A company sells access to a web-based interface that lets users send, receive, and manage text messages and other communications from one screen. Are its charges for that interface subject to Tennessee sales and use tax?

Plain-English summary

The company (a Tennessee business; its identity and customer type are redacted) sells access to proprietary software that lets one group of users communicate with another through a single, web-based interface. The interface is an encrypted, password-protected channel — hosted on third-party cloud servers — that pulls several communication channels into one place, including text messaging (SMS) and other messaging mediums. A user can send a message through the interface and have it converted and delivered to the other party as a text message, and can view and respond to incoming messages from one centralized screen. The company asked whether its charges for the interface are subject to Tennessee sales and use tax.

The Department said yes — the charges are taxable as "ancillary services." Tennessee taxes only specifically enumerated services, but telecommunications services are one enumerated category, and so are ancillary services — defined as services "associated with, or incidental to, the provision of telecommunication services" (§ 67-6-102(7)). Text messaging is itself a telecommunications service: the "electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals" between points (§ 67-6-102(90)(A)). The interface's whole purpose is to facilitate communication — including sending and receiving those text messages — across various channels from one access point. Because that function is associated with and incidental to the underlying telecommunications, the interface fits the definition of an ancillary service and is taxable under § 67-6-205(c)(9).

Notably, the Department analyzed the charge as an ancillary service, not as remotely accessed software or under a true-object test — it found the service couldn't be characterized as any other taxable service and limited its ruling to the ancillary-services category.

The takeaway: a messaging or communications platform built around moving text messages and similar telecommunications can be taxable as an ancillary service in Tennessee, even though customers reach it as web-based software.

What this means for you

Communications and messaging platforms

If your product's core function is to send, route, receive, or manage telecommunications — text messages, calls, and the like — Tennessee may tax it as a telecommunications or ancillary service, even though customers use it as web-based or app-based software. The label "software" doesn't control; what the service does relative to telecommunications does.

Businesses bundling messaging into a broader service

Tools that consolidate texting and other channels into one interface sit close to the telecommunications line. If the interface's purpose is to facilitate that communication, expect ancillary-service treatment. If messaging is genuinely incidental to a different, non-enumerated service, the analysis can differ — but here the Department found communication was the point.

Accountants and tax professionals

This ruling applies the enumerated-services framework on the telecommunications side: § 67-6-205(c)(3) (telecommunications) and § 67-6-205(c)(9) (ancillary services), with the definitions in § 67-6-102(90)(A) (telecommunications service) and § 67-6-102(7) (ancillary services). The Department expressly declined to analyze the charge as remotely accessed software or under the true-object test, confining the ruling to ancillary services. Note the breadth of the telecommunications definition — it reaches transmission "in which computer processing applications are used to act on the form, code, or protocol," including voice over Internet protocol.

Customers buying these platforms

If you buy a messaging or communications interface for use in Tennessee, expect the charge to carry sales tax as an ancillary service.

Common questions

Q: My platform is web-based software. Why would it be taxed as a telecommunications-related service?
A: Because Tennessee looks at what the service does. If its purpose is to send, route, or manage telecommunications such as text messages, it can be taxed as a telecommunications service or as an "ancillary service" associated with or incidental to telecommunications — regardless of being delivered as software.

Q: What is an "ancillary service"?
A: A service associated with, or incidental to, the provision of telecommunications. The statute gives examples like detailed billing service, directory assistance, vertical service, and voice mail. Tennessee enumerates ancillary services as taxable (§ 67-6-205(c)(9)).

Q: Is text messaging a telecommunications service in Tennessee?
A: Yes. Text messaging is the electronic transmission, conveyance, or routing of information between points, which fits the statutory definition of a telecommunications service (§ 67-6-102(90)(A)).

Q: Did the Department treat this as remotely accessed software?
A: No. It analyzed the charge only as an ancillary service and found the service couldn't be characterized as any other taxable service, so it didn't apply the remotely-accessed-software or true-object analysis.

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.):

• § 67-6-205(c)(9) (the furnishing of ancillary services is a taxable enumerated service); § 67-6-205(c)(3) (telecommunications services are taxable)
• § 67-6-102(7) (definition of "ancillary services" — services associated with or incidental to telecommunications)
• § 67-6-102(90)(A) (definition of "telecommunications service")
• § 67-6-102(76) ("retail sale")

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/16-09.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 16-09
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 sales involving proprietary software that
allows [REDACTED] to communicate with [REDACTED] through a single, web-based interface that
supports text messaging, [REDACTED] messaging, and [REDACTED].
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 Tennessee [REDACTED] that, through its proprietary software,
allows [REDACTED] the ability to communicate with [REDACTED] through text messaging,

1

[REDACTED] messaging, and [REDACTED], all through a single, web-based interface (the “Interface”).
The Interface includes an encrypted channel that requires authentication and allows the exchange
2
of [REDACTED] information. The Taxpayer’s software and all messages are stored on [REDACTED],
cloud-based servers. The Taxpayer contracts with [REDACTED] for the provision of such cloud-based
hosting and storage services.
[REDACTED] who communicate via text messaging send text messages to a telephone number
provided by their [REDACTED]. [REDACTED]. [REDACTED], depending on the circumstances, send
formatted text messages to the Taxpayer’s software, where it can be viewed by a [REDACTED] by
accessing the Interface.
A [REDACTED] responds to a [REDACTED] text message by typing a message through the Interface.
The Interface will route the message to [REDACTED], and [REDACTED] software will convert the
message to text messaging and send to the [REDACTED] through [REDACTED].
[REDACTED] and their [REDACTED] also exchange messages through [REDACTED]. [REDACTED].
Finally, [REDACTED] and their [REDACTED] can exchange messages through [REDACTED].
[REDACTED]. When a [REDACTED] sends an [REDACTED] message to his [REDACTED], the
[REDACTED] may view the message by accessing the Interface. [REDACTED] can also use the
Interface to write an [REDACTED] message [REDACTED].
RULING
Are the Taxpayer’s charges for its Interface subject to Tennessee sales and use tax?
Ruling: Yes, the Taxpayer’s charges for its Interface are subject to the Tennessee sales and use
tax as the sale of ancillary services, which are taxable under TENN. CODE ANN. § 67-6-205(c)(9)
(2013).
ANALYSIS
The Taxpayer’s charges for its Interface are subject to the Tennessee sales and use tax as the sale of
ancillary services taxable under TENN. CODE ANN. § 67-6-205(c)(9) (2013).
3

Under the Retailers’ Sales Tax Act, 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,
4
or subrent.”

1

The Taxpayer has stated that at this time a [REDACTED] can only access the Interface by logging into a website. In the near
future, however, the Taxpayer plans to offer a mobile app that a [REDACTED] can download.

2

[REDACTED].

3

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 & Supp. 2016)).

4

TENN. CODE ANN. § 67-6-102(76) (Supp. 2016).

The furnishing of “intrastate, interstate or international telecommunication services” is one such
5
specifically enumerated service. “Telecommunications service” is defined by TENN. CODE ANN. § 67-6102(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 “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
6
value added.”
Another specifically enumerated service that is subject to the sales and use tax is “[t]he furnishing,
7
for a consideration, of ancillary services.” Ancillary services are “services that are associated with, or
incidental to, the provision of telecommunication services, including, but no limited to, detailed
telecommunications billing service, directory assistance service, vertical service, and voice mail
8
service.”
The Taxpayer’s Interface allows [REDACTED] to access and respond to [REDACTED] communications
from and through various mediums via one centralized web-based access point. As part of the
Taxpayer’s Interface, [REDACTED] can view and respond to text messages from [REDACTED] in one
web-based location. Additionally, the Taxpayer’s Interface allows [REDACTED] to receive and send
messages via text messaging by [REDACTED]. Text messaging constitutes a telecommunications
service as it is an “electronic transmission, conveyance, or routing of voice, data, audio, video, or any
9
other information or signals to a point, or between or among points.”
Although the Taxpayer’s Interface allows a [REDACTED] to send and receive text messages, a
telecommunications service, the overarching purpose behind the services provided by the
Taxpayer’s Interface is the facilitation of communication between [REDACTED] and their [REDACTED]
through various mediums and is “associated with, or incidental to, the provision of
10
telecommunication services.” Accordingly, the Taxpayer’s Interface is subject to the Tennessee
sales and use tax as an ancillary service.

Gary Williams
Assistant General Counsel

5

TENN. CODE ANN. § 67-6-205(c)(3).

6

TENN. CODE ANN. § 67-6-102(90)(A).

7

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 ancillary services.

8

TENN. CODE ANN. § 67-6-102(7).

9

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

10

See TENN. CODE ANN. § 67-6-102(7).

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

November 10, 2016