Does Tennessee sales tax apply to a subscription information-database service, its email alerts and data licenses, and a bundled system that includes physical equipment?
Plain-English summary
The taxpayer compiles data, stores it on its own servers, and sells customers subscription access to a web-based information database (the "Main Service") for a monthly fee, with the ability to generate customized reports. It also sells several add-ons. The question for each: does Tennessee sales tax apply?
The Department's answers turn on two ideas: data processing and information services are not taxable in Tennessee (they are neither an enumerated taxable service nor a taxable telecommunications service, and the 2015 remote-software law expressly leaves them alone), and the true-object test decides mixed transactions. Four of the five offerings came out nontaxable; only the one that bundles in physical equipment was taxable.
1. The core database subscription — NOT taxable. Customers reach the database through the taxpayer's web portal, and Tennessee taxes remotely accessed software (§ 67-6-231). But the true object is the nontaxable data processing and information service — customers buy the information, and the portal is "merely a tool to view the end result." Tennessee's telecommunications-tax definition specifically excludes data processing and information services when "the purchaser's primary purpose for the underlying transaction is the processed data or information" (§ 67-6-102(90)(B)(i)), and § 67-6-231(b) expressly says the remote-software tax does not reach "information or data processing services" or "the storage of data." So the subscription isn't taxable.
2. The auto-notification (email alert) service — NOT taxable. This service emails customers when new listings match their search parameters. Email is telecommunications, but "the fact that a service might employ, involve, or be accessed by telecommunications, without more, will not transform it into a taxable telecommunications service" (Qualcomm Inc. v. Chumley). The customer's primary purpose is the processed database data, so it stays nontaxable under § 67-6-102(90)(B)(i).
3. The license to use a portion of the database data — NOT taxable. Under "Third Party Data Access Agreements," a subscriber can access or download a specific slice of the data for an approved purpose. That's just limited access to the same nontaxable information service, so the monthly license fee isn't taxable.
4. Fees and fines to keep the data accurate — NOT taxable. The taxpayer charges fees/fines to discourage subscribers from cluttering or manipulating the data. To owe one, a customer must first pay for database access, then violate the access terms. These are charges made in conjunction with access to a nontaxable service, so they're nontaxable too.
5. The separate "System" that includes physical equipment — TAXABLE. This offering bundles an item of tangible personal property with an annual data-access fee (and a fee for a redacted component). Because the sale includes tangible property that is necessary to complete the sale, the bundling rule makes the entire price the taxable sales price: the equipment fee is taxed as a sale of tangible personal property, and the annual access fee is taxed as part of the sales price of that property (§ 67-6-202(a); § 67-6-102(79)(A)). Here the physical good flips the analysis — unlike the pure-information services, the true object includes taxable tangible property.
The throughline: packaging information as a service (subscription, alerts, licenses, accuracy fees) keeps it outside Tennessee sales tax; the moment you wrap the same information sale around a tangible product that's needed to complete the deal, the whole bundle — service fees included — becomes taxable.
What this means for you
Database, SaaS, and information-service providers selling in Tennessee
If your real product is information or data processing and customers only reach it through your software/portal, your subscription, data-license, and even alert fees are generally not subject to Tennessee sales tax — the software access is incidental to the nontaxable service, and Tennessee specifically excludes data/information processing from both the telecommunications tax and the remote-software tax. Document that the customer's primary purpose is the data itself.
Watch the line: software-as-a-product vs. service-delivered-through-software
Tennessee taxes remotely accessed software but not the services delivered through it. The deciding question is the true object — are customers buying the program, or the information/result it produces? If it's the result (data, reports, alerts), you're likely nontaxable. If customers are really buying the use of the application itself, you're back in § 67-6-231 territory.
The tangible-property trap
The instant you bundle a physical item that's necessary to complete the sale, the bundling rule can pull your otherwise-nontaxable service fees into the taxable sales price. If you sell hardware (or other tangible goods) alongside data access, expect the whole package — including the recurring access fee — to be taxable, separately stated or not. Consider whether the tangible component can truly stand apart from the service.
Accountants and tax professionals
Key hooks: data/information processing excluded from "telecommunications service" and not taxable when the data is the purchaser's primary purpose (§ 67-6-102(90)(A), (B), (B)(i)); the § 67-6-231(b) service carve-outs (data/information processing, data storage); the true-object/bundling test (Thomas Nelson; AT&T; Rivergate Toyota; Ltr. Rul. 14-10); and that telecommunications use alone doesn't make a service taxable (Qualcomm Inc. v. Chumley). The tangible-property bundle is taxed under § 67-6-202(a) with "sales price" defined at § 67-6-102(79)(A) (and Rule 1320-05-01-.32(1)).
Common questions
Q: I sell access to an online database. Do I charge Tennessee sales tax?
A: Generally no, if what your customers are really buying is the information/data and they just reach it through your portal. Tennessee treats that as a nontaxable data-processing/information service, and the remote-software tax expressly doesn't reach it.
Q: My service sends customers email or text alerts. Does that make it a taxable telecommunications service?
A: No, not by itself. Using email or telecommunications to deliver a service doesn't convert it into a taxable telecommunications service when the customer's primary purpose is the underlying data.
Q: What about a license that lets customers download part of my data?
A: In this ruling, a limited license to use a portion of the database data was still a nontaxable information service. The customer's purpose was access to the information, not a software product.
Q: Why was the "System" taxable when everything else wasn't?
A: Because it bundled tangible personal property (physical equipment) with the data access, and the tangible item was necessary to complete the sale. Tennessee's bundling rule then taxes the entire price, including the recurring access fee, as the sales price of the tangible property.
Q: Can I rely on this ruling?
A: Not directly. A Tennessee letter ruling binds the Department only as to the taxpayer and exact facts it addressed and cannot be relied on by anyone else. It shows the Department's reasoning; confirm your own facts with a tax professional.
Citations and references
Tennessee statutes (Tenn. Code Ann.):
- § 67-6-231(a) (computer software taxable regardless of delivery method); § 67-6-231(b) (remotely accessed software taxable but not reaching otherwise-nontaxable services, expressly information/data processing and data storage) — 2015 Tenn. Pub. Acts Ch. 514, § 22
- § 67-6-205(c)(3) (telecommunications services taxable); § 67-6-102(90)(A) ("telecommunications service"); § 67-6-102(90)(B), (B)(i) (excludes data processing/information services and internet access; not taxable when the data/information is the purchaser's primary purpose)
- § 67-6-202(a) (sales tax on the sales price of tangible personal property at retail); § 67-6-102(79)(A) ("sales price" — total consideration, no deduction for service charges); Tenn. Comp. R. & Regs. 1320-05-01-.32(1) (1987)
- § 67-6-102(78)(A), (C), (K) ("sale"; furnishing of taxable things/services; transfer or loading of software); § 67-6-102(76) ("retail sale"); § 67-6-102(18) (computer software); § 67-6-102(24) (delivered electronically); § 67-6-102(68) (prewritten computer software); § 67-6-102(89)(A) (tangible personal property)
Case law:
- Qualcomm Inc. v. Chumley, No. M2006-01398-COA-R3-CV, 2007 WL 2827513, at 8 (Tenn. Ct. App. Sept. 26, 2007) (telecommunications use alone does not make a service a taxable telecommunications service)
- Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 624 (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) (true-object / bundling)
- Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976); Univ. Computing Co. v. Olsen*, 677 S.W.2d 445 (Tenn. 1984) (software taxable as tangible personal property since 1977)
Related guidance:
- Tenn. Dep't of Revenue Ltr. Rul. 14-10 (Oct. 14, 2014) (bundling and the true-object test); compare Rev. Rul. 19-01 (event-ticketing platform; same § 67-6-231(b) service carve-outs) and Ltr. Rul. 20-04 (live vs. self-paced online courses)
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/19-04.pdf
Original ruling text
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.
The application of the Tennessee sales and use tax to database services and an Internet-based
information system.
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.
[TAXPAYER] (the “Taxpayer”) is a [REDACTED] that provides [TYPE OF SERVICES] [REDACTED].
1. [MAIN SERVICE] Database
The Taxpayer’s main service offering is [REDACTED], a web-based information database [REDACTED].
The Taxpayer maintains the database and makes the information available to customers for a
monthly access fee. Customers are assigned a personalized account login that allows them to access
the [REDACTED] database and generate customized reports within the Taxpayer’s web-based
1
portal.
The Taxpayer also provides optional services and products for additional service fees. As discussed
below, these additional fees can take the form of a per-item fee, a one-time fee, a monthly fee, or
some combination thereof.
2. Auto-Notification Service
The Taxpayer will auto-notify potential buyers of [ITEMS FOR SALE] [REDACTED] for a fee that
2
entitles the customer to [NUMBER] notifications. To use this service, [TAXPAYER’S CLIENT] sets up
the search parameters and an e-mail address for a potential buyer in the [MAIN SERVICE] database,
and [MAIN SERVICE] automatically notifies the potential buyer of the new [ITEMS FOR SALE] by email.
3. License for [MAIN SERVICE] Data
The Taxpayer offers a [REDACTED] license to use the [MAIN SERVICE] data for a specifically approved
purpose, pursuant to a [REDACTED] Agreement. The [REDACTED] license allows an existing
subscriber to the [MAIN SERVICE] database (or the subscriber’s licensee) to directly access or
download a specific portion of the data contained in the [MAIN SERVICE] database, and to use that
data for a limited purpose beyond simply accessing the [MAIN SERVICE] database. Customers may
use the covered data for such things as [REDACTED]. The [REDACTED] Agreements do not include
the full suite of offerings that accompany the standard [MAIN SERVICE] subscription. The Taxpayer
charges a monthly fee for this license.
4. Fees to limit and maintain the accuracy of [MAIN SERVICE] data on the database
To discourage unfair tactics and prevent the unnecessary accumulation of [MAIN SERVICE] data, the
Taxpayer charges a fee to subscribers if they [MANIPULATE MAIN SERVICE DATA]. The Taxpayer also
issues notices to and imposes fines on customers for unlawful, unethical, and inaccurate
[REDACTED] information submitted to the database, in an effort to motivate customers to keep the
[MAIN SERVICE] data accurate.
5. [REDACTED] System
[REDACTED].
The Taxpayer charges customers an annual access fee and a fee for [REDACTED]. The annual access
fee allows the customer to access the [REDACTED] System for one year and includes [ITEM of
1
The Taxpayer provides additional services to its customers as part of its monthly access fee. These services include
[REDACTED].
2
The Taxpayer provides [NUMBER] auto-notifications to a customer as part of its monthly access fee. Customers must pay for
the auto-notification service for notifications in excess of [NUMBER].
2
TANGIBLE PERSONAL PROPERY] and access to data [REDACTED]. The Taxpayer charges an additional
fee for replacement [ITEM of TANGIBLE PERSONAL PROPERY].
- Is the Taxpayer’s [MAIN SERVICE] database service subject to Tennessee sales and use tax?
Ruling: No. The Taxpayer’s [MAIN SERVICE] database service is not subject to Tennessee
sales and use tax. Although the [MAIN SERVICE] database service involves the use of
remotely accessed computer software, the primary purpose of the service is the nontaxable
data processing and information service. - Is the Taxpayer’s [REDACTED] service subject to Tennessee sales and use tax?
Ruling: No. The Taxpayer’s [REDACTED] service is not subject to Tennessee sales and use tax.
Although the [REDACTED] service includes an e-mail messaging component, the primary
purpose is providing database information to customers, which is not taxable as a
telecommunications service. - Is the Taxpayer’s license for [MAIN SERVICE] data subject to Tennessee sales and use tax?
Ruling: No. The Taxpayer’s license for [MAIN SERVICE] data is not subject to Tennessee sales
and use tax. The license provides a customer specified limited access to use certain data
contained in the Taxpayer’s nontaxable data processing and information service. - Are the Taxpayer’s fees to limit and maintain the accuracy of the [MAIN SERVICE] data
subject to Tennessee sales and use tax?
Ruling: No. The fees to limit and maintain the accuracy of the [MAIN SERVICE] data are not
subject to Tennessee sales and use tax because they are charges made in conjunction with
having access to a nontaxable data processing and information service. - Are the Taxpayer’s [REDACTED] fee and annual fee for access to the [REDACTED] System
subject to Tennessee sales and use tax?
Ruling: Yes. The Taxpayer’s [REDACTED] fee is subject to Tennessee sales and use tax as the
sale of tangible personal property for a consideration; the annual fee for access to the
[REDACTED] System is subject to Tennessee sales and use tax as part of the sales price of the
[ITEM OF TANGIBLE PERSONAL PROPERTY].
Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and
3
specifically enumerated services are subject to sales and use tax, unless an exemption applies.
3
Tennessee Retailers’ Sales Tax Act, Ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts Ch. 22, §§ 2254 (codified as amended at TENN. CODE
ANN. §§ 67-6-101 to -907 (2018).
3
“Retail sale” is defined as “any sale, lease, or rental for any purpose other than for resale, sublease,
4
or subrent.”
TENN. CODE ANN. § 67-6-102(78)(A) (2018) defines “sale,” in pertinent part, to mean “any transfer of
title or possession, or both . . . of tangible personal property for a consideration.” “Tangible personal
property” includes “property that can be seen, weighed, measured, felt, or touched, or that is in any
5
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
6
author or other creator to the specifications of a specific purchaser.”
In addition to the transfer of tangible personal property, the term “sale” also includes “the furnishing
7
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 customer 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
8
otherwise provided.
“Computer software” is “a set of coded instructions designed to cause a computer . . . to perform a
9
task.” Computer software is “delivered electronically” if delivered “by means other than tangible
10
storage media.”
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
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 to include a new subdivision (b), which
states in pertinent part that:
4
TENN. CODE ANN. § 67-6-102(76) (2018).
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.”
7
TENN. CODE ANN. § 67-6-102(78)(C).
8
TENN. CODE ANN. § 67-6-231(a) (2018). 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).
9
TENN. CODE ANN. § 67-6-102(18).
10
TENN. CODE ANN. § 67-6-102(24).
4
[f]or purposes of subsection (a), “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
11
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
12
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 Tennessee sales tax also applies to retail sales of services specifically enumerated in the
13
Retailers’ Sales Tax Act. In particular, TENN. CODE ANN. § 67-6-205(c)(3) (2018) imposes the sales tax
on retail sales of the service of “furnishing, for a consideration, of intrastate, interstate or
international telecommunication services.” “Telecommunications service” is defined as “the
electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information
14
or signals to a point, or between or among points.”
However, “telecommunication service” does
15
not include data processing and information services or Internet access services.
Furthermore, 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
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 (b) 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,
16
and distributing digital products.
11
2015 Tenn. Pub. Acts Ch. 514, § 22 (codified at TENN. CODE ANN. § 67-6-231(b) (2018)).
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 405,
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).
13
See TENN. CODE ANN. § 67-6-205(c) (2018).
14
TENN. CODE ANN. § 67-6-102(90)(A).
15
TENN. CODE ANN. § 67-6-102(90)(B).
16
2015 Tenn. Pub. Acts Ch. 514, § 22 (codified at TENN. CODE ANN. § 67-6-231(b) (2018)).
5
Therefore, while TENN. CODE ANN. § 67-6-231(b) (2018) modernizes taxation 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
17
items is subject to sales tax, the entire sales price is subject to sales tax as a bundled transaction.
When a transaction involves taxable and nontaxable components and the transaction’s true object
18
19
20
21
22
or a “crucial,”
“essential,”
“necessary,”
“consequential,”
or “integral”
element of the
23
transaction is subject to tax, the entire transaction is subject to sales tax. Only if the true object of
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
24
sales tax.
1. [MAIN SERVICE] Database
The Taxpayer’s main service offering is the [MAIN SERVICE] database. The Taxpayer compiles [DATA],
stores the data on its own servers, and allows customers to access the data through the Taxpayer’s
web-based portal using their own internet service. The primary purpose of the Taxpayer’s [MAIN
SERVICE] database service is providing [REDACTED] data to customers. Pursuant to TENN. CODE ANN.
§ 67-6-102(90)(B)(i), such data processing and information services are not considered taxable
telecommunication services when the “purchaser’s primary purpose for the underlying transaction
is the processed data or information.” Thus, the [MAIN SERVICE] database service is not taxable as a
telecommunications service.
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(b) requires the access and use of the computer software by a
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).
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 nontaxable 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 product 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 20.
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 19.
24
See generally id.
6
customer from a location within Tennessee. However, TENN. CODE ANN. § 67-6-231(b) clarifies that the
application of the sales and use tax to remotely accessed software does not make otherwise
nontaxable services subject to tax. TENN. CODE ANN. § 67-6-231(b) specifically states that “information
or data processing services” and “the storage of data” remain nontaxable for Tennessee sales and
25
use tax purposes. Although the Taxpayer’s web-based portal constitutes computer software for
26
Tennessee sales and use tax purposes, and the Taxpayer’s customers access the portal from
locations within Tennessee, a customer’s use of the portal is merely incidental to the true object of
the [MAIN SERVICE] information database service. Customers do not purchase access to the
Taxpayer’s [MAIN SERVICE] database to access the web-based portal; rather, customers purchase
access for the [REDACTED] information services. The web-based portal is merely a tool to view the
end result of the information services that customers purchase from the Taxpayer.
Because the Taxpayer does not sell the [MAIN SERVICE] software to its customers, nor does it
provide a taxable service by providing access to the [MAIN SERVICE] information database service,
the charges for use of the [MAIN SERVICE] database service are not subject to Tennessee sales and
use tax.
2. Auto-Notification Service
The Taxpayer’s auto-notification service automatically notifies [CUSTOMERS] of new [MAIN SERVICE]
database listings via e-mail, based on their chosen [REDACTED] search parameters. The service
necessarily employs telecommunications. However, “the fact that a service might employ, involve, or
be accessed by telecommunications, without more, will not transform it into a taxable
27
telecommunications service.” Although the Taxpayer’s auto-notification service sends electronic
communications to [CUSTOMERS], the customer’s primary purpose in purchasing this service is the
processed [MAIN SERVICE] data itself. As such, pursuant to TENN. CODE ANN. § 67-6-102(90)(B)(i), the
Taxpayer’s auto-notification service is not a taxable telecommunications service.
Therefore, the Taxpayer’s auto-notification service is not subject to Tennessee sales and use tax.
3. License for [MAIN SERVICE] Data
As noted above, the Taxpayer’s charges for use of the [MAIN SERVICE] database service are not
subject to Tennessee sales and use tax because the Taxpayer does not sell the [MAIN SERVICE]
software to its customers, nor does it provide a taxable service by providing access to the [MAIN
SERVICE] information database service. Similarly, the Taxpayer’s worldwide license to use its [MAIN
SERVICE] data for specific, approved purposes, as set out in Third Party Data Access Agreements, is
also a nontaxable service because the customer’s primary purpose in entering into the Third Party
Data Access Agreement is to obtain access to a specific portion the information contained in the
[MAIN SERVICE] database.
25
TENN. CODE ANN. § 67-6-231(b).
26
See TENN. CODE ANN. § 67-6-102(18).
27
Qualcomm Inc. v. Chumley, No. M2006-01398-COA-R3-CV, 2007 WL 2827513, at *8 (Tenn. Ct. App. Sept. 26, 2007).
7
Thus, license fees to use the Taxpayer’s [MAIN SERVICE] data are not subject to Tennessee sales and
use tax.
4. Fees to limit and maintain the accuracy of [MAIN SERVICE] data on the database
The Taxpayer’s imposition of fees and fines to discourage customers from cluttering or improperly
manipulating the [MAIN SERVICE] data are charges made in conjunction with having access to a
nontaxable data processing and information service. In order to be subject to such fees or fines, a
customer must first pay for access to the [MAIN SERVICE] database. The customer is only charged a
fee or fine for a violation of that access.
Because the charges for use of the [MAIN SERVICE] database service are not subject to Tennessee
sales and use tax, any fees and fines paid in conjunction with access to the [MAIN SERVICE] database
are also not subject to Tennessee sales and use tax.
5. [REDACTED] System
Tennessee imposes a sales tax on the “sales price of each item or article of tangible personal
28
property when sold at retail in this state.” The “sales price” upon which tax is due is the “total
amount of consideration, including cash, credit, property, and services, for which personal property
or services are sold, leased, or rented, valued in money, whether received in money or otherwise,
29
without any deduction” for charges by the seller for any services necessary to complete the sale.
Sales of the Taxpayer’s [REDACTED] System involve multiple components: [REDACTED – ITEMS OF
TANGIBLE PERSONAL PROPERTY], and an annual access fee. Because the sale of the [REDACTED]
System involves both tangible personal property and services, and the tangible components are
necessary to complete the sale, all the fees associated with these components make up the sales
price of the system. Accordingly, the Taxpayer’s [REDACTED] fee is subject to Tennessee sales and
use tax as the sale of tangible personal property for a consideration and the annual fee for access to
the [REDACTED] System is subject to Tennessee sales and use tax as part of the sales price of the
[ITEMS OF TANGIBLE PERSONAL PROPERTY].
APPROVED:
David Gerregano
Commissioner of Revenue
DATE:
7/26/19
28
TENN. CODE ANN. § 67-6-202(a) (2018).
29
TENN. CODE ANN. § 67-6-102(79)(A). See also TENN. COMP. R. & REGS. 1320-05-01-.32(1) (1987).
8