A company pays third-party vendors for software the vendors build and host to convert and translate data between two incompatible records-management systems. The company and its clients never access or control that software. Are those charges subject to Tennessee sales and use tax?

Plain-English summary

The company (its identity is redacted) runs an independent lab-testing service with a cloud platform: clients order tests, and results flow back, over the Internet. The catch is that the company and each client run different, incompatible records-management systems that can't exchange the order and result messages directly. So the company hires third-party records-management vendors to build small conversion programs that reformat (translate) the data so each side's system can read it. The company doesn't write these programs, and — importantly — neither the company nor its clients ever access, download, or control them. The programs sit on the vendor's own server and run automatically; only the vendor has access. The company asked whether the charges it pays those vendors are subject to Tennessee sales and use tax.

The Department said no. The vendors are providing the nontaxable service of converting digital products, not selling software or anything else taxable. Tennessee taxes the retail sale of tangible personal property and a defined list of specifically enumerated services; it also taxes computer software, including — since the 2015 remote-software law — software a customer remotely accesses from Tennessee (Tenn. Code Ann. § 67-6-231(a)(2)). But that remote-software provision only reaches software that a customer accesses and uses from Tennessee. Here the customer is not the one using the program — the vendor is, to perform a service.

The same 2015 law makes the point explicit: it says nothing in the remote-software rule taxes services that weren't already taxable, listing examples that include "the service of converting, managing, and distributing digital products." That's exactly what the vendors do. And because the vendors don't sell any taxable good or service alongside the conversion service, there was nothing to bundle — so the Department didn't even need to run the "true object" test. The conversion charges are not taxable.

What this means for you

Vendors who convert or translate data for a fee

Charging to convert, reformat, or translate data between systems is generally a nontaxable service in Tennessee, even though you obviously use software to do it. The 2015 remote-software law specifically lists "converting, managing, and distributing digital products" as a service it does not tax. The key is that you (the vendor) use the software to perform the service; you're not selling or licensing the software to the customer.

Businesses that buy data-conversion or integration services

If a vendor builds and hosts the integration/conversion software and you never access or control it, you're buying a service, not taxable software. That's different from remotely accessed software, which is taxable when you log in and use the vendor's software from Tennessee. The dividing line is who uses the software — you, or the vendor on your behalf.

Accountants and tax professionals

Two independent grounds support nontaxability: (1) § 67-6-231(a)(2) taxes remote software only when the customer accesses it from Tennessee — here the vendor, not the customer, uses the program; and (2) the same statute preserves the nontaxability of enumerated examples including the service of converting, managing, and distributing digital products. Because no taxable item was sold with the service, the bundling/true-object analysis (§ 67-6-205 enumerated-services rule; Covington Pike Toyota; Ryder Truck Rental; and the true-object line of Thomas Nelson, AT&T, Rivergate, and Letter Ruling 14-10) was unnecessary.

Common questions

Q: Are charges for converting or translating data taxable in Tennessee?
A: Generally no. Converting, managing, and distributing digital products is a service Tennessee does not tax — the 2015 remote-software law names it as an example of what it does not reach. Using software to perform the service doesn't make the charge taxable.

Q: How is this different from taxable "remotely accessed software"?
A: Remotely accessed software is taxable when the customer accesses and uses the vendor's hosted software from Tennessee. Here, the customer never accesses the program — the vendor uses its own software to perform a conversion service, so the charge is for a service, not for software use.

Q: Does it matter that the conversion is done by software?
A: No. The Department said the fact that software performs the task is "inconsequential" because the vendor uses software it develops internally to provide the service. What's taxed is the use of software by a customer, not a service the vendor performs with its own software.

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. The 2015 software law and later guidance also continue to evolve. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-231(a), (a)(2) (use of computer software; remotely accessed software taxable when a customer accesses it from Tennessee; preserves nontaxable services such as "converting, managing, and distributing digital products")
• § 67-6-205 (sales tax applies only to specifically enumerated services); § 67-6-102(76) ("retail sale"); § 67-6-102(78)(A), (C) ("sale")
• § 67-6-102(18) ("computer software"); § 67-6-102(68) ("prewritten computer software"); § 67-6-102(24) ("delivered electronically"); § 67-6-102(89)(A) ("tangible personal property")
• 2015 Tenn. Pub. Acts Ch. 514, § 22 (2015 remote-software law, effective July 1, 2015)

Cases referenced (background only — the ruling found the true-object test unnecessary):

• 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 taxed)
• Creasy Sys. Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986); Univ. Computing Co. v. Olsen, 677 S.W.2d 445 (Tenn. 1984); true-object line of Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987), AT&T Corp. v. Johnson, 2002 WL 31247083 (Tenn. Ct. App. 2002), Rivergate Toyota, Inc. v. Huddleston, 1998 WL 83720 (Tenn. Ct. App. 1998), and Letter Ruling 14-10

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/15-04.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 15-04

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 the service of converting digital products.
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 [REDACTED] testing and analysis services for [REDACTED] (the
“Clients”). The Taxpayer’s services range from [REDACTED - DESCRIPTION OF SPECIFIC SERVICES].
Typically in the field of [REDACTED] testing, [REDACTED – TAXPAYER CLIENTS] request lab tests
[REDACTED]. In doing so, a [REDACTED – TAXPAYER CLIENT] professional takes a [REDACTED] sample
[REDACTED], transports the sample to an independent lab, and requests the lab to conduct a
Page: 1

specified test on the sample. The lab then communicates the test results to the [REDACTED –
TAXPAYER CLIENT].
The Taxpayer serves as the independent lab, described above, for its Clients. [REDACTED].
The Taxpayer [UTILIZES] a web-based platform whereby its Clients can order lab tests, receive test
results, [REDACTED]. The platform is cloud-based and allows access to [REDACTED] records over the
Internet.
To order a lab test, a Client, using a web browser on its own computer, sends a universal resource
locator (“URL”) link to the web server located on the Taxpayer’s central computer. The server fetches
a log-in page from the database and sends it to the Client's computer. After the Client logs in with
the correct user name and user password, the server sends an ordering document URL link to the
Client’s web browser. The Client fills in the test order and sends a test order URL back to the server.
The Client communicates with the central computer to order a test, to ascertain the results of a test,
and to handle administrative functions associated with the test order, such as billing and
customizing of pages showing [REDACTED]. Upon successful communication to order a test by the
Client computer, a requisition for the test [REDACTED] are generated.
The performing lab [REDACTED] performs the testing. The lab sends the results to the Taxpayer’s
central computer. The central computer (or a computer at the performing lab) may interpret the test
result and provide an alert [REDACTED].
The central computer then releases the test results to the Client computer. The Taxpayer provides
the test results by electronic transmission over the Internet at the Client’s request, providing a
method for viewing or printing test results [REDACTED].
The lab orders and results are sent over the Internet between the Client’s computer and the
Taxpayer’s central computer in the form of [REDACTED] 1 messages through each party’s
[REDACTED] records (“[RECORDS MANAGEMENT]”) systems. Both the Taxpayer and its Clients have
their own unique [RECORDS MANAGEMENT] systems that cannot directly communicate the
[REDACTED] messages between each other. Therefore, the configuration of [REDACTED –
DESCRIPTION OF SOFTWARE PROGRAM] allows the two conflicting systems to accurately exchange
data.
The Taxpayer does not develop these [SOFTWARE PROGRAMS]. Instead, the Taxpayer’s Clients direct
the Taxpayer to the [RECORDS MANAGEMENT] provider that is most knowledgeable with their
specific [RECORDS MANAGEMENT SYSTEM]. The Taxpayer then works with the [RECORDS
MANAGEMENT] vendor to develop and provide the [PROGRAM] services used to connect the Client’s
[RECORDS MANAGEMENT SYSTEM] to the Taxpayer’s [RECORDS MANAGEMENT SYSTEM]. These
[PROGRAMS] include computer code or instructions that manipulate the format of the data sent in
the [REDACTED] messages so that each party’s respective [RECORDS MANAGEMENT SYSTEM]
correctly reads the data.
These [PROGRAMS] neither change nor utilize the software used in either party’s [RECORDS
MANAGEMENT SYSTEM]. The purpose of the [PROGRAM] is to provide a translation service (or data
1

[REDACTED].

Page: 2

manipulation) necessary to electronically transmit the [REDACTED] order and results data between
the two systems. The [PROGRAM] processes the [REDACTED] messages and displays them within the
[RECORDS MANAGEMENT SYSTEM] software located at the Client’s office.
Neither the Taxpayer nor its Clients have access or rights to the [PROGRAM]. Access to the
[PROGRAM] is restricted solely to the [RECORDS MANAGEMENT] vendor creating the [PROGRAM].
The [PROGRAM] automatically performs the translation services without the interaction of the
Taxpayer or its Clients. The only data exchanged by and to the Taxpayer and its Clients are
[REDACTED] messages.
RULING
Are the [PROGRAM] charges that the Taxpayer pays to various [RECORDS MANAGEMENT] vendors
subject to the Tennessee sales and use tax?
Ruling: No, the [PROGRAM] charges that Taxpayer pays to various [RECORDS MANAGEMENT]
vendors are not subject to the Tennessee sales and use tax because the [RECORDS
MANAGEMENT] vendors are providing the non-taxable service of converting digital products.
ANALYSIS
LEGAL BACKGROUND
2

Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and
specifically enumerated services are subject to the sales and use tax, unless an exemption applies.
“Retail sale” is defined as “any sale, lease, or rental for any purpose other than for resale, sublease,
3
or subrent.”
TENN. CODE ANN. § 67-6-102(78)(A) (Supp. 2015) 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
4
is in any other manner perceptible to the senses.” 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
5
author or other creator to the specifications of a specific purchaser.”
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) (Supp. 2015).

4

TENN. CODE ANN. § 67-6-102(89)(A).

5

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.” Id.
Page: 3

In addition to the transfer of tangible personal property, the term “sale” also includes “the furnishing
6
of any of the things or services” taxable under the Retailers’ Sales Tax Act. 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
7
otherwise provided.
“Computer software” is “a set of coded instructions designed to cause a computer . . . to perform a
8
task.” Computer software is “delivered electronically” if delivered “by means other than tangible
9
storage media.” The Tennessee Supreme Court has stated that the fabrication of, or customized
modification or enhancement to, computer software is considered a taxable sale of computer
10
software.
Additionally, the term “sale” specifically includes the transfer of computer software, including the
creation of computer software on the premises of the consumer and any programming,
11
transferring, or loading of computer software onto a computer.
In response to advances in technology that allow the remote access and use of software over the
Internet, the Tennessee General Assembly adopted into law 2015 Tenn. Pub. Acts Ch. 514, § 22. This
new law effectively treats all uses of computer software in this state equally, regardless of how a
person accesses the software. It amends TENN. CODE ANN. § 67-6-231(a) to include a new subdivision
(2), which states in pertinent part that
[f]or purposes of subdivision (a)(1), “use of computer software” includes the access
and use of software that remains in the possession of the dealer who provides the
software or in the possession of a third party on behalf of such dealer. If the
customer accesses the software from a location in this state as indicated by the
residential street address or the primary business address of the customer, such

6

TENN. CODE ANN. § 67-6-102(78)(C).

7

TENN. CODE ANN. § 67-6-231(a) (Supp. 2015). The term “sale” specifically includes the transfer of computer
software, including the creation of computer software on the premises of the consumer and any programming,
transferring, or loading of computer software onto a computer. TENN. CODE ANN. § 67-6-102(78)(K).
8

TENN. CODE ANN. § 67-6-102(18).

9

TENN. CODE ANN. § 67-6-102(24).

10

See Creasy Sys. Consultants, Inc. v. Olsen, 716 S.W.2d 35, 36 (Tenn. 1986).

11

TENN. CODE ANN. § 67-6-102(78)(K).

Page: 4

access shall be deemed equivalent to the sale or licensing of the software and
electronic delivery of the software for use in the state.

12

As a result, effective for all billing periods beginning on or after July 1, 2015, the access and use of
computer software in this state, which has generally been subject to tax since 1977,
subject to sales and use tax regardless of a customer’s chosen method of use.

13

remains

The sales and use tax also applies to retail sales of services specifically enumerated in the Retailers’
14
Sales Tax Act. Notably, the application of the sales tax to retail sales of services in Tennessee
remains unaffected by the enactment of 2015 Tenn. Pub. Ch. 514, § 22. The sales tax remains
15
applicable only to those services specifically enumerated in the Retailers’ Sales Tax Act. As
reassurance of this fact, the General Assembly included language in Section 22 stating that nothing
in the new subdivision (a)(2) of TENN. CODE ANN. § 67-6-231
shall be construed to impose a tax on any services that are not currently subject to
tax under this chapter, such as, but not limited to, information or data processing
services, including the capability of the customer to analyze such information or data
provided by the dealer; payment or transaction processing services; payroll
processing services; billing and collection services; Internet access; the storage of
data, digital codes, or computer software; or the service of converting, managing,
and distributing digital products.

16

Therefore, while the new TENN. CODE ANN. § 67-6-231(a)(2) modernizes taxation on the use of
computer software in this state, it has no effect on the taxation of services.
Additionally, whenever two or more items are sold for a single sales price and at least one of the
items is subject to sales tax, the entire sales price is subject to the sales tax as a bundled
12

2015 Tenn. Pub. Acts Ch. 514, § 22 (codified at TENN. CODE ANN. § 67-6-231(a)(2) (Supp. 2015)).

13

The General Assembly amended the definition of “tangible personal property” in 1977 to specifically include
computer software in response to the Tennessee Supreme Court’s holding to the contrary in Commerce Union
Bank, 538 S.W.2d at 408. 1977 Tenn. Pub. Acts Ch. 42 (defining “tangible personal property” to include computer
software); see also Univ. Computing Co. v. Olsen, 677 S.W.2d 445, 447 (Tenn. 1984) (detailing the General
Assembly’s actions taken to subject computer software to sales and use tax).
14

The Retailers’ Sales Tax Act imposes the sales tax only on services specifically enumerated in the Act. See, e.g.,
TENN. CODE ANN. § 67-6-205 (2013); Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992); Ryder
Truck Rental, Inc. v. Huddleston, No. 91-3382-III, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug. 12, 1994) (sales tax
does not apply to all services; rather, it only applies to retail sales of services specifically enumerated by the
statute).
15

The Retailers’ Sales Tax Act imposes the sales tax only on services specifically enumerated in the Act. See, e.g.,
TENN. CODE ANN. § 67-6-205 (2013); Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992); Ryder
Truck Rental, Inc. v. Huddleston, No. 91-3382-III, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug. 12, 1994) (sales tax
does not apply to all services; rather, it only applies to retail sales of services specifically enumerated by the
statute).
16

2015 Tenn. Pub. Acts Ch. 514, § 22 (codified at TENN. CODE ANN. § 67-6-231(a)(2) (Supp. 2015)).

Page: 5

17

transaction. Finally, when a transaction involves taxable and nontaxable components and the
18
19
20
21
22
transaction’s true object or a “crucial,” “essential,” “necessary,” “consequential,” or “integral”
23
element of the transaction is subject tax, the entire transaction is subject to sales tax.
APPLICATION
The [RECORDS MANAGEMENT] vendors’ [PROGRAM] charges are not subject to the Tennessee sales
and use tax.
No sale, transfer, or electronic delivery of tangible personal property or computer software occurs in
Tennessee when the [RECORDS MANAGEMENT] vendors charge the Taxpayer for the [PROGRAMS].
The [RECORDS MANAGEMENT] vendors do not transfer title, possession, or control of the
[PROGRAMS] at any time, nor does the Taxpayer electronically download the [PROGRAMS].
Moreover, the [RECORDS MANAGEMENT] vendors are not furnishing taxable services or things in
Tennessee. As previously stated, only specifically enumerated services and things, such as the use of
computer software, are subject to the Tennessee sales and use tax.
With respect to the taxable use of computer software in this state that remains in possession of the
dealer, TENN. CODE ANN. § 67-6-231(a)(2) requires the access and use of the computer software by a
customer in this state. Although [A PROGRAM], which is housed on a server in possession of an
[RECORDS MANAGEMENT] vendor, is a set of coded instructions that enables a computer to perform

17

See generally Tenn. Dept. of Rev. Ltr. Rul. 14-10 (Oct. 14, 2014) [hereinafter “Ltr. Rul. 14-10”] (discussing
Tennessee
law
regarding
bundling
and
the
“true
object”
test),
available
at
http://www.tennessee.gov/assets/entities/revenue/attachments/14-10.pdf.

18

See, e.g., Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 624 (Tenn. 1987) (holding that a transaction involving
the sale of non-taxable intangible advertising concepts was nevertheless subject to sales tax on the entire
amount of the transaction because advertising models, which were tangible personal property, were an
“essential,” “crucial,” and “necessary” element of the transaction).
19

Id.; see also AT&T Corp. v. Johnson, No. M2000-01407-COA-R3-CV, 2002 WL 31247083, at *8 (Tenn. Ct. App. Oct.
8, 2002) (holding that a transaction involving the sale of engineering services along with separately itemized
tangible telecommunications systems was subject to sales tax on the entire amount of the contract because
“equipment, engineering, and installation combine in this instance to produce BellSouth's desired result: a
functioning item of tangible personal property assembled on the customer's premises,” and further describing
the engineering services as “‘essential’” and “‘integral’” to the sale of tangible personal property).

20

See supra note 18.

21

See Rivergate Toyota, Inc. v. Huddleston, No. 01A01-9602-CH-00053, 1998 WL 83720, at *4 (Tenn. Ct. App. Feb.
27, 1998) (holding that a transaction involving the commission and distribution of advertising brochures was
subject to sales tax on the “‘entire cost of the transaction’” because, although the transaction involved a number
of services, the brochures themselves “were not inconsequential elements of the transaction but, in fact, were
the sole purpose of the contract”).
22

See AT&T Corp. v. Johnson, 2002 WL 31247083, at *8.

23

See generally Ltr. Rul. No. 14-10, supra note 17.

Page: 6

24

a task and, thus, constitutes computer software for Tennessee sales and use tax purposes, the
Taxpayer is not using the [PROGRAM]. Rather, the [RECORDS MANAGEMENT] vendor is providing a
service through the [PROGRAM].
TENN. CODE ANN. § 67-6-231(a)(2) clarifies that the application of the sales and use tax to remotely
accessed software does not make otherwise nontaxable services subject to tax. One such service is
25
that of “converting, managing, and distributing digital products.“
Here, the [RECORDS
MANAGEMENT] vendors develop the [PROGRAMS] to convert data from one type of [DATA
INTERCHANGE] digital content into a different, readable form. The fact that computer software is
used to perform these tasks is inconsequential because the [RECORDS MANAGEMENT] vendors use
the software that they develop internally in the service of converting digital products. Thus, the
[PROGRAMS] developed by the [RECORDS MANAGEMENT] vendors and used in the provision of
services is not subject to tax as remote access software.
Because the [RECORDS MANAGEMENT] providers do not make sales of taxable goods or services in
conjunction with the sale of the service of converting digital products, the sale of such services
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.
Analysis under the principles set forth in the “true object” test is unnecessary because the [RECORDS
MANAGEMENT] vendors do not sell a taxable service or item of tangible personal property with the
information or data processing service.
Accordingly, the [RECORDS MANAGEMENT] vendors’ [PROGRAM] charges are not subject to the
Tennessee sales and use tax.

Grant M. Marshall
Assistant General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

October 19, 2015

24

See TENN. CODE ANN. § 67-6-102(18).

25

TENN. CODE ANN. § 67-6-231(a)(2).

Page: 7