act’s passage, the Tennessee Supreme Court had occasion to review the
application of the lease provisions of the act to a business’s rental of diapers. The plaintiff in
Saverio v. Carson operated a laundry service business that also rented cloth diapers.6 According
to the plaintiff, a significant portion of the cost associated with such rentals was actually for the
service of “collecting, delivering and laundering diapers, rather than the rental return upon the
original purchase price.”7
The Court nevertheless rejected the plaintiff’s contention that such rentals should not be subject
to tax, holding that “[t]he measure of the tax is the gross proceeds of the rental paid by the lessee
to the lessor without any deduction for service charges, regardless of how small may be the
percentage of the return on the property rented.”8 The Court also stated that the “statute is plain
in that the tax must be paid on the final rental or selling price, even though this price includes
service charges.”9
Although the sales tax statutes have changed over the years, much has remained the same. It is
still the legislative intent to impose the sales and use tax on the “sales price of all leases and
rentals of tangible personal property . . . in this state”10 by or incidental to an established
business.11 And like the original definition of sales price, the current statute defines “sales price”
as “the total amount of consideration, including cash, credit, property, and services, for which
personal property or services are sold, leased, or rented, value in money,” but without any
deduction for “service cost[s]” or “[c]harges by the seller for any services necessary to complete
the sale.”12

4

Tennessee Retailers’ Sales Tax Act, ch. 3, § 3, 1947 Tenn. Pub. Acts 22, 26.

5

Tennessee Retailers’ Sales Tax Act, ch. 3, § 3(c), 1947 Tenn. Pub. Acts at 27; see also Tennessee Retailers’ Sales
Tax Act, ch. 3, § 3(d), 1947 Tenn. Pub. Acts at 27 (imposing the tax on the monthly lease or rental price paid by the
lessee).
6

208 S.W.2d 1018, 1018 (Tenn. 1948).

7

Id. at 1018-19.

8

Id. at 1019.

9

Id. (citing Tennessee Retailers’ Sales Tax Act, ch. 3, § 2(d), 1947 Tenn. Pub. Acts at 24 (including “any services
that are a part of a sale” as part of the “sales price” definition).
10

“Tangible personal property” is defined as “personal property that can be seen, weighed, measured, felt, or
touched, or that is in any other manner perceptible to the senses.” Tenn. Code Ann. § 67-6-102(89)(A) (Supp. 2012).
11

See TENN. CODE ANN. § 67-6-204(a) (2011); see also TENN. CODE ANN. § 67-6-102(78)(A) (Supp. 2012)
(defining “sale” in pertinent 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 property for a
consideration.” (emphasis added)).
12

TENN. CODE ANN. § 67-6-102(79)(A)(ii)-(iii) (Supp. 2012).

3

In other words, the general rule remains that leases or rentals that also involve services are taxed
on the entire amount of the lease. Practically, the tax is levied on the “sales price derived from
the lease or rental of tangible personal property.”13 But if the lessee or renter pays on an
installment basis, rather than in a lump sum, TENN. CODE ANN. § 67-6-204(a)(2) imposes the tax
on each installment payment when due, rather than on the entire lease at the beginning of the
lease term.14 As further explained in TENN. COMP. R. & REGS. 1320-5-1-.32(2) (2008), the terms
of the contract establish the basis for computing the tax, be it a lump sum or periodic payment.
Notwithstanding the general rule, however, there is one unique circumstance where Tennessee
courts have disallowed the taxation of certain goods or services accompanying the transfer of
tangible personal property pursuant to a lease: where two separate and divisible agreements are
embodied in a single contract.
The seminal case to invoke this standard, Penske Truck Leasing Co. v. Huddleston involved a
taxpayer that leased vehicles to customers under a “lease and service” agreement.15 In addition to
providing the terms relating to the lease of the vehicle, the agreement also provided the lessee
with the option of purchasing fuel for the leased vehicles from the taxpayer, or of purchasing fuel
from other vendors.16
To decide whether the fuel purchase portion of the contract should be included in the “gross
proceeds”17 of the lease and would therefore be subject to tax, the Court looked to whether the
terms of the agreement related to the purchase of fuel were separate and divisible from the rest of
the lease.18 The Court determined that it was.19

13

TENN. CODE ANN. § 67-6-204(a)(1); see also TENN. COMP. R. & REGS. 1320-5-1-.32(1) (2008) (“The tax shall be
computed on the gross receipts, gross proceeds, or rental payable without any deduction whatsoever for expense
incident to the conduct of business.”)
14

This approach accords with the original imposition of the tax in 1947 by the Tennesse Retailer’s Sales Tax Act,
ch. 3, § 3(c)-(d), 1947 Tenn. Pub. Acts at 27. The Taxpayer suggests that the amount “contracted or agreed to be
paid by lessee or renter,” see TENN. CODE ANN. § 67-6-204(a)(2), should establish the tax base such that taxpayers
can control whether a transaction is taxed by careful drafting. As the Saverio Court warned, however, such “an
attempted division or separation of the charge for services rendered would result in confusion in the administration
of the Act and render the law unworkable.” Saverio, 208 S.W.2d at 1018.
15

795 S.W.2d 669, 670 (Tenn. 1990).

16

Id. at 670.

17

The Court’s analysis is derived from the imposition of the tax on the “gross proceeds” of a lease under the thencurrent TENN. CODE ANN. § 67-6-204(a). The term “gross proceeds” has since been replaced by the term “sales
price.” Compare TENN. CODE ANN. § 67-6-204(a) (1989) (“gross proceeds”), with TENN. CODE ANN. § 67-6-204(a)
(2011) (“sales price”). The analytical framework remains valid, however.
18

Id. at 671.

19

Id.

4

Importantly, the Court based its holding on the fact that the parties to the lease and service
agreement intended and understood that the lease of equipment was separate and apart from fuel
sales, though the terms of both transactions were embodied in the same document.20 The Court
gave considerable weight to the fact that the lease portion of the contract was “readily
distinguishable” from the portion covering fuel sales, and that neither portion of the contract was
dependent upon the other.21 The Court also emphasized that the fuel agreement could be
terminated independently, without causing termination of the lease agreement.22 Because the fuel
agreement was separate and divisible from the lease agreement, receipts from sales of fuel
(which were not subject to the sales and use tax) were not properly included in the gross
proceeds23 from the leasing of vehicles (which was subject to the sales and use tax).24
The Taxpayer’s Contract here involves, in part, the transfer of [TANGIBLE PERSONAL
PROPERTY] and other equipment. There is no question that these items are tangible personal
property, and are consequently subject to sales or use tax under TENN. CODE ANN. § 67-6-204(a).
Whether the Taxpayer’s sale of Services and the License is subject to Tennessee sales and use
tax, therefore, depends upon whether the terms of the Taxpayer’s Contract relating to the
Services and License are separate, divisible, and “readily distinguishable” from the portion of the
contract relating to the provision of the [TANGIBLE PERSONAL PROPERTY] and equipment.
A review of the provided Contract reveals that the terms are not separate, divisible, or “readily
distinguishable.”
First, there is no option in the Contract for a party to choose only to lease [TANGIBLE
PERSONAL PROPERTY] and equipment or to receive the Services and License,
notwithstanding the word “option” included in the [REDACTED] price schedule. The first
provision under the “[REDACTED]” heading states that:
[REDACTED].
This language does not contemplate an option to [USE] independently owned [TANGIBLE
PERSONAL PROPERTY].
Moreover, it is seemingly impossible for a party to lease only [TANGIBLE PERSONAL
PROPERTY] from the Taxpayer without also acquiring the Taxpayer’s services, as many of the
Services and the License are tied to the use of [REDACTED] leased [TANGIBLE PERSONAL
PROPERTY]. [MOST] provisions listed under [THE SERVICES AND LICENSE SECTION]
refer to the contracting party as a “LESSEE,” and also reference either [REDACTED] leased

20

Id.

21

Id.

22

Id.

23

Note that the tax on the lease or rental of property is no longer based on “gross proceeds,” but is instead based on
the “sales price.” See TENN. CODE ANN. § 67-6-204(a) (2011).
24

Penske Truck Leasing Co., 795 S.W.2d at 671.

5

[TANGIBLE PERSONAL PROPERTY] or leased equipment. [REDACTED].25 The provisions
regarding Services are mostly dependent upon the lease of [TANGIBLE PERSONAL
PROPERTY], and are not “readily distinguishable.”26
Second, [REDACTED].
Third, [REDACTED].”27
Fourth, unlike the separately terminable agreements in Penske Truck Leasing Co., the Contract at
issue here contains one cancellation clause [REDACTED] allowing either party to cancel “at the
end of any lease term.” The Taxpayer is further allowed to cancel the Contract if the lessee
breaches the Contract or “fails to [USE] the [TANGIBLE PERSONAL PROPERTY] in a safe
and prudent manner.” This provision makes no distinction between a lease of [TANGIBLE
PERSONAL PROPERTY] and equipment and the provision of Services and a License. If the
Contract is cancelled for any reason, the entire agreement is cancelled, and [ANOTHER]
provision allows the Taxpayer to repossess the leased [TANGIBLE PERSONAL PROPERTY] if
necessary.
Finally, although the Taxpayer represents that it “does expressly provide [its Services and
License] to [CONTRACTING PARTIES] who own their own [TANGIBLE PERSONAL
PROPERTY] and equipment and to whom the Taxpayer leases no tangible personal property,”
the Taxpayer has not represented that it would ever lease [TANGIBLE PERSONAL
PROPERTY] to a [CONTRACTING PARTY] without requiring the [CONTRACTING
PARTY] to use the Taxpayer’s Services and License. This omission accords with a plain reading
of the contract and common sense, as it is unlikely that the Taxpayer would allow its brand name
and image to rest on [CONTRACTING PARTIES] that have not had its own training, that do not
use its [REDACTED], and may or may not be insured. Clearly the leasing of [TANGIBLE
PERSONAL PROPERTY] is intertwined with the provision of the Taxpayer’s Services and
License.
The lease agreement for the Services and License is therefore not separate from the lease
agreement for the [TANGIBLE PERSONAL PROPERTY] and Equipment. Having found the
agreements to be indivisible, the Taxpayer’s non-enumerated Services and the License are
necessarily bundled with a taxable sale of tangible personal property. Consequently, the
Taxpayer’s Services and License are subject to Tennessee sales and use tax.

R. John Grubb II
Senior Tax Counsel
25

(Emphases added).

26

See Penske Truck Leasing Co., 795 S.W.2d at 671.

27

(Emphasis added).

6

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

August 16, 2013

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