Does Tennessee charge sales or use tax on cloud-computing services — remote online data storage, virtual computing capacity, and the usage fees for moving data — when the provider's servers are all located outside Tennessee?

Plain-English summary

An out-of-state company that sells cloud computing — what the industry calls "infrastructure as a service" — asked the Tennessee Department of Revenue whether its services are subject to Tennessee sales and use tax. The Department said no to all three of them, on these facts.

The company runs two core services plus a usage fee:

• Remote Storage Service — customers set up an account over the Internet and upload, store, and retrieve their own data, files, and applications on the company's servers (think online backup or scalable file storage). The customer keeps ownership of everything it uploads; the company just provides the infrastructure.
• Virtual Computing Service — customers rent scalable computing capacity (virtual servers) to run their own applications, host websites, or process data, without buying their own servers or building their own data center. Any operating-system or other software runs on the company's servers and is never downloaded or licensed to the customer.
• Usage fees — separately billed, metered charges that kick in when a customer does something like copy or move data between the company's data centers. A customer can't incur one on its own; it's always a byproduct of using the storage or computing service.

The key facts that drove the result: all of the company's data centers and servers are outside Tennessee (there are none in the state), customers never download any of the company's software and never receive title, possession, or control of it, and the software always stays on the company's out-of-state servers.

Tennessee's Retailers' Sales Tax Act taxes (1) retail sales of tangible personal property — which by statute includes prewritten computer software, taxable no matter how it's delivered (Tenn. Code Ann. § 67-6-231(a)) — and (2) a short, specific list of enumerated services, one of which is telecommunications (§ 67-6-205(c)(3)). The Department walked each service through both:

• No taxable property or software changed hands in Tennessee. Because the software stays on the provider's out-of-state servers and is never transferred to or installed on the customer's machines, there is no sale, license, or in-state use of tangible personal property or software.
• It isn't taxable "telecommunications." Moving data between points could superficially fit the definition of a telecommunications service (§ 67-6-102(90)(A)), but the statute expressly excludes "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" (§ 67-6-102(90)(B)(i)). A customer's primary purpose in cloud storage and computing is the data and information — so these fall squarely inside the exclusion.
• Nothing was bundled or "intertwined" with a taxable item. The free software-development kits and management consoles the company throws in are not charged for, and the company sells no taxable goods alongside the services. With no tangible personal property in the deal, the Department didn't even need to run the Crescent "crucial/essential/integral" bundling analysis.

The usage fees followed the storage and computing services and came out non-taxable for the same reasons.

One important caveat about timing: this ruling interprets Tennessee law as it stood in 2012–2013. Tennessee later amended its sales-tax law to reach remotely accessed software (cloud-hosted applications), so a service that gives customers access to software running on a provider's servers may be treated differently today. Treat this ruling as a snapshot of older law and verify the current rules before relying on the result.

What this means for you

Businesses buying cloud storage or computing

In 2013 Tennessee treated pure infrastructure cloud services — online storage and rented virtual computing — as non-taxable data-processing/information services, not as taxable software or telecommunications, especially where the provider's servers sit out of state and nothing is downloaded to you. But the law in this area has moved: Tennessee subsequently began taxing remotely accessed software. If you're budgeting tax on a cloud or SaaS subscription today, don't rely on this older result — confirm the current treatment.

Cloud, hosting, and SaaS providers

The two facts the Department leaned on most were (1) the software never leaves the provider's servers — no download, no transfer of title, possession, or control — and (2) the customer's primary purpose is the processed data or information, which puts the service inside the data-processing/information-services exclusion from "telecommunications." If your offering instead delivers or licenses software to the customer, or its real object is something enumerated and taxable, the analysis changes. And again, the remotely-accessed-software rules enacted after 2013 may now reach offerings this ruling treated as exempt.

Accountants and tax professionals

The framework: Tennessee taxes retail sales of tangible personal property, including prewritten software regardless of delivery method (§ 67-6-231(a); § 67-6-102(68), (89)(A)), plus enumerated services (§ 67-6-201(3); § 67-6-205(c)(3)). The telecommunications definition (§ 67-6-102(90)(A)) is cut back by the data-processing/information-services exclusion in § 67-6-102(90)(B)(i). Two ways a non-enumerated service still gets taxed — bundling into a taxable item's sales price (§ 67-6-102(79)(A)) or being a "crucial/essential/integral" part of a transaction involving taxable TPP (the Crescent line) — both failed because no taxable property was in the deal. Use tax (§ 67-6-203(a)) didn't apply because the servers are out of state. Note the post-2013 statutory change taxing remotely accessed software.

Common questions

Q: Is cloud storage or virtual server hosting taxable in Tennessee?
A: In this 2013 ruling, no — the Department treated online data storage and rented virtual computing as non-taxable data-processing/information services rather than taxable software or telecommunications, where the provider's servers were out of state and nothing was downloaded. Be careful, though: Tennessee later amended its law to tax remotely accessed software, so the current answer for a given service may differ. Verify current law.

Q: Why isn't moving data between data centers a taxable "telecommunications service"?
A: It can look like one, but the statute excludes "data processing and information services" where the customer's primary purpose is the processed data or information (§ 67-6-102(90)(B)(i)). Cloud storage and computing fit that exclusion, so the data-transfer usage fees were not taxable telecommunications.

Q: The provider includes free software tools — does that make the service taxable?
A: No. The software-development kits and management consoles were provided free of charge, and the provider sold no taxable goods alongside the services. Because nothing taxable was bundled in (and no tangible personal property changed hands), the free tools didn't make the services taxable.

Q: Does it matter that the servers are outside Tennessee?
A: Yes, it was important here. Use tax applies to tangible personal property used in Tennessee; because the servers and software stayed entirely outside the state and nothing was delivered into Tennessee, there was no in-state use of taxable property.

Q: Can I rely on this letter ruling for my own cloud business?
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. It also interprets older law that has since changed for remotely accessed software. Use it to understand the Department's reasoning, but confirm your own situation with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.; Retailers' Sales Tax Act, §§ 67-6-101 to -907):

• § 67-6-102(76) (definition of "retail sale"); § 67-6-102(78)(A) (definition of "sale"); § 67-6-102(78)(C) (a "sale" includes furnishing the things/services taxed by the Act)
• § 67-6-102(89)(A) (tangible personal property); § 67-6-102(68) (prewritten computer software); § 67-6-102(18) (computer software); § 67-6-102(24) ("delivered electronically")
• § 67-6-231(a) (sale, lease, licensing, or use of computer software is taxable regardless of delivery method)
• § 67-6-205(c)(3) (telecommunications as an enumerated taxable service); § 67-6-201(3) (tax on enumerated services); § 67-6-102(90)(A) (telecommunications service); § 67-6-102(90)(B)(i) (data-processing and information-services exclusion)
• § 67-6-102(79)(A), (A)(iii) ("sales price"; no deduction for services to complete the sale; bundling); § 67-6-203(a) (use tax); § 67-6-102(94)(A)-(B) (definition of "use")

Tennessee cases cited by the ruling:

• Crescent Amusement Co. v. Carson, 213 S.W.2d 27 (Tenn. 1948) (tangible personal property that is a "crucial/essential/integral" element of a transaction pulls the whole charge into the sales price)
• Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976) (a tangible method of data transfer that is "merely incidental" is not subject to the tax)
• Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132 (Tenn. 1992); Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994) (only enumerated services are taxable)
• Tomkats Catering, Inc. v. Johnson, 2001 WL 1090516 (Tenn. Ct. App. 2001); Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987); AT&T v. Johnson, 2002 WL 31247083 (Tenn. Ct. App. 2002); Rivergate Toyota, Inc. v. Huddleston, 1998 WL 83720 (Tenn. Ct. App. 1998); Nashville Mobilphone Co. v. Woods, 655 S.W.2d 934 (Tenn. 1983) (bundling and the "merely incidental" line)

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/13-12.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 13-12
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 Retailers’ Sales Tax Act to various cloud computing 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”) offers information technology infrastructure services to
customers via the Internet. The services allow customers to access applications and platforms,
server bandwidth, and storage capacity without significant information technology capital
investment.
The Taxpayer is headquartered in [STATE] and has offices in [LOCATIONS]. While the
Taxpayer does not own any data centers, it does utilize large data centers located in
1

[LOCATIONS] to provide its services [REDACTED]. Besides the large data centers, the
Taxpayer also utilizes very small clusters of servers [REDACTED] located in [LOCATIONS].
The [REDACTED] data centers and [REDACTED] sites are owned and operated by affiliated
entities. Currently, there are no data centers or [REDACTED] sites located in Tennessee.
The Taxpayer’s cloud computing services include the [REMOTE STORAGE SERVICE] and the
[VIRTUAL COMPUTING SERVICE].
[REMOTE STORAGE SERVICE]
The Taxpayer’s [REMOTE STORAGE SERVICE] allows customers to store, retrieve, and
maintain content, data, applications, and software on its servers. Customers can store and retrieve
large amounts of data at any time and from any location via the Internet. Customers do this by
setting up an account via the Internet, which enables them to upload and download their content
to servers within the Taxpayer’s network. Both companies and individual developers use [THE
REMOTE STORAGE SERVICE]. Companies may use it to backup data or store large amounts
of data for which they do not have the memory capacity, or to store temporary data used in
setting up a website. Individual developers generally utilize the remote storage services to
backup and store data in lieu of setting up their own on-premises server infrastructure.
Customers that utilize [THE REMOTE STORAGE SERVICE] retain ownership of the content
uploaded to the Taxpayer’s network. The Taxpayer does not have the authority to use, sell, or
license customer content stored within [THE REMOTE STORAGE SERVICE]. The Taxpayer
merely provides access to the infrastructure necessary for customers to store their own digital
content. The remote storage services are also scalable such that customers can increase storage
space, speed, throughput, and robustness to adapt the service to their evolving storage needs.
Customers have the capability to select a specific data center to provide the [REMOTE
STORAGE SERVICE]. The customer does not know the exact server hosting its data, and the
Taxpayer may also move the customer’s data from one server to another without providing
notice to the customer.
The Taxpayer makes available, free of charge, certain software development kits and a
management console to aid customers in uploading and managing their stored data.
[REDACTED]. The free tools are optional, and customers may choose to make use of
[REMOTE STORAGE SERVICE] without utilizing these free tools.
Customers are charged both a base fee, determined by the amount of gigabytes used in a given
month, as well as an incidental usage fee based on their activity while using the service. The flat
fee prices are on a sliding scale, per gigabyte basis. The usage fee is called a [FEE] and is
described more fully below. Customers are not charged for Internet access or any other similar
means of using the Internet to store or retrieve information through [THE REMOTE STORAGE
SERVICE]. They are independently responsible for their own Internet connections and
telecommunications services.

2

[VIRTUAL COMPUTING SERVICE]
The Taxpayer provides a scalable virtual computing environment with its [VIRTUAL
COMPUTING SERVICE]. Through [THE VIRTUAL COMPUTING SERVICE], customers can
procure computing resources in order to perform a variety of activities typically done using a
server, including, but not limited to, running applications, monitoring computers and computer
usage, and hosting web domains. The service’s core benefit is that it allows customers to obtain
computing capacity and control of their computing resources without a significant information
technology investment (e.g., customers no longer have to buy their own servers or set up their
own on-premises data centers).
In order to use [THE VIRTUAL COMPUTING SERVICE], customers create a virtual server to
run specific applications and services. Customers select a configuration of memory, CPU, and
storage that is optimal for their choice of operating system and application. This configuration is
called a [CONFIGURATION] and is the basis for the fee the customer is charged for [THEIR
VIRTUAL COMPUTING SERVICE] usage.
Customers are not required to use specific software for the [VIRTUAL COMPUTING
SERVICE] and do not download any software as part of [A CONFIGURATION]. The Taxpayer
provides its customers free help in the form of application programming interfaces and software
development kits. The free tools are optional, and customers may choose to make use of the
[VIRTUAL COMPUTING SERVICE] without utilizing these free tools. Customers can use an
operating system to upload the applications that they wish to run and can use application
programming interfaces to allow their existing systems to communicate with the [VIRTUAL
COMPUTING SERVICE]. Specifically, the Taxpayer makes available either open source or
third party operating system software so that customers can make use of the virtual servers. The
open source operating system software used in an “Open Source [CONFIGURATION]” is freely
accessible by anyone over the Internet. Neither the Taxpayer nor its customers pay a fee to
access the open source operating system software. Customers may also opt to use a third party
operating system in a “Third Party [CONFIGURATION].”
Whether a customer selects the Open Source or Third Party [CONFIGURATION] option, the
operating system software runs on the Taxpayer’s servers to provide the [VIRTUAL
COMPUTING SERVICE]. Customers cannot download the operating system software for their
own use. A customer’s use of this operating system software is only in conjunction with the use
of the [VIRTUAL COMPUTING SERVICE]. No license is sold or otherwise transferred from
the Taxpayer to customers. Moreover, the Taxpayer does not separately license, sell, or distribute
any software with its [VIRTUAL COMPUTING SERVICE]. [REDACTED].
Customers retain all intellectual property rights to all data and content sent to the Taxpayer’s
network. Customers must represent that they own or license the intellectual property and
software that they are uploading to use during a computing session. Customers may select a
specific data center to provide their computing services. Customers do not know which exact
server is hosting their data, and the Taxpayer may move the customer’s data from one server to
another without providing notice to the customer.

3

[VIRTUAL COMPUTING SERVICE] charges are based on the computing resources that the
customer consumes. Customers are charged both a base fee, determined by the amount of
computing power used in a given month, as well as an incidental usage fee based on their activity
while using the service. The Taxpayer provides operating system software, application tools,
data, and other content are solely for the convenience of the customer, and these costs are built
into the per-hour [VIRTUAL COMPUTING SERVICE] charges. The incidental usage fee is
called a “[FEE]” and is described more fully below. [REDACTED].
[FEES]
Customers’ usage of services like [THE REMOTE STORAGE SERVICE AND THE VIRTUAL
COMPUTING SERVICE] generate incidental usage charges called [FEES], which are separately
stated from base fees for [THE REMOTE STORAGE SERVICE AND THE VIRTUAL
COMPUTING SERVICE] on their monthly bills. These usage fees are based upon a customer’s
activity on the Taxpayer’s network, such as when a customer requests access to resources in a
new data center or requests that data be copied or moved within the Taxpayer’s network.
Within the Taxpayer’s network are clusters of data centers in a similar geographic area
[REDACTED].
Requests by customers to copy data from one [DATACENTER] to another may trigger a usage
fee. [REDACTED].
These fees act as a metering mechanism that tracks a customer’s usage of the Taxpayer’s
services and network and are not fees for underlying telecommunications infrastructure. To the
contrary, both the Taxpayer and its customers must obtain and pay their own telecommunications
access and usage fees to their respective telecommunications service providers outside of and
independent from the Taxpayer’s service transaction.
A customer cannot [INCUR A FEE] in isolation. The [FEE] is always a consequence of a
customer’s active use of a different and primary service such as [VIRTUAL COMPUTING
SERVICE]. [REDACTED].
[REDACTED].
RULINGS
1.

Is the Taxpayer’s [REMOTE STORAGE SERVICE] subject to the Tennessee sales and
use tax?
Ruling: No. The Taxpayer’s [REMOTE STORAGE SERVICE] is not subject to the
Tennessee sales and use tax.

2.

Is the Taxpayer’s [VIRTUAL COMPUTING SERVICE] subject to the Tennessee sales
and use tax?
Ruling: No. The Taxpayer’s [VIRTUAL COMPUTING SERVICE] is not subject to the
Tennessee sales and use tax.
4

3.

Is the Taxpayer’s [FEE] subject to the Tennessee sales and use tax?
Ruling: No. The Taxpayer’s [FEE] is not subject to the Tennessee sales and use tax.
ANALYSIS

Under the Retailers’ Sales Tax Act, 1 the retail sale in Tennessee of tangible personal property
and specifically enumerated services is subject to the sales tax, unless an exemption applies.
“Retail sale” is defined as “any sale, lease, or rental for any purpose other than for resale,
sublease, or subrent.” 2
TENN. CODE ANN. § 67-6-102(78)(A) (Supp. 2012) defines “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.”
“Tangible personal property” includes “property that can be seen, weighed, measured, felt, or
touched, or that is in any other manner perceptible to the senses.” 3 Tangible personal property
also includes “prewritten computer software,” which is defined in TENN. CODE ANN. § 67-6102(68) in pertinent part as “computer software, including prewritten upgrades, that is not
designed and developed by the author or other creator to the specifications of a specific
purchaser.” 4 Conversely, the sale or use of intangible intellectual property generally is not
subject to Tennessee sales and use tax unless stored on a tangible storage media. 5
In addition to the transfer of tangible personal property, the term “sale” also includes “the
furnishing of any of the things or services” taxable under the Retailers’ Sales Tax Act. 6 One of
the “things” specifically taxable is:
[t]he retail sale, lease, licensing or use of computer software in this state, including
prewritten and custom computer software . . . regardless of whether the software is
delivered electronically, delivered by use of tangible storage media, loaded or

1

TENN. CODE ANN. §§ 67-6-101 to -907 (2011 & Supp. 2012).

2

TENN. CODE ANN. § 67-6-102(76) (Supp. 2012).

3

TENN. CODE ANN. § 67-6-102(89)(A).

4

TENN. CODE ANN. § 67-6-102(68) further provides that “‘[p]rewritten computer software’ or a prewritten portion
of the computer software that is modified or enhanced to any degree, where the modification or enhancement is
designed and developed to the specifications of a specific purchaser, remains prewritten computer software.” Note,
however, that “where there is a reasonable, separately stated charge or an invoice or other statement of the price
given to the purchaser for the modification or enhancement, the modification or enhancement shall not constitute
prewritten computer software.” TENN. CODE ANN. § 67-6-102(68).
5

Compare Crescent Amusement Co. v. Carson, 213 S.W.2d 27, 29 (Tenn. 1948) (rental films are taxable tangible
personal property), with Commerce Union Bank v. Tidwell, 538 S.W.2d 405, 407 (Tenn. 1976) (finding a tangible
method of data transfer “merely incidental” to the underlying transaction, and thus not subject to sales and use tax).
6

TENN. CODE ANN. § 67-6-102(78)(C).

5

programmed into a computer, created on the premises of the consumer or otherwise
provided. 7
“Computer software” is “a set of coded instructions designed to cause a computer . . . to perform
a task.” 8 Computer software is “delivered electronically” if delivered “by means other than
tangible storage media.” 9
The sales tax also applies to retail sales of services specifically enumerated in the Retailers’
Sales Tax Act.10 The furnishing of “intrastate, interstate or international telecommunication
services” is one such specifically enumerated service. 11 “Telecommunications service” is defined
by TENN. CODE ANN. § 67-6-102(90)(A) 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.” TENN. CODE ANN. § 67-6-102(90)(B)(i) excludes from the definition of
“telecommunications service,” however, “[d]ata 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.”
There are two ways that non-enumerated services, however, may be included in the sales price of
a given transaction, despite not being directly subject to tax. First, a nontaxable service or item
may be subject to taxation when charges for the nontaxable service or item are included in the
sales price of a taxable good or service. Specifically, TENN. CODE ANN. § 67-6-102(79)(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.” Thus, if taxable goods or services and nontaxable
goods or services are sold together for a single charge, the entire charge is generally subject to
taxation, with the bundled sales price as the measure of tax. 12
The second manner in which a non-enumerated service will be included in the sales price of a
transaction is where the service is intertwined with the sale of taxable tangible personal property.
The definition of “sales price” provides in pertinent part that there will be no deductions for

7

TENN. CODE ANN. § 67-6-231(a) (2011) (emphasis added).

8

TENN. CODE ANN. § 67-6-102(18).

9

TENN. CODE ANN. § 67-6-102(24).

10

TENN. CODE ANN. § 67-6-201(3) (Supp. 2012); see also TENN. CODE ANN. § 67-6-102(78)(C); Covington Pike
Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992); Ryder Truck Rental, Inc. v. Huddleston, No. 91-3382III, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug. 12, 1994).
11

TENN. CODE ANN. § 67-6-205(c)(3) (Supp. 2012).

12

See Tomkats Catering, Inc. v. Johnson, No. M2000-03107-COA-R3-CV, 2001 WL 1090516, at *2 (Tenn. Ct.
App. Sept. 19, 2001); cf. TENN. CODE ANN. § 67-6-102(79)(A)(vi) (“Sales price” includes “[t]he value of exempt
personal property given to the purchaser where taxable and exempt personal property have been bundled together
and sold by the seller as a single product or piece of merchandise.”).

6

“labor or service” cost by the seller and also includes “[c]harges by the seller for any services
necessary to complete the sale, other than delivery and installation charges.” 13
In addition and as a complement to the sales tax, the Retailers’ Sales Tax Act imposes a use tax
at the same rate as the sales tax on “the purchase price of each item or article of tangible personal
property when the tangible personal property is not sold, but is used, consumed, distributed, or
stored for use or consumption in this state; provided, that there shall be no duplication of the
tax.” 14
“Use” is defined in pertinent part as either “the exercise of any right or power over tangible
personal property incident to the ownership thereof, except that it does not include the sale at
retail of that property in the regular course of business” 15 or “the consumption of any of the
services . . . taxable under [the Retailer’s Sales Tax Act].”16
Accordingly, the Taxpayer’s activities will be subject to the Tennessee sales tax if its charges
relate to: 1) the sale of tangible personal property or computer software in Tennessee; 2) the
furnishing of a taxable service, including a telecommunications service, in Tennessee; 3) the
furnishing of an otherwise nontaxable good or service that is bundled with a taxable good or
service; and/or 4) the furnishing of a non-enumerated service that is a “crucial,” “essential”, or
“integral” element of a transaction that involves that sale of taxable tangible personal property,
or vice versa.
The Taxpayer’s activities will be subject to the Tennessee use tax if its charges relate to:
1) tangible personal property or taxable services; 2) that are used, consumed, distributed, or
stored for use or consumption in this state.

13

TENN. CODE ANN. § 67-6-102(79)(A)(iii). A line of cases, beginning with Crescent Amusement Co. v. Carson,
213 S.W.2d 27 (Tenn. 1948), expand this concept, establishing that where a sale of a non-enumerated service is
accompanied by tangible personal property that is a “crucial,” “essential,” or “integral” element of the transaction,
the sales price will include the entire cost of the transaction, including the value of the non-enumerated service, see,
e.g., Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 625 (Tenn. 1987), and conversely, where a sale of tangible
personal property is accompanied by a non-enumerated service that are a “crucial,” “essential,” or “integral” element
of the transaction, the sales price will include the entire cost of the transaction, including the value of the nonenumerated services. See, e.g., AT&T v. Johnson, No. M2000-01407-COA-R3-CV, 2002 WL 31247083, at 7-9
(Tenn. Ct. App. Oct. 8, 2002); see also Rivergate Toyota, Inc. v. Huddleston, No. 01A01-9602-CH-00053, 1998 WL
83720, at 4 (Tenn. Ct. App. Feb. 27, 1998). In contrast, where a transfer of tangible personal property or a service
is “merely incidental” to a sale of a non-enumerated service, the transaction would not be subject to the sales tax.
See Commerce Union Bank v. Tidwell, 538 S.W.2d 405, 407 (Tenn. 1976) (citing Washington Times-Herald, Inc. v.
District of Columbia, 213 F/2d 23 (1954)); cf. Nashville Mobilphone v. Woods, 655 S.W.2d 934, 935-37 (Tenn.
1983) (holding that the renting of radio equipment was merely incidental to the taxpayer’s principal business of
“furnishing services as a ‘radio common carrier system,’” and therefore the taxpayer’s purchase of the radio
equipment was subject to sales or use tax).
14

TENN. CODE ANN. § 67-6-203(a) (Supp. 2012) (footnote added).

15

TENN. CODE ANN. § 67-6-102(94)(A).

16

TENN. CODE ANN. § 67-6-102(94)(B).
7

1. [REMOTE STORAGE SERVICE]
The Taxpayer’s [REMOTE STORAGE SERVICE] is not subject to the Tennessee sales and use
tax.
First, no sale, transfer, or electronic delivery of tangible personal property or computer software
occurs in Tennessee in conjunction with the Taxpayer’s furnishing of remote data storage
through its [REMOTE STORAGE SERVICE]. The Taxpayer provides its customers with a webbased interface that it stores on various servers, all of which are located outside of Tennessee.
The interface aids customers in uploading and managing their data. After a customer uploads its
data to the Taxpayer’s server, that customer retains all ownership of the data, and the Taxpayer
does not access the data except to store and track for billing purposes. Regardless of whether the
interface meets the statutory definition of “computer software” or “prewritten computer
software,” the Taxpayer prohibits customers from downloading any part of the interface itself.
Moreover, the Taxpayer does not transfer title, possession, or control of the interface to the
customer at any time. As such, the interface is never delivered to, transferred to, or installed on
the customer’s computers but remains on the Taxpayer’s servers located outside of Tennessee.
Second, the Taxpayer’s [REMOTE STORAGE SERVICE] does not constitute the furnishing of
a taxable service in Tennessee for purposes of the Tennessee sales and use tax. As stated above,
only specifically enumerated services, such as telecommunications services, are subject to the
Tennessee sales and use tax. Use of the [REMOTE STORAGE SERVICE] involves the
electronic transmission, conveyance, or routing of data between points because the Taxpayer’s
customers are transferring data from their computer systems to the Taxpayer’s servers and back,
so [REMOTE STORAGE SERVICE] could potentially be characterized as a
telecommunications service under TENN. CODE ANN. § 67-6-102(90)(A). However, [THE
REMOTE STORAGE SERVICE] is excluded from the definition of a telecommunications
service through the operation of TENN. CODE ANN. § 67-6-102(90)(B)(i). TENN. CODE ANN. § 676-102(90)(B)(i) specifically excludes from the definition of “telecommunications service” any
“[d]ata 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.”
The Taxpayer’s primary purpose of the underlying transaction is the remote storage of digital
data, applications, and information. Accordingly, the Taxpayer’s [REMOTE STORAGE
SERVICE] fits within the category of data processing and information services, which are
specifically excluded from the definition of a telecommunications service. Thus, the provision of
[THE REMOTE STORAGE SERVICE] does not constitute a taxable telecommunications
service.
Third, because the Taxpayer does not make sales of taxable goods or services in conjunction
with the sale of [THE REMOTE STORAGE SERVICE], the sale of such service cannot be
characterized as the furnishing of an otherwise nontaxable service that is sold as part of the sale
of a taxable good or service. Although the Taxpayer makes available and may furnish its
customers with software development kits and management consoles to aid in uploading and
managing stored data, those tools are free of charge and are not subject to the Tennessee sales
and use tax. The Taxpayer’s [FEES] may accompany the sale of [REMOTE STORAGE
SERVICE], but the [FEES] are separately billed and are otherwise nontaxable as set forth below.
8

Fourth, analysis under the principles set forth in the Crescent line of cases 17 is unnecessary
because the Taxpayer does not sell any item of tangible personal property with [REMOTE
STORAGE SERVICE].
Finally, the Taxpayer’s [REMOTE STORAGE SERVICE] is not subject to the use tax because,
as discussed above, even though [REMOTE STORAGE SERVICE] does involve the use of
tangible personal property in the form of computer server hard drives, the servers are located
outside of Tennessee so there is no use of tangible personal property occurring in this state.
Accordingly, the Taxpayer’s [REMOTE STORAGE SERVICE] is not subject to the Tennessee
sales and use tax.

2. [VIRTUAL COMPUTING SERVICE]
   The Taxpayer’s [VIRTUAL COMPUTING SERVICE] is not subject to the Tennessee sales and
   use tax. 18
   First, no retail sale or use of tangible personal property occurs in Tennessee when the Taxpayer
   provides access to [ITS VIRTUAL COMPUTING SERVICE]. [THE VIRTUAL COMPUTING
   SERVICE] provides a virtual computing environment where the Taxpayer’s customers perform
   activities on virtual servers. To provide [THE VIRTUAL COMPUTING SERVICE], the
   Taxpayer gives its customers access to software [REDACTED] on the Taxpayer’s servers. No
   sale or use of tangible personal property occurs in Tennessee when a customer accesses [THE
   VIRTUAL COMPUTING SERVICE] software on the Taxpayer’s servers, because all of the
   servers are located outside of Tennessee.
   Moreover, the Taxpayer does not sell, lease, license, or otherwise provide the use of computer
   software in Tennessee to its customers in conjunction with [THE VIRTUAL COMPUTING
   SERVICE]. Customers use this software only in conjunction with [THE VIRTUAL
   COMPUTING SERVICE] and cannot download this software for their own use. The Taxpayer
   does not transfer title, possession, or control of [VIRTUAL COMPUTING SERVICE] software
   to its customers at any time. Moreover, the Taxpayer retains full control over [VIRTUAL
   COMPUTING SERVICE] software on its out-of-state servers at all times. Thus, [VIRTUAL
   COMPUTING SERVICE] software is never delivered to, transferred to, or installed on a
   customer’s computers but remains on the Taxpayer’s servers located outside of Tennessee.
   Second, the Taxpayer’s [VIRTUAL COMPUTING SERVICE] does not constitute a taxable
   service for purposes of the Tennessee sales and use tax. As noted above, only specifically
   enumerated services, such as telecommunications services are subject to the Tennessee sales and
   use tax. Use of [THE VIRTUAL COMPUTING SERVICE] involves the electronic transmission,
   conveyance, or routing of data between points, and [VIRTUAL COMPUTING SERVICE] could
   17

See supra note 13.

18

Whether [THE VIRTUAL COMPUTING SERVICE] is provided as an open source [CONFIGURATION] or a
third party [CONFIGURATION] has no bearing on this determination.

9

potentially be characterized as a telecommunications service under TENN. CODE ANN. § 67-6102(90)(A). TENN. CODE ANN. § 67-6-102(90)(B)(i), however, specifically excludes from the
definition of “telecommunications service” any “[d]ata 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.” The primary purpose of the Taxpayer’s
[VIRTUAL COMPUTING SERVICE] is most accurately categorized as a data processing or
information service. In most cases, the Taxpayer’s customer utilizes [THE VIRTUAL
COMPUTING SERVICE] to expand its computing power to process and store large amounts of
data or facilitate heavy web traffic, to eliminate the need to invest in real estate and information
technology hardware such as servers, and to reduce information technology overhead. 19 This
technology is especially useful for companies in emerging markets that are unable to accurately
predict the amount of computing power needed to deliver a reliable product. As such, a
customer’s primary purpose in using [THE VIRTUAL COMPUTING SERVICE] is to access
processed data or information that it stores on the Taxpayer’s servers, all of which are located
outside of Tennessee. Accordingly, the Taxpayer’s [VIRTUAL COMPUTING SERVICE] fits
within the exclusion from the definition of a taxable telecommunications service as a data
processing and information service. Thus, the provision of [THE VIRTUAL COMPUTING
SERVICE] is not a taxable telecommunications service.
Third, because the Taxpayer does not make sales of taxable goods or services in conjunction
with the sale of [THE VIRTUAL COMPUTING SERVICE], the sale of such service cannot be
characterized as the furnishing of an otherwise nontaxable service that is sold as part of the sale
of a taxable good or service. Although, the Taxpayer provides its customers with optional
application programming interfaces and software development kits to aid in utilizing computer
power, the Taxpayer does not charge its customers for those tools, and the tools are not subject to
the Tennessee sales and use tax. The Taxpayer’s [FEES] for incidental usage may accompany
the Taxpayer’s sale of [VIRTUAL COMPUTING SERVICE]; however, the [FEES] are
separately billed and are otherwise nontaxable as set forth below.
Fourth, analysis under the principles set forth in the Crescent line of cases 20 is unnecessary
because the Taxpayer does not sell any item of tangible personal property with [ITS VIRTUAL
COMPUTING SERVICE].
Finally, [THE VIRTUAL COMPUTING SERVICE] is not subject to use tax because, as
discussed above, although [THE VIRTUAL COMPUTING SERVICE] does involve the use of
tangible personal property in the form of computer servers and software, the servers are located
outside of Tennessee so there is no use of tangible personal property occurring in this state.
Accordingly, the Taxpayer’s [VIRTUAL COMPUTING SERVICE] is not subject to the
Tennessee sales and use tax.
19

For example, to keep up with rapid growth in emerging technology and the constant needed to build new data
centers, a number of companies have used the Taxpayer’s [VIRTUAL COMPUTING SERVICE] in the cloud as a
replacement for their physical data centers.
20

See supra note 13.
10

3. [FEE]
The Taxpayer’s [FEES] are not subject to Tennessee sales and use tax.
First, no retail sale or use of tangible personal property, including computer software, occurs in
Tennessee when the Taxpayer charges its customers [FEES]. These fees are incidental usage fees
separately stated on a customer’s monthly bill and track a customer’s active usage of the
Taxpayer’s services and network in adding files, moving files [REDACTED], and retrieving data
while actively utilizing [THE REMOTE STORAGE SERVICE AND THE VIRTUAL
COMPUTING SERVICE]. When customers take such actions, the Taxpayer never transfers title,
possession, or control of any tangible personal property or computer software. The transactions
covered by the [FEE] do not cause delivery, transfer, or installation of computer software on a
customer’s computers. Moreover, these actions take place on or between the Taxpayer’s servers,
all of which are located outside of Tennessee.
Second, [FEES] do not result from an enumerated taxable service. These fees do not cover
services separate and distinct from [THE REMOTE STORAGE SERVICE AND THE
VIRTUAL COMPUTING SERVICE], but rather are incidental usage fees that a Taxpayer’s
customer incurs through the use of [THE REMOTE STORAGE SERVICE AND THE
VIRTUAL COMPUTING SERVICE]. Although [FEES] generally meets the definition of a
“telecommunications service” set forth in TENN. CODE ANN. § 67-6-102(90)(A) 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,” it falls within the exclusion for
“[d]ata 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.” 21 The Taxpayer’s [FEE] covers the backing up, copying, and retrieving of the
customer’s data, and these actions can be characterized as actions taken in conjunction with and
necessary to employing either [REMOTE STORAGE SERVICE] or [VIRTUAL COMPUTING
SERVICE], both of which are document management services. Additionally, [MOVING DATA]
is not among those taxable services enumerated under the Retailers’ Sales Tax Act.
Third, because the Taxpayer does not make sales of taxable goods or services in conjunction
with the sale of [MOVING DATA], the sale of such service cannot be characterized as the
furnishing of an otherwise nontaxable service that is sold as part of the sale of a taxable good or
service. The Taxpayer’s [FEES] are incidental usage fees based on a customer’s activity when
utilizing [THE REMOTE STORAGE SERVICE] or [THE VIRTUAL COMPUTING
SERVICE] and the Taxpayer sells no taxable good or service along with [MOVING DATA]. As
previously established, [THE REMOTE STORAGE SERVICE AND THE VIRTUAL
COMPUTING SERVICE] are nontaxable services, and the [FEE] is separately billed.

21

TENN. CODE ANN. § 67-6-102(90)(B)(i).

11

Fourth, it is not necessary to analyze the Taxpayer’s [FEE] under the principles set forth in the
Crescent line of cases 22 because no transfer of tangible personal property accompanies the
[MOVING OF DATA].
Finally, the [FEE] is not subject to use tax because, as discussed above, although the [FEE] is
charged as a component of the use of a service that does involve tangible personal property, the
tangible personal property is located outside of Tennessee so there is no use of tangible personal
property occurring in this state.
Accordingly, the Taxpayer’s [FEE] is not subject to the Tennessee sales and use tax.

Jennifer Wilson
Assistant General Counsel

22

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

9/12/13

See supra note 13.
12