A company buys software, hosts it on its own servers outside Tennessee, and has its Tennessee employees access it remotely to do their work and to support its affiliates. Are its software purchases or its affiliate support fees subject to Tennessee sales and use tax?

Plain-English summary

The company (its identity, industry, and home state are redacted) is a multistate service provider that wholly owns several operating subsidiaries it calls the "Affiliates." To run its business, it buys prewritten and custom software from third parties and stores it on servers at its own data center located outside Tennessee. The company's employees — including employees in Tennessee — reach that software remotely (over web browsers, point-to-point links, and a VPN) to process, store, and manage data. It does not license the software to the Affiliates, and the Affiliates' employees never touch it. Separately, the company performs support services for the Affiliates and charges them a fee equal to its actual cost; its own Tennessee employees use the software to do that work. The company asked whether either the support-service fees or its software purchases are subject to Tennessee sales and use tax.

The Department said no to both.

Support-service fees (charged to the Affiliates) — not taxable. Tennessee taxes only services it specifically lists, and these support services aren't on the list. Just as important, when the company performs them it is the company's own employees who access and use the software — not the Affiliate customers. Tennessee's remotely-accessed-software tax applies when a customer accesses software from a Tennessee location; that isn't what happens here. And the statute is explicit that taxing remotely accessed software does not sweep in otherwise-nontaxable services — the fact that the company uses software to perform a service doesn't make the service taxable.

Software the company buys and hosts out of state — not taxable. When the company purchases third-party software and has it delivered to its data center outside Tennessee, the sale of that software happens out of state. Its employees later accessing it from Tennessee doesn't create a new taxable Tennessee sale. The 2015 remotely-accessed-software rule (§ 67-6-231(a)(2)) reaches software that remains in the seller's (or its agent's) possession and is accessed by a customer from Tennessee — a SaaS-style arrangement. Here the company owns the software and accesses it itself, so it isn't a customer reaching a seller's hosted software; the access-and-use provision doesn't apply.

The throughline: Tennessee's remotely-accessed-software tax is aimed at a customer reaching a vendor's hosted software from Tennessee. A business that buys its own software, hosts it out of state, and has its own staff use it — and that merely uses software to deliver non-enumerated services — isn't taxed under these rules.

What this means for you

Companies that buy software and host it themselves out of state

If you purchase software (prewritten or custom) and have it delivered to and hosted on your own servers outside Tennessee, that purchase is sourced out of state. Your Tennessee employees later accessing it remotely doesn't, by itself, create a taxable Tennessee transaction. The taxable "remotely accessed software" pattern is a customer reaching a vendor's hosted software — not a company using software it owns.

Service providers that use software to do the work

Using software to perform a service doesn't convert a nontaxable service into a taxable one. If what you sell is a service Tennessee doesn't specifically enumerate, it stays nontaxable even though software is essential to delivering it — because the customer is buying the service, and your employees (not the customer) are the ones using the software.

Companies billing affiliates for shared or back-office support

Charging a wholly owned affiliate for support services, at cost or otherwise, generally isn't taxable when those services aren't enumerated and the affiliate isn't itself accessing your software. Watch the line carefully: if you instead give the affiliate access to software that remains in a vendor's possession, you can land in the taxable remotely-accessed-software category (compare LR 16-04, on a qualified data center's treatment of affiliate software access).

Accountants and tax professionals

The decision turns on two limits in § 67-6-231(a)(2): the software must remain in the dealer's possession, and the customer must access it from Tennessee. Software a taxpayer owns and hosts out of state for its own employees meets neither prong; and § 67-6-231(a)(2) expressly does not make otherwise-nontaxable services taxable (§ 67-6-205; Covington Pike Toyota; Ryder Truck Rental). Compare LR 16-01 (company resold third-party software access to customers — taxable) and LR 16-04 (data center deemed the consumer of affiliate-accessed software).

Common questions

Q: I bought software and host it on my own servers in another state. Do I owe Tennessee tax because my Tennessee employees use it?
A: Under this ruling, no. The software was delivered and sold outside Tennessee, and your employees accessing it from Tennessee doesn't create a new taxable Tennessee sale. Tennessee's remotely-accessed-software tax targets a customer accessing a vendor's hosted software, not a company using software it owns.

Q: Does using software to perform a service make the service taxable?
A: No. Tennessee taxes only specifically enumerated services, and the 2015 remotely-accessed-software law expressly does not make otherwise-nontaxable services taxable. The fact that you use software to deliver the service is irrelevant.

Q: When would remotely accessed software actually be taxable?
A: When the software stays in the seller's (or its agent's) possession and a customer accesses it from a Tennessee location — the typical SaaS situation. Then the access is treated as a taxable sale and electronic delivery in Tennessee.

Q: I charge my affiliate for back-office support. Is that taxable?
A: Generally not, if the support service isn't enumerated and the affiliate isn't itself accessing software you provide. If you give the affiliate access to software held by a vendor, the analysis can change.

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, lease, licensing, or use of computer software taxable regardless of how delivered); § 67-6-231(a)(2) (remotely accessed software — software remains in the dealer's possession and the customer accesses it from Tennessee) — 2015 Tenn. Pub. Acts Ch. 514, § 22 (eff. July 1, 2015)
• § 67-6-205 (sales tax applies only to specifically enumerated services)
• § 67-6-102(76) ("retail sale"); § 67-6-102(78)(C) ("sale" includes the furnishing of taxable things or services); § 67-6-102(78)(K) (transfer, programming, or loading of software)
• § 67-6-102(18) ("computer software"); § 67-6-102(24) ("delivered electronically")

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)
• Enumerated-services rule: 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)

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/16-07.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 16-07
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 remotely accessed software.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon the
Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation or
modification shall be effective retroactively unless the following conditions are met, in which case
the revocation shall be prospective only:
(A)

The taxpayer must not have misstated or omitted material facts involved in the
transaction;

(B)

Facts that develop later must not be materially different from the facts upon
which the ruling was based;

(C)

The applicable law must not have been changed or amended;

(D)

The ruling must have been issued originally with respect to a prospective or
proposed transaction; and

(E)

The taxpayer directly involved must have acted in good faith in relying upon the
ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.
FACTS

[TAXPAYER] (the “Taxpayer”) is a [REDACTED – SERVICE] provider headquartered in [LOCATION]. The
Taxpayer’s [REDACTED – PRODUCTS] include [REDACTED]. The Taxpayer directly owns and controls
one hundred percent of [REDACTED] operating subsidiaries that provide [REDACTED – PRODUCTS]
(the “Affiliates”).

In providing [REDACTED] services, the Taxpayer utilizes both prewritten and custom software that it
purchases from third parties. The Taxpayer maintains a data center located in [STATE – NOT
TENNESSEE] where it stores these software applications for use by the Taxpayer’s employees,
including employees located within Tennessee. The Taxpayer does not license the software to its
Affiliates, nor do the Affiliates’ employees access the software.
The Taxpayer’s Tennessee-based employees access the software remotely from locations within
Tennessee through a variety of means, including Web browsers, point-to-point communication
services contracted from third parties, and a virtual private network. These employees access the
software to process, store, network, manage, and distribute data derived from providing
[REDACTED] services to customers.
Additionally, the Taxpayer provides various support services to the Affiliates, including [REDACTED]
(the “Support Services”). For these services, the Taxpayer charges the Affiliates a [REDACTED] fee
equal to the actual cost the Taxpayer incurs in providing these support services. The Taxpayer’s
employees access the software remotely from locations within Tennessee to provide the Support
Services to the Affiliates.
RULINGS
1.

Are the fees that the Taxpayer charges the Affiliates for providing the Support Services
subject to Tennessee sales and use tax?
Ruling: No, the fees that the Taxpayer charges for its Support Services are not subject to the
Tennessee sales and use tax because these services are not specifically enumerated taxable
services under Tennessee law.

2.

Are the charges that the Taxpayer incurs when it purchases software from third parties that
is installed onto the Taxpayer’s server at its [STATE – NOT TENNESSEE] data center and
remotely accessed by employees from locations within Tennessee subject to Tennessee
sales and use tax?
Ruling: No, the charges that the Taxpayer incurs for software installed at a location outside
of Tennessee and remotely accessed by the Taxpayer’s employees in Tennessee are not
subject to Tennessee sales and use tax.
ANALYSIS
LEGAL BACKGROUND
1

Under the Retailers’ Sales Tax Act, 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”
2
is defined as “any sale, lease, or rental for any purpose other than for resale, sublease, or subrent.”
1

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)).

TENN. CODE ANN. § 67-6-102(78)(C) (Supp. 2015) defines “sale” in pertinent part to include “the
3
furnishing of any of the things or services” taxable under the Retailers’ Sales Tax Act. The Tennessee
sales and use tax applies to retail sales of services specifically enumerated in the Retailers’ Sales Tax
4
Act.
Additionally, 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
5
otherwise provided.
“Computer software” is “a set of coded instructions designed to cause a computer . . . to perform a
6
task.” Computer software is “delivered electronically” if delivered “by means other than tangible
7
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
8
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,
9
transferring, or loading of computer software onto a computer.
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

2

TENN. CODE ANN. § 67-6-102(76) (Supp. 2015).

3

TENN. CODE ANN. § 67-6-102(78)(C).

4

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 (2015); Covington Pike Toyota, Inc. v. Caldwell, 829 S.W.2d 132, 135 (Tenn. 1992); Ryder Truck Rental, Inv. v.
Huddleston, No. 91-3382-III, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug. 12, 1994) (providing that sales tax does not apply to all
services; rather, it only applies to retail sales of services specifically enumerated by statute).
5

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).
6

TENN. CODE ANN. § 67-6-102(18).

7

TENN. CODE ANN. § 67-6-102(24).

8

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

9

TENN. CODE ANN. § 67-6-102(78)(K).

[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
10
electronic delivery of the software for use in the state.
As a result, effective for all billing periods beginning on or after July 1, 2015, the access and use of
11
computer software in this state, which has generally been subject to tax since 1977, remains
subject to sales and use tax regardless of a customer’s chosen method of use.
The sales tax also applies to retail sales of services specifically enumerated in the Retailers’ Sales Tax
12
Act. Notably, the application of the sales tax to retail sales of services in Tennessee remains
unaffected by the enactment of 2015 Tenn. Pub. Acts Ch. 514, § 22. The sales tax remains applicable
13
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,
14
and distributing digital products.
Therefore, while the new TENN. CODE ANN. § 67-6-231(a)(2) modernizes taxation of computer software
in this state, it has no effect on the taxation of services.

10

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

11

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).

12

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).
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; 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

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

APPLICATION
1.

Support Services

The fees that the Taxpayer charges the Affiliates for the Support Services 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 Taxpayer charges its Affiliates for the provision of Support Services. Although
the Taxpayer’s employees remotely accesses its software housed at its out-of-state data center to
perform the services, the Taxpayer does not transfer title, possession, or control of the software
programs at any time, nor do its Affiliate customers electronically download the software programs.
Moreover, the Taxpayer is not furnishing taxable services 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 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 from a location in this state. In this instance, it is the Taxpayer’s
employees that remotely access and use the computer software to perform services.
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. The fact that the
Taxpayer uses computer software to perform the Support Services is irrelevant.
Accordingly, the Taxpayer’s services Support Services are not subject to the Tennessee sales and use
tax.
2.

Software Hosted at the Data Center

The charges that the Taxpayer incurs for software that it purchases and hosts on servers located
outside of Tennessee and that is remotely accessed by the Taxpayer’s employees from locations
within Tennessee are not subject to Tennessee sales and use tax.
Under these circumstances, there is no sale, lease, license, or transfer of the computer software in
this state since the software is delivered to an out-of-state location. Although the Taxpayer’s
employees access or use the software remotely from locations within Tennessee, the sale of the
software has already occurred outside of Tennessee. The Taxpayer’s subsequent provision of access
and use of software to itself, whether used to provide [REDACTED] products to its customers or the
Support Services to its Affiliates, is not subject to Tennessee sales and use tax. The access and use of
the software is not under the remotely accessed software provisions because the software is not in
the possession of the seller.

Grant Marshall
Assistant General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

September 8, 2016