A company delivers electronically generated products for its clients and gives them a web-based interface (with a layout-design tool) to manage orders and view reports. Are its 'Basic Package' charges subject to Tennessee sales tax when the whole service runs on the company's software?

Plain-English summary

A company (its identity and industry are redacted) asked the Department whether its main product — a bundle it calls the "Basic Package" — is subject to Tennessee sales and use tax. The Department said no.

The company's business is delivering electronically generated products on behalf of its clients and using data-gathering tools to produce reports and analytics for them. To run this, the company built proprietary software, including a web-based interface that clients log into to do things like specify when and to whom their products go, use a built-in layout-design system to format products themselves, upload and manage their own information, and view the data and analysis the company compiles. The interface is hosted on the company's servers, and clients reach it from Tennessee.

Software is normally taxable in Tennessee, and since 2015 that includes remotely accessed software a customer uses over the internet. So the question was whether bundling the service with this software made the whole Basic Package taxable. The Department said no, applying the true-object test: clients don't buy the Basic Package to get the software; they buy it to outsource the delivery of their products and to receive the reports and analytics. The interface merely facilitates that work and is "merely incidental" to it. Because the true object is a service — and Tennessee taxes only services it specifically lists (§ 67-6-205), which these are not — the charges are not taxable.

The takeaway: wrapping a nontaxable service in a capable software interface doesn't make the service taxable, as long as the software is a tool for delivering the service rather than the thing the customer is actually buying.

What this means for you

Service businesses that deliver through a customer portal or app

If customers pay you for a service and merely use your software (a portal, dashboard, or interface) as the means of working with you, your charges generally stay nontaxable — provided the service isn't one Tennessee specifically enumerates as taxable. The software being remotely accessed doesn't change that; what matters is the true object of what the customer is buying.

When the software is the product

The result flips if the software itself is what customers are paying for. If they're really buying the use of the software — not an output it produces or a service it supports — the charge is taxable as remotely accessed software (compare Tennessee LR 17-15, a scheduling platform that was the true object, and LR 16-01, where a rebranded platform resold for its own sake was taxable). Look at why customers sign up, not at how the work is delivered.

A self-serve design or upload tool inside your service

Even a fairly capable client-facing tool — here, a layout-design system clients used to build products themselves — can stay on the nontaxable side when it only facilitates the underlying service. The Department focused on the fact that clients didn't contract for the interface; they contracted for the delivery and the reports.

Accountants and tax professionals

This is a straightforward application of the true-object/primary-purpose test (Thomas Nelson; AT&T) layered on the enumerated-services rule (§ 67-6-205; Covington Pike Toyota; Ryder Truck Rental). The 2015 remote-software law (§ 67-6-231(a)(2); 2015 Tenn. Pub. Acts Ch. 514, § 22) modernized how software is taxed but expressly did not make otherwise-nontaxable services taxable. Where the in-house/web interface is incidental and the underlying service isn't enumerated, the whole charge escapes tax. Companion rulings on the same axis: LR 17-01 and LR 18-09 (software incidental → nontaxable) versus LR 16-01 and LR 17-15 (software the true object → taxable).

Common questions

Q: My service runs on software my customers log into. Is it taxable in Tennessee?
A: Generally no, if the true object is a service that Tennessee doesn't specifically enumerate, and the software is just the means of delivering it. Tennessee taxes only listed services and the sale or use of software as such.

Q: Does it matter that the software is accessed over the internet?
A: Not by itself. Since 2015, remotely accessed software is taxable like other software — but the 2015 law expressly didn't make nontaxable services taxable. The true-object test still decides bundled deals.

Q: My customers use a design or upload tool inside my platform. Does that make it taxable?
A: Not necessarily. A client-facing tool can remain incidental to a nontaxable service if customers aren't really paying for the tool itself, but for the service it supports.

Q: When would charges like these be taxable?
A: When the software is the true object — when customers are essentially buying the use of the software rather than a service it merely supports — or when the underlying service is one Tennessee specifically enumerates.

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-231(a)(1) (sale, license, or use of computer software taxable regardless of delivery method); § 67-6-231(a)(2) (access and use of remotely accessed software; expressly does not make otherwise-nontaxable services taxable) — 2015 Tenn. Pub. Acts Ch. 514, § 22 (eff. July 1, 2015)
• § 67-6-102(76) ("retail sale"); § 67-6-102(78)(A), (C), (K) ("sale")
• § 67-6-102(68) ("prewritten computer software"); § 67-6-102(18) ("computer software"); § 67-6-102(24) ("delivered electronically"); § 67-6-102(89)(A) ("tangible personal property")
• § 67-6-205 (sales tax applies only to services specifically enumerated in the Retailers' Sales Tax Act)

Case law:

• Creasy Sys. Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986) (fabrication/customization of software = taxable sale of software)
• Univ. Computing Co. v. Olsen, 677 S.W.2d 445 (Tenn. 1984); Commerce Union Bank v. Tidwell, 538 S.W.2d 405, 408 (Tenn. 1976) (software treated as tangible personal property after the 1977 amendment)
• True object / enumerated services: Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987); AT&T Corp. v. Johnson, 2002 WL 31247083 (Tenn. Ct. App. 2002); 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); Tenn. Dep't of Revenue Ltr. Rul. 14-10 (Oct. 14, 2014)

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/16-02.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 16-02
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
Application of the Tennessee sales and use tax to the provision of [REDACTED] 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 ruling herein is binding upon the
Department and is 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”) [REDACTED] delivers [REDACTED – ELECTRONICALLY GENERATED
PRODUCTS] on behalf of its clients and provides [REDACTED – RELATED SERVICE] functions to its
clients [REDACTED]. With respect to the [REDACTED – DELIVERY AND USE] of [REDACTED –
ELECTRONICALLY GENERATED PRODUCTS], a client may use a web-based interface to [REDACTED –
DESCRIPTION OF USES]. The Taxpayer stores the software, proprietary information, and customer
information used for these purposes on servers located in [REDACTED – STATES].
The Taxpayer’s core business functions are delivering [REDACTED – ELECTRONICALLY GENERATED
PRODUCTS] and using data-gathering tools [REDACTED] to create [REDACTED] reports for clients
(the “Basic Package”). Clients pay a [REDACTED] fee based on [REDACTED].1 The Taxpayer has
developed proprietary software that facilitates or automates these core functions, including a webbased interface (the [“WEB-BASED INTERFACE”]) that allows clients to efficiently interface with the
Taxpayer’s in-house system. Clients use the [WEB-BASED INTERFACE] to [REDACTED – DESCRIPTION
OF USES].
The [WEB-BASED INTERFACE] contains a [LAYOUT DESIGN SYSTEM] that enables users to create
[REDACTED – ELECTRONICALLY GENERATED PRODUCTS] themselves in a format that can be sent
automatically. Using the [LAYOUT DESIGN SYSTEM], clients can [REDACTED – DESCRIPTION OF
SPECIFIC USES OF THE LAYOUT DESIGN SYSTEM].
Clients use the [WEB-BASED INTERFACE] to specify when and to whom to send the [REDACTED –
ELECTRONICALLY GENERATED PRODUCTS] and may upload and manage their [REDACTED – CLIENT
OWNED INFORMATION] on the Taxpayer’s system. [REDACTED].
Finally, clients use the [WEB-BASED INTERFACE] to access [REDACTED] data and analysis generated
and compiled by the Taxpayer through its proprietary software. [REDACTED].
The Taxpayer exercises control over the [REDACTED] information gathered and made available
through [REDACTED]. The Taxpayer’s employees determine what information is collected, how that
information is best analyzed, and what information is automatically reported to clients through the
[WEB-BASED INTERFACE]. [REDACTED].
RULING
Are the Taxpayer’s charges for its Basic Package subject to Tennessee sales and use tax?
Ruling: No, the Taxpayer’s charges for its Basic Package are not subject to the Tennessee
sales and use tax. Although the Basic Package involves the use of software, the true object of
the Basic Package transaction is the provision of nontaxable [REDACTED] services.

1

In addition to these core functions, the Taxpayer gives its clients the option to purchase a number of specific,
related services. The Taxpayer’s personnel perform these services for separate specified fees. [REDACTED].

ANALYSIS
LEGAL BACKGROUND
Under the Retailers’ Sales Tax Act,2 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.”3
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 “prewritten computer software,” which is defined in TENN. CODE ANN. § 676-102(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.”4
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.5 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.6

2

Tennessee Retailers’ Sales Tax Act, Ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts Ch. 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

“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.” TENN. CODE ANN. § 67-6-102(89)(A). With regard to prewritten
computer software, TENN. CODE ANN. § 67-6-102(68) 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. § 67-6102(68).
5

6

TENN. CODE ANN. § 67-6-102(78)(C).

TENN. CODE ANN. § 67-6-231(a)(1) (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).

“Computer software” is “a set of coded instructions designed to cause a computer . . . to perform a
task.”7 Computer software is “delivered electronically” if delivered “by means other than tangible
storage media.”8 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
software.9
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,
transferring, or loading of computer software onto a computer.10
In response to advances in technology that allow persons to remotely access and use software over
the Internet, the Tennessee General Assembly adopted into law 2015 Tenn. Pub. Acts Ch. 514, § 22
(effective July 1, 2015). This new law effectively treats all purchases of computer software in this
state equally, regardless of how the software is provided to and used by a purchaser in this state. 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
access shall be deemed equivalent to the sale of licensing of the software and
electronic delivery of the software for use in the state.11
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 1977,12 remains
subject to sales and use tax regardless of a customer’s chosen method of use.
The sales and use tax also applies to retail sales of services specifically enumerated in the Retailers’
Sales Tax Act.13 Notably, the application of the sales tax to retail sales of services in Tennessee

7

TENN. CODE ANN. § 67-6-102(18).

8

TENN. CODE ANN. § 67-6-102(24).

9

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

10

TENN. CODE ANN. § 67-6-102(78)(K).

11

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

12

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).

remains unaffected by the enactment of 2015 Tenn. Pub. Acts Ch. 514, § 22. The sales tax remains
applicable only to those services specifically enumerated in the Retailers’ Sales Tax Act.14 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,
15

and distributing digital products.

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 sales tax as a bundled transaction.
Finally, when a transaction involves taxable and nontaxable components and the transaction’s true
object or a “crucial,”16 “essential,”17 “necessary,”18 “consequential,” or “integral” element of the
transaction is subject to tax, the entire transaction is subject to sales tax. Only if the true object of
13

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).

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

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

16

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).

17

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).
18

See supra note 12.

the transaction is not independently subject to sales tax and the items that would be subject to sales
tax are “merely incidental” to the true object of the transaction will the transaction not be subject to
sales tax.
APPLICATION
The Taxpayer’s charges for the Basic Package are not subject to the Tennessee sales and use tax.
The Basic Package provides the customer with [REDACTED – ELECTRONICALLY GENERATED
PRODUCT] services. 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 within this state. Here, as part of its Basic Package, the Taxpayer
provides its clients with web-based access to its [WEB-BASED INTERFACE], which facilitates the
Taxpayer’s core functions at no separate charge. The Taxpayer’s [WEB-BASED INTERFACE]
constitutes computer software for Tennessee sales and use tax purposes,19 and the [WEB-BASED
INTERFACE] is accessed by the Taxpayer’s clients from locations within Tennessee. A client’s use of
the [WEB-BASED INTERFACE] software, however, is merely incidental to the true object of the Basic
Package.
With the Basic Package, the Taxpayer generates [REDACTED – ELECTRONICALLY GENERATED
PRODUCTS]. [REDACTED].
The Taxpayer uses [RELATED] data to generate reports and produce analytics that it then relays to
its clients through use of the [WEB-BASED INTERFACE]. [REDACTED – DESCRIPTION OF USES].
Importantly, however, clients do not purchase the Basic Package in order to access the [WEB-BASED
INTERFACE]. Rather, clients purchase the Basic Package to outsource [REDACTED – THE DELIVERY
OF ELECTRONICALLY GENERATED PRODUCTS] and to receive the reports and analytics produced
from [REDACTED]. The purpose of the [WEB-BASED INTERFACE] is merely to facilitate
communication between the clients and the Taxpayer about the [REDACTED – ELECTRONICALLY
GENERATED PRODUCTS], and it only incidentally allows clients to use the [REDACTED - WEB-BASED
INTERFACE].
Accordingly, the true object of the Basic Package transaction is the provision of [REDACTED] services,
i.e., the delivery of [REDACTED – ELECTRONICALLY GENERATED PRODUCTS] and the creation of
[RELATED] reports.
With respect to the sale of services in Tennessee, only specifically enumerated services are subject
to tax under the Retailers’ Sales Tax Act. The Taxpayer’s [REDACTED] services, which are the true
object of the Basic Package transaction, are not specifically enumerated under TENN. CODE ANN. § 676-205.
Accordingly, the Taxpayer’s charges for its Basic Package are not subject to the Tennessee sales and
use tax.

19

See TENN. CODE ANN. § 67-6-102(18).

Grant Marshall
Assistant General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

March 8, 2016