A company sells a hosted 'cloud collaboration' service that instructs and augments a customer's phone equipment for voice, video, messaging, presence, and conferencing, keeping all hardware and software on its own out-of-state servers. Is that service subject to Tennessee sales and use tax, and how is it sourced and rated?

Plain-English summary

The company (its identity is redacted) sells a Cloud Collaboration Service — a hosted alternative to running your own phone-system back end. Instead of a customer maintaining the hardware and software that tells its phone equipment how to process and route calls, the company's out-of-state servers do that, augmenting the customer's voice, video, messaging, presence, audio/web conferencing, and mobile capabilities. The customer keeps its own phones, Internet, and network; the company just instructs and supports them, for a monthly per-user fee. Calls are not routed through the company's servers, and the customer never downloads or controls any of the company's software. The company asked three things: is the service taxable, where is it sourced, and are its own hardware/software buys purchases for resale?

1. Taxable — as telecommunications and ancillary services, not software. The Department first cleared away the software question: because the company never transfers any hardware or software to the customer (it all stays on the company's out-of-state servers, and the customer can't access or control it), there's no taxable sale of tangible personal property or software, and it isn't taxable "remotely accessed software." But the service is taxable as telecommunications services (§ 67-6-205(c)(3)). Tennessee's telecom definition expressly covers routing in which "computer processing applications are used to act on the form, code, or protocol" of voice/data/video — including VoIP (§ 67-6-102(90)(A)) — which is exactly what this service does. The messaging (voicemail) and audio/web conferencing pieces are taxable ancillary services (§ 67-6-205(c)(9)): a "conference bridging service" links conference participants, and a "voice mail service" lets a customer store/send/receive recorded messages (§ 67-6-102(7), (7)(A), (7)(E)). Because every part is a taxable component, the entire monthly fee is taxable. The Department also distinguished this from nontaxable cloud computing whose true purpose is accessing data (excluded as data processing under § 67-6-102(90)(B)(i)) — here the purpose is telecom routing.

2. Sourcing — to the customer's place of primary use. Telecommunications and ancillary services are sourced to the customer's "place of primary use" — the residential or primary business street address where the customer mainly uses the service (§ 67-6-905). So a sale is taxable in Tennessee if the customer primarily uses the service at a Tennessee address, and not taxable here if that address is outside Tennessee. The service is intrastate (it originates and terminates where the customer is, § 67-6-102(47)), so it carries the 7% state rate and the 2.5% local rate (§ 67-6-702(g)); the bundling statute (§ 67-6-539) makes no difference because the telecom and ancillary pieces are taxed at the same rate.

3. The company's hardware/software buys are not "for resale." The company is the end user of the hardware and software it buys, leases, or licenses — it consumes them to provide the service and never passes title, possession, or control to customers — so those purchases are not sales for resale (§ 67-6-102(75)) and the company can't buy them tax-free on a resale certificate.

What this means for you

Hosted/cloud communications providers

If your cloud service routes or processes calls — acting on the form, code, or protocol of voice/video (including VoIP) — Tennessee will likely treat it as a taxable telecommunications service, even though it runs on software and you never hand the customer any equipment. Voicemail and conferencing add-ons are taxable ancillary services. The whole monthly fee can be taxable. This is different from cloud services whose real purpose is accessing data (which can be nontaxable data processing). It's also immaterial that you don't provide the customer's underlying phone or Internet access.

Where the tax applies, and at what rate

Telecom and ancillary services are sourced to the customer's place of primary use (its main street address), not where your servers sit. Tennessee intrastate telecom and ancillary services carry the 7% state + 2.5% local rate. Where telecom and ancillary pieces are taxed at the same rate, the bundling rules don't change the result.

Service providers buying equipment and software

You generally can't buy the hardware and software you use to deliver a service tax-free for resale if your customers never get possession or control of it. You're the end user/consumer, so those purchases are taxable to you (a resale certificate is for property you actually resell, sublease, or rent out).

Accountants and tax professionals

This rides the telecommunications/ancillary-services rails (§ 67-6-205(c)(3), (9)), turning on the VoIP/"computer-processing-on-form-code-protocol" branch of § 67-6-102(90)(A) and the ancillary-service definitions in § 67-6-102(7). Sourcing is place-of-primary-use (§ 67-6-905); rate is § 67-6-702(g); bundling (§ 67-6-539) is moot at equal rates. The resale denial rests on the absence of "possession" (ordinary meaning) — the customer has no dominion or control. It is an early Tennessee analog to the later messaging-interface ancillary-services ruling LR 16-09.

Common questions

Q: Is a hosted cloud phone/collaboration service taxable in Tennessee?
A: It can be — as telecommunications services (and ancillary services for voicemail/conferencing) when it routes or processes calls and acts on the form, code, or protocol of voice/video, including VoIP. Here the entire monthly fee was taxable, even though no software or equipment was transferred to the customer.

Q: Isn't this just nontaxable cloud software or data processing?
A: Not here. The Department distinguished cloud services whose real purpose is accessing data (which can be excluded as data processing) from this service, whose purpose is telecom routing. Because the true function was telecommunications, it was taxable.

Q: Where is the service taxed?
A: To the customer's place of primary use — the main street address where the customer uses the service — not where the provider's servers are. If that address is in Tennessee, Tennessee tax applies at 7% state plus 2.5% local.

Q: Can the provider buy its servers and software tax-free for resale?
A: No. The provider is the end user that consumes the hardware and software to deliver the service; customers never get possession or control, so the purchases aren't sales for resale.

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. Telecommunications taxation is fact-specific. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-205(c)(3) (telecommunications services), § 67-6-205(c)(9) (ancillary services)
• § 67-6-102(90)(A) (telecommunications service, incl. computer-processing-on-form/code/protocol and VoIP); § 67-6-102(90)(B)(i) (data-processing exclusion); § 67-6-102(47) ("intrastate")
• § 67-6-102(7), (7)(A), (7)(E) (ancillary services; conference bridging; voice mail)
• § 67-6-905 (sourcing to place of primary use); § 67-6-702(g) (state/local rates); § 67-6-539 (bundling)
• § 67-6-102(75) ("sale for resale"); § 67-6-102(76) ("retail sale"); Tenn. Comp. R. & Regs. 1320-5-1-.32(3); § 67-6-231(a) (computer software)

Cases (TPP vs. incidental media; "possession" / ordinary meaning):

• Crescent Amusement Co. v. Carson, 213 S.W.2d 27 (Tenn. 1948); Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976)
• Bryant v. Genco Stamping & Mfg. Co., 33 S.W.3d 761 (Tenn. 2000); Tenn. Farmers Assur. Co. v. Chumley, 197 S.W.3d 767 (Tenn. Ct. App. 2006); Beare Co. v. Tenn. Dep't of Revenue, 858 S.W.2d 906 (Tenn. 1993)

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/14-05.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 14-05
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 a cloud collaboration service.
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 comprehensive and integrated technology solutions to
business, government, education, and healthcare customers through hardware, software, and valueadded services.
One such service is a cloud-based collaboration service (“Cloud Collaboration Service”).
Organizations receive access to telephone lines through a telephone provider, but often require
hardware and software to internally instruct their telecommunication equipment as to how to process

and route calls. Historically, organizations have handled these functions internally, but the
Taxpayer’s Cloud Collaboration Service serves as an alternative to its customers that provides
cloud-based applications and related services to supplement and support a customer’s
telecommunication equipment. This support augments a customer’s voice, video, messaging,
presence, audio/web conferencing, and mobile capabilities. The Cloud Collaboration Service
therefore eliminates the need for a customer to maintain software and hardware necessary to process
and route calls.
The Cloud Collaboration Service includes the following types of services:
Voice
A Taxpayer server, utilizing [BRAND NAME] clusters (the “Cluster”), communicates with
the customer’s voice gateway device to provide instructions for processing and routing calls
among the customer’s phone extensions. The call is not routed through the Taxpayer’s server.
This system also supports a customer’s other forms of communication to its Internet Protocol
end-points, media-processing devices, Voice Over Internet Protocol gateways, mobile
devices, and multimedia applications.
Video
Video is the technology of electronically capturing, recording, processing, storing,
transmitting, and reconstructing a sequence of still images representing scenes in motion.
Video utilizes components such as [BRAND NAME] IP end-points, or purpose-built video
endpoints such as [BRAND NAME SYSTEM] or larger units. The Taxpayer’s server
provides the video support services through the Cluster in the same manner as outlined above
with respect to a customer’s voice communication capabilities.
Messaging
When a customer phone extension does not answer an incoming call, the Taxpayer’s server,
utilizing the Cluster, instructs the customer’s voice gateway device to send the call to
voicemail. The voice messages are then stored on the Taxpayer’s servers and available for
the user to access and manage at his or her convenience. The voice messaging support
services provided by the Cloud Collaboration Service allow users to access and manage
voice messages stored on Taxpayer-owned servers in a variety of ways, using an e-mail
inbox, web browser, [BRAND NAME IP PHONE], Smartphone, and [BRAND NAME
APPLICATION], among other components.
Presence
The Taxpayer provides presence support services through a [BRAND NAME PRESENCE]
application that provides users the ability to determine when colleagues are available and
allow instant messaging. The customer’s own communications equipment accesses the
Presence application hosted on the Taxpayer’s servers to utilize the presence capabilities.

Audio Conferencing
With respect to a customer’s audio conferencing capabilities, the Taxpayer supports a
customer-owned [BRAND NAME] router and phone devices through its hosted Cluster, in a
manner similar to that described above with respect to the voice support services.
Web Conferencing
[BRAND NAME CONFERENCING] application is an optional, subscription-based
component of the Cloud Collaboration Service that permits desktop sharing through a web
browser with phone conferencing and video. [BRAND NAME CONFERENCING
APPLICATION] operates through a user’s computer or wireless device, an audio connection,
and an optional webcam.
Mobility Services
The Taxpayer supports a customer’s mobile devices through use of the [BRAND NAME]
application. Mobile clients utilizing [BRAND NAME APPLICATION] can place and receive
calls over their own corporate wireless local area network and telephony infrastructure, using
the Taxpayer’s server to instruct the routing of calls. [BRAND NAME APPLICATION]
essentially turns a mobile phone into another extension on the Cluster. The Taxpayer’s server
itself does not provide the routing for the call or otherwise function as a switch.
In order to provide its Cloud Collaboration Service, the Taxpayer owns, leases, or licenses the
necessary hardware and software to facilitate its service. The hardware and software required for
providing the Cloud Collaboration Service are installed on servers located in [STATE], and the
software is not downloaded by the customer. The Taxpayer’s employees in [STATE] maintain the
hardware and software, and the Taxpayer’s employees in [STATE] remotely monitor performance,
perform necessary adds, moves, changes, and deletions and provide troubleshooting for issues that
arise during performance.
The customer is responsible for obtaining its own telephone, Internet, and network connections, and
the Taxpayer relies on the customer’s QoS-enabled, voice-grade Local Area Network and Wide Area
Network to provide services throughout a customer’s geographic location. The Taxpayer does not
provide telephone, Internet, or network access.
To purchase the Cloud Collaboration Service, customers enter into a contract with the Taxpayer that
includes a customer service order, a service description for the Cloud Collaboration Service, and a
detailed pricing invoice.
Under the contract, the Taxpayer charges a customer a monthly user fee1 calculated based on the
number of users of the Cloud Collaboration Service. The monthly fee covers charges for hardware,
software, virtual server instances, required storage, rack space, power and cooling, monitoring and
management, most moves-adds, and major version upgrades. To the extent a customer purchases
add-on services (including the hosting of customer-owned software applications), the Taxpayer
1

The fee is denominated as a “license” fee, but the Taxpayer does not in fact license or lease any software or
tangible personal property (to the customer under the contract).

charges separate fees for each such service. The Taxpayer separately states charges for maintenance
and management of any customer-owned software applications on the monthly invoice.
RULINGS
1.

Is the Taxpayer’s sale of its Cloud Collaboration Service subject to the Tennessee sales and
use tax?
Ruling: Yes. The Taxpayer’s Cloud Collaboration Service is subject to the Tennessee sales
and use tax as the sale of intrastate telecommunications and ancillary services.

2.

If the Taxpayer’s Cloud Collaboration Service is subject to the Tennessee sales and use tax,
is the sale to a Tennessee customer sourced to Tennessee?
Ruling: If the Taxpayer sells its Cloud Collaboration Service to a Tennessee customer, that
sale is sourced to Tennessee if the customer primarily uses the service at a street address
located in Tennessee.

3.

Do the Taxpayer’s purchases, leases, or licenses of hardware and software qualify as sales for
resale?
Ruling: No. The Taxpayer is considered the user and consumer of the hardware and software
that it purchases in providing its service, and, thus, it does not resell such hardware and
software to its customers.
ANALYSIS

1. TAXATION OF CLOUD COLLABORATION SERVICE

The Taxpayer’s Cloud Collaboration Service is subject to the Tennessee sales and use tax as the
sale of intrastate telecommunications and ancillary services taxable under TENN. CODE ANN. § 67-6205(c)(3), (9) (2013).
Under the Retailers’ Sales Tax Act,2 the retail sale in Tennessee of tangible personal property and
specifically enumerated items and 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.”3
Various transactions may qualify as a sale. One type of “sale” involves “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.”4
2

Tennessee Retailers’ Sales Tax Act, ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts 22, 22-54 (codified as amended at TENN.
CODE ANN. §§ 67-6-101 to -907 (2013)).

3

TENN. CODE ANN. § 67-6-102(76) (2013) (emphasis added).

4

TENN. CODE ANN. § 67-6-102(78)(A).

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.”5 Tangible personal property also includes
“prewritten computer software,” which is defined in TENN. CODE ANN. § 67-6-102(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.”6 Conversely, the sale or use of
intangible intellectual property generally is not subject to Tennessee sales and use tax unless stored
on tangible storage media.7
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.8 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
programmed into a computer, created on the premises of the consumer or otherwise
provided.9
“Computer software” is “a set of coded instructions designed to cause a computer . . . to perform a
task.”10 Computer software is “delivered electronically” if delivered “by means other than tangible
storage media.”11
The sales tax also applies to sales of services specifically enumerated in the Retailers’ Sales Tax Act.
The furnishing of “intrastate, interstate or international telecommunication services” is one such
specifically enumerated service.12 “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,” and includes
5

TENN. CODE ANN. § 67-6-102(89)(A).

6

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).

7

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).
8

TENN. CODE ANN. § 67-6-102(78)(C).

9

TENN. CODE ANN. § 67-6-231(a) (2013) (emphasis added).

10

TENN. CODE ANN. § 67-6-102(18).

11

TENN. CODE ANN. § 67-6-102(24).

12

TENN. CODE ANN. § 67-6-205(c)(3).

“such transmission, conveyance or routing in which computer processing applications are used to act
on the form, code, or protocol, without regard to whether such service is referred to as voice over
Internet protocol services or is classified by the federal communications commission as enhanced or
value added.”13
Another sale of a service subject to the sales and use tax is “[t]he furnishing, for a consideration, of
ancillary services.”14 Ancillary services are “services that are associated with, or incidental to, the
provision of telecommunication services.”15 One particular form of ancillary service is a “conference
bridging service,” which “links two (2) or more participants of an audio or video conference call.”16
Conference bridging services, however, do not include “the telecommunications services used to
reach the conference bridge.”17 Another ancillary service is a “voice mail service,” which “enables a
customer to store, send or receive recorded messages.”18
The Taxpayer’s Cloud Collaboration Service therefore is subject to the sales tax if it involves: 1) the
sale of tangible personal property; 2) the sale of telecommunications services; or 3) the sale of
ancillary services.
No retail sale or use of tangible personal property or computer software occurs in Tennessee when
the Taxpayer provides its Cloud Collaboration Service. The Taxpayer’s Cloud Collaboration
Service enhances the functionality of a customer’s phone and other telecommunications equipment.
The Taxpayer, as a provider of services, ultimately uses and consumes both hardware and software as
a means of providing its services. The Taxpayer maintains this hardware and software at its data
center outside of Tennessee. Importantly, the Taxpayer does not sell, lease, license, or otherwise
provide the use of any tangible personal property or computer software in Tennessee to its customers
in conjunction with Cloud Collaboration Service. The Taxpayer does not transfer title, possession,
or control of any tangible personal property or software to a customer. Any hardware that the
Taxpayer uses remains in [STATE – NOT TENNESSEE]. Moreover, the software applications
remain on the Taxpayer’s servers at all times and are never delivered to, transferred to, or installed on
a customer’s computers. Thus, no sale of tangible personal property or computer software occurs in
Tennessee for sales and use tax purposes.
The Taxpayer’s Cloud Collaboration Service, however, does constitute the furnishing of taxable
services in Tennessee for purposes of the Tennessee sales and use tax.19 All aspects of the Cloud
13

TENN. CODE ANN. § 67-6-102(90)(A).

14

TENN. CODE ANN. § 67-6-205(c)(9). The Taxpayer’s services cannot be characterized as any other type of service
that is taxable under the Retailers’ Sales Tax Act. This letter ruling, therefore, does not discuss any specifically
enumerated services other than telecommunications services and ancillary services.
15

TENN. CODE ANN. § 67-6-102(7).

16

TENN. CODE ANN. § 67-6-102(7)(A).

17

Id.

18

TENN. CODE ANN. § 67-6-102(7)(E).

19

The Taxpayer’s Cloud Collaboration Service differs from other cloud computing services accessed by Tennessee
customers that are located on servers out of state and excluded from the definition of a telecommunications service

Collaboration Service are taxable telecommunications services, except for the Taxpayer’s provision
of messaging and audio/web conferencing, which constitute taxable ancillary services.
As stated above, the definition of telecommunications service includes
such transmission, conveyance, or routing in which computer processing applications
are used to act on the form, code or protocol of the content for the purposes of
transmission, conveyance or routing, without regard to whether such service is
referred to as voice over Internet protocol services or is classified by the federal
communications commission as enhanced or value added.20
In this case, the Taxpayer’s Cloud Collaboration Service uses computer processing applications to
provide customers with voice, video, presence, and mobility capability in conjunction with its
customers’ Public Switched Telephone Network connections. Accordingly, the Taxpayer routes
“voice, data, audio, video, or any other information or signals to a point, or between or among
points” and uses “computer processing applications that act on the form, code, or protocol of the
content for purposes of transmission, conveyance, or routing.”21 Such services are properly
considered telecommunications services and are subject to sales tax.
The Cloud Collaboration Service also involves functions that are considered ancillary services. As
discussed above, ancillary services are “services that are associated with, or incidental to, the
provision of telecommunication services.”22 The Taxpayer’s audio and web conferencing services
“link two (2) or more participants of an audio or video conference call” and are properly considered
“conference bridging services” that come under the umbrella of “ancillary services.”23 The
messaging aspect of the Cloud Collaboration Service “enables the customer to store, send, or
receive recorded messages,” and is thus a taxable ancillary “voice mail service.”24
Having concluded that all of the Cloud Collaboration Service is comprised of taxable components,
it follows that the entire monthly fee charged by the Taxpayer is subject to sales tax. The applicable
rate, however, depends upon whether the Taxpayer’s telecommunications services are international,
interstate, or intrastate.

as “data processing and information services” through TENN. CODE ANN. § 67-6-102(90)(B)(i). While the primary
purpose of other such cloud computing services is to access data and information located on servers, this is not the
purpose of the Taxpayer’s Cloud Collaboration Service.
20

See TENN. CODE ANN. § 67-6-102(7), (90)(A).

21

Id.

22

TENN. CODE ANN. § 67-6-102(7).

23

TENN. CODE ANN. § 67-6-102(7)(A).

24

See TENN. CODE ANN. § 67-6-102(7)(E). Note that for both the Taxpayer’s telecommunications services and its
ancillary services, it is immaterial that the Taxpayer does not provide the telephone, Internet, or other network
services upon which the Taxpayer’s services are transferred.

The local tax on international and interstate telecommunications services is limited to only 1.5%,
unless the services are provided to a business, in which case they are exempt from the local tax.25 But
if the telecommunications services are intrastate in nature, the local tax is imposed at the rate of
2.5%, with no exemption for business customers.26
The Taxpayer’s telecommunications services here are intrastate in nature. TENN. CODE ANN. § 67-6102(47) defines “intrastate” in pertinent part as “a telecommunications service that originates in one
(1) United States state . . . and terminates in the same United States state.” Although the Taxpayer’s
data center, software, and hardware are located in the state of [STATE], the Taxpayer’s service of
using computer processing application information to act on a customer’s content occurs where its
customer is located. A customer both initiates and terminates the telecommunications service using
its own Public Switched Telephone Network Circuits, phone lines, and Internet connections to
communicate with the Taxpayer’s Cluster. Moreover, customers connect with third parties through
Public Switched Telephone Network Connections that are never physically routed through the
Taxpayer’s data center.27 As such, if a customer is located in Tennessee, the Taxpayer’s service both
originates and terminates in Tennessee.
Consequently, the Taxpayer’s telecommunications services are subject to the 7% state rate and the
2.5% local rate pursuant to TENN. CODE ANN. § 67-6-702(g)(2). Similarly, ancillary services are
always subject to the 2.5% local rate pursuant to TENN. CODE ANN. § 67-6-702(g)(2), along with the
regular 7% state rate. Finally, because both of the Taxpayer’s services are taxed at the same rate, the
special bundling provisions of TENN. CODE ANN. § 67-6-539 (2013) are rendered moot.28 The end
result is that the entire monthly fee that Taxpayer charges for its Cloud Collaboration Service is
subject to sales tax at the 7% state tax rate and the 2.5% local tax rate.

2. SOURCING OF CLOUD COLLABORATION SERVICE WHERE SALE IS MADE TO A TENNESSEE
   CUSTOMER
   The Taxpayer’s Cloud Collaboration Service provided to a Tennessee customer is sourced to
   Tennessee if the customer primarily uses the service at a street address located in Tennessee.
   TENN. CODE ANN. § 67-6-905 (2013) sets forth the sourcing rules for sales of telecommunications
   services in Tennessee. Except for certain situations not applicable here,29 all telecommunications
   25

TENN. CODE ANN. § 67-6-702(g)(1) (2013).

26

TENN. CODE ANN. § 67-6-702(g)(2).

27

In other words, while a customer may use their telephone service to call a location outside of Tennessee, which
would be interstate in nature, the Taxpayer’s Cloud Collaboration Service that augments the customer’s telephone
service is delivered entirely where the customer is located.
28

See generally TENN. CODE ANN. § 67-6-539 (providing a methodology for determining the appropriate sales tax
rates when telecommunications services are bundled with ancillary services subject to a different tax rate); see also
DEP’T
OF
REVENUE,
IMPORTANT
NOTICE
05-19
(Oct.
2005),
available
at
TENN.
http://tn.gov/revenue/notices/sales/sales05-19.pdf (last visited July 1, 2014). The Cloud Collaboration Service would
constitute a bundle under TENN. CODE ANN. § 67-6-539, but the applicable rates are the same for the
telecommunications service component and the ancillary service component, so the statute has no practical effect.
29

See TENN. CODE ANN. § 67-6-905(b) (telecommunication services sold on a call-by-call basis); TENN. CODE ANN.
§ 67-6-905(d) (other exceptions).

services and ancillary services are sourced according to a customer’s “place of primary use,”
regardless of where the telecommunication originates or terminates.30 “Place of primary use” is “the
street address representative of where the customer’s use of the telecommunications service primarily
occurs, which must be the residential street address or the primary business street address of the
customer.”31
Accordingly, if a customer primarily uses the Taxpayer’s Cloud Collaboration Service at a street
address located in Tennessee, the sale of the Cloud Collaboration Service would be subject to the
sales and use tax in Tennessee. But if a customer primarily uses the Taxpayer’s Cloud Collaboration
Service at a street address located outside of Tennessee, the sale of the Cloud Collaboration Service
would not be subject to Tennessee sales and use tax.

3. THE TAXPAYER’S PURCHASES, LEASES, OR LICENSES OF HARDWARE AND SOFTWARE
   The Taxpayer’s purchases, leases, or licenses of hardware and software do not qualify as sales for
   resale in Tennessee.
   The Retailers’ Sales Tax Act subjects the retail sale of tangible personal property and specifically
   enumerated services to the sales and use tax. The term “retail sale” means “any sale, lease, or rental
   for any purpose other than for resale, sublease, or subrent.”32 Thus, sales for resale are not subject to
   the Tennessee sales and use tax.
   TENN. CODE ANN. § 67-6-102(75) defines a “sale for resale” as “the sale of the property, services, or
   taxable item intended for subsequent resale by the purchaser” and requires any sales for resale to be
   “in strict compliance with rules and regulations promulgated by the commissioner.” Moreover, TENN.
   COMP. R. & REGS. 1320-5-1-.32(3) (1987) provides that “tangible personal property sold to be used
   exclusively for renting or leasing may be sold upon a resale certificate.”
   Here, the Taxpayer is the end user of the hardware and software that it purchases, leases, or licenses.
   The Taxpayer, as a provider of services, ultimately uses and consumes such hardware and software
   as a means of providing its Cloud Collaboration Service. As stated in the response to Question #1,
   the Taxpayer does not transfer title or possession of the hardware or software to a customer as part of
   the sale of its services. The software remains on the Taxpayer’s servers, and any equipment that the
   Taxpayer uses to provide the service remains at the Taxpayer’s data center. Moreover, a customer
   cannot manipulate the hardware or software in any way. A customer does not have any access to or
   use or control of the software, and thus does not have the requisite dominion or control over the
   software and equipment to constitute possession.33

30

TENN. CODE ANN. § 67-6-905(c).

31

TENN. CODE ANN. § 67-6-905(a)(9).

32

TENN. CODE ANN. § 67-6-102(76) (emphasis added).

33

“Possession” is not defined under the Retailers' Sales Act. When a term is not defined under that statute, the
Tennessee Supreme Court has stated that the term must be given its ordinary and common meaning. See e.g., Byrant
v. Genco Stamping & Mfg. Co., 33 S.W.3d 761, 765 (Tenn. 2000); Tenn. Farmers Assur. Co. v. Chumley, 197
S.W.3d 767, 782-83 (Tenn. Ct. App. 2006); Beare Co. v. Tenn. Dep't of Revenue, 858 S.W.2d 906, 908 (Tenn.
1993). Possession is generally understood to mean “having or holding property in one's power,” the exercise of

Accordingly, the Taxpayer’s purchases, leases, and licenses of hardware and software do not qualify
as sales for resale in Tennessee.

Jennifer Wilson
Assistant General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

August 25, 2014

dominion over property, or the right to exercise exclusive control over something. See BLACK'S LAW DICTIONARY
1281 (9th ed. 2009); see also Ford v. Okla. Tax Comm’n, 285 P.2d 436, 437-48 (Okla. 1955). In this case, the
Taxpayer’s customers have none of these incidents of possession.