Are web-based data analytics services — reports, dashboards, and analyst consulting — taxable in Tennessee, or a nontaxable service delivered through software?

Plain-English summary

A data analytics company sells web-based services to customers around the country, including in Tennessee. It takes in a customer's raw data, geocodes it, and aggregates it with third-party data to build a comprehensive data set, then turns that into three kinds of offerings: digital reports (performance and market-trend analyses), an interactive web-based dashboard (where customers can query data and auto-generate reports), and consulting services (on-demand analyst help and in-person strategy sessions). Everything is delivered online or digitally — never on paper. Customers pay either one all-inclusive fee or itemized charges.

The question: are these data analytics services subject to Tennessee sales and use tax? The Department ruled no.

The reasoning hinges on a key piece of Tennessee software law. Tennessee taxes computer software — including remotely accessed software — no matter how it's delivered. But the statute that taxes remote software (§ 67-6-231(b)) also says, in so many words, that it does not tax services that weren't already taxable — and it lists "information or data processing services, including the capability of the customer to analyze such information or data provided by the dealer" as a prime example of something that stays non-taxable even when software is used to deliver it.

Applying the true object test, the Department found that what customers actually buy is the company's expertise in analyzing, organizing, and adding context to their data. The dashboards and platforms are computer software, and customers in Tennessee access them remotely — but that software is just the means to view the results of the analytics service. It would be "useless and of no value" to a customer without the underlying analysis. So the software is merely incidental, the true object is the non-taxable data analytics (information/data processing) service, and the whole charge is non-taxable — regardless of how it's invoiced.

The Department drew a sharp boundary, though: if the company instead licenses stand-alone software that customers operate themselves (for example, to upload, store, and manage their own data) with no analytics service attached, that is a taxable sale of remotely accessed software. The non-taxable result depends on the human analytical service being the real thing sold.

What this means for you

Analytics, BI, and data-service businesses selling into Tennessee

If customers are really paying for your analysis and expertise — and the dashboard or portal is just how they see the results — Tennessee treats it as a nontaxable information/data processing service, even though it's delivered through software accessed remotely from Tennessee. The delivery software riding along doesn't make the service taxable.

The boundary: service vs. self-service software

The result flips when the software itself is the product. If you license a tool customers use on their own, with no analytical service attached, that's taxable remotely accessed software (§ 67-6-231(a); § 67-6-205(c)(6)). Compare Letter Ruling 22-07, where users operated the software to build their own advertising — taxable — versus the nontaxable data service here and in Letter Ruling 22-08.

Invoicing doesn't control — substance does

The Department said it didn't matter whether the company charged one all-inclusive fee or itemized the pieces; what controlled was the true object. Itemizing a taxable component separately, however, can change the analysis if that component is sold as its own product, so align your billing with what you're actually selling.

Accountants and tax professionals

Section 67-6-231(b) taxes remotely accessed software but expressly preserves non-taxable services, naming information/data processing services with customer analysis capability. The true-object/essential-element analysis draws on Thomas Nelson, Inc. v. Olsen, AT&T Corp. v. Johnson, and Rivergate Toyota, Inc. v. Huddleston, and follows Letter Ruling 14-10. The historical software-as-TPP background (Commerce Union Bank; Univ. Computing Co. v. Olsen; the 1977 amendment) is recited as well.

Common questions

Q: We deliver analytics through a cloud dashboard accessed in Tennessee. Is that taxable software? A: Under this ruling, no — if the true object is your data analysis service and the dashboard is merely the way customers view the results. Tennessee's remote-software tax expressly does not reach otherwise-nontaxable information and data processing services.

Q: When would our offering become taxable?
A: When the software is the product — i.e., you license a tool customers operate themselves with no analytical service attached. That's a taxable sale of remotely accessed software.

Q: Does itemizing the dashboard separately make it taxable?
A: The Department said the true object controls regardless of invoicing here. But selling a software component as its own stand-alone product (used without your services) can be taxable, so billing should track what you actually provide.

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, and it expressly may not apply if the facts differ. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes:

• Tenn. Code Ann. §§ 67-6-101 to -907 (Retailers' Sales Tax Act — tangible personal property and enumerated services are taxable)
• Tenn. Code Ann. § 67-6-231(a) (use of computer software is taxable, including remotely accessed software) and § 67-6-231(b) (taxing remote software does not tax otherwise-nontaxable services such as information or data processing services, including the customer's capability to analyze data provided by the dealer)
• Tenn. Code Ann. § 67-6-102(18) (definition of computer software); § 67-6-102(95) (tangible personal property includes prewritten software)
• Tenn. Code Ann. § 67-6-205 (enumerated taxable services); § 67-6-205(c)(6) (sale of a software product the customer uses without the seller's services)

Cases:

• Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987); AT&T Corp. v. Johnson, 2002 WL 31247083 (Tenn. Ct. App. 2002); Rivergate Toyota, Inc. v. Huddleston, 1998 WL 83720 (Tenn. Ct. App. 1998) (essential/integral element makes the whole transaction taxable)
• Commerce Union Bank, 538 S.W.2d 405 (Tenn. 1976); Univ. Computing Co. v. Olsen, 677 S.W.2d 445 (Tenn. 1984) (software-as-tangible-personal-property history)

Related rulings:

• Tenn. Dep't of Revenue Letter Ruling 14-10 (Oct. 14, 2014) (bundling and the "true object" test)
• Tenn. Dep't of Revenue Letter Ruling 22-08 (compliance-monitoring data service non-taxable; portal/API incidental) and Letter Ruling 22-07 (user-operated advertising software taxable)

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/21-01.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 21-01
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 Tennessee sales and use tax to data analytics 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 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 [TYPE] data analytics company headquartered in [CITY, STATE]. The Taxpayer provides web-based data analytics services to its customers, which primarily consist of
[ENTITIES] located across the country, including in Tennessee. The Taxpayer’s data analytics services are geared towards achieving efficiency and effectiveness in its customers’ strategic planning initiatives. To that end, the Taxpayer takes in its customers’ [REDACTED] data for processing, geocodes

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the data, and aggregates the customer data with data obtained from third parties, such as
[REDACTED]. The Taxpayer uses these information streams to create a comprehensive data set, which is stored on servers leased by the Taxpayer and further processed in a variety of ways to provide the range of data analytics services offered to its customers. Digital Reports The Taxpayer offers several types of digital reports that are prepared using its customer and thirdparty data, including the following (collectively, the “Digital Report Services”): (1) [REDACTED] reports, which provide an overall measure of client performance and an evaluation of the health and growth potential of the client’s competition; and (2) [REDACTED], which are high-level reports that include key strategic insights and customized visualizations of the client and third-party data to facilitate the analysis of market trends. All of the digital report types produced by the Taxpayer are either accessed by its customers online or transmitted to the customer using other digital means. The Taxpayer’s Digital Report Services are never delivered in a printed or otherwise tangible format. Web-Based Data Analytics Dashboard The Taxpayer also offers a web-based data analytics dashboard, which consists of [NUMBER] components (collectively, the “Dashboard Components”): (1) [REDACTED], which permits the Taxpayer’s data to be searched or queried; (2) [REDACTED], which contains several standard and custom electronic reports that customers can generate automatically; and (3) [REDACTED], which allows generated reports to be distributed efficiently and securely. All of the Taxpayer’s Dashboard Components are accessed by the customer online or are otherwise digitally transmitted. In addition to the web-based Dashboard Components, the Taxpayer also offers its customers access to [REDACTED] and [REDACTED], which are essentially more refined versions of the Dashboard Components that generate standard reports and unique visualizations of customer and third-party data.
[CONSULTING SERVICES]
The Taxpayer also offers consultant-type services in addition to the Digital Report Services and Dashboard Components described above. The Taxpayer’s [REDACTED] service is an on-demand offering that allows its customers to supplement their internal analytics efforts with assistance from the Taxpayer’s employees, who may be engaged to perform specific projects for a particular customer. Additionally, the Taxpayer offers [REDACTED], which consist of in-person meetings with Taxpayer personnel to assist the customer in developing competitive strategic initiatives. Both the [REDACTED] on-demand offering and the [REDACTED] (collectively, the “Consulting Services”) rely heavily on the Taxpayer’s provision of analysis of the customer and third-party data, essentially comprising a further extension of the data analytics services provided in connection with its other report and web-based offerings. Any reports or unique visualizations of customer and third-party data arising out of the Taxpayer’s Consulting Services are only accessible online or through other digital means.

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Pricing
The Taxpayer offers different pricing models for its data analytics services. Some customers prefer to pay a single, all-inclusive charge based on the amount of data processed and analyzed, the length of time the Taxpayer will provide data analytics services to the customers, and the particular electronic reports and services requested. Other customers prefer to pay on an itemized basis for each of the particular data analytics services provided by the Taxpayer. In all cases, and no matter how the services are invoiced, the Taxpayer has represented that its customers specifically want to obtain the data analytics services that it provides. RULING Are the Taxpayer’s data analytics services subject to the Tennessee sales and use tax? Ruling: No, the Taxpayer’s data analytics services are not subject to Tennessee sales and use tax. ANALYSIS Under the Retailers’ Sales Tax Act (the “Act”), 1 retail sales of tangible personal property and specifically enumerated services are subject to sales tax. While all Tennessee sales of tangible personal property are subject to tax unless an exemption applies, only specifically enumerated services are subject to tax under the Act. Computer software is subject to tax on a stand-alone basis and under the definition of “tangible personal property,” which includes “prewritten software.” 2 In 2015, the Tennessee General Assembly amended TENN. CODE ANN. § 67-6-231 to include a new subdivision (b), which states in pertinent part that:
[f]or purposes of subdivision (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 electronic delivery of the software for use in the state. 3 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, 4 remains subject 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 & Supp. 2020)). 1

2

TENN. CODE ANN. §§ 67-6-231(2018) and 67-6-102(95) (Supp. 2020).

3

2015 Tenn. Pub. Acts Ch. 514, § 22 (codified at TENN. CODE ANN. § 67-6-231(b) (2018)).

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.

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to sales and use tax regardless of a customer’s chosen method of use. However, TENN. CODE ANN. § 676-231(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: Nothing in this subsection (b) shall be construed to impose a tax on any services that are not currently subject to tax under this chapter, such as, but not limited to, information or data processing services, including the capability of the customer to analyze such information or data provided by the dealer; payment or transaction processing services; payroll processing services; billing and collection services; internet access; the storage of data, digital codes, or computer software; or the service of converting, managing, and distributing digital products. The Taxpayer has explained the nature of its services outlined above as follows: None of the customers simply want access to [the Taxpayer’s] web-based data analytics dashboard or other similar platforms because that access would be useless and of no value to the customer unless the customer obtained [its] data analytics and related data storage and information and data processing services. In fact, the whole purpose of the web-based data analytics dashboard and other similar platforms is to permit the customer to obtain [the Taxpayer’s] services. 5 The Taxpayer asserts that the dashboards or platforms, which are potentially taxable as remotely accessed software, are of no value to the customer on a stand-alone basis. This suggests that although the Taxpayer has different pricing options, the dashboards and platforms described above are not a separate product apart from its data analytics services. 6 Furthermore, regardless of how the product is invoiced, the Taxpayer claims to be selling a nontaxable service, as opposed to taxable remotely accessed software. 7

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). 5

Letter to Commissioner Gerregano, [DATE], pg. [NUMBER].

However, if the Taxpayer offers a software product for sale that allows its customer to upload, store, and manage data without the services of [TAXPAYER], then such software product would be subject to tax under TENN. CODE ANN. § 67-6-205(c)(6).

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7

To the extent these facts are inaccurate the Ruling contained herein may not apply to some products.

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When a transaction involves taxable and nontaxable components and the transaction’s true object or a crucial,” 8 “essential,” 9 “necessary,” 10 “consequential,” 11 or “integral” 12 element of the transaction is subject to tax, the entire transaction is subject to sales tax. 13 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 sales tax. 14 Based on the facts presented, customers do business with the Taxpayer in order to benefit from its expertise in analyzing, managing and organizing data. The Taxpayer uses its software to collect raw data from its customers, geocodes that data, and aggregates it with data from third parties such as
[REDACTED] to create a comprehensive data set. Although the Taxpayer’s customers own their raw data, the Taxpayer’s services add context to that raw data, allowing customers to better organize, understand, and use their own data and, if desired, to make comparisons with competitors by accessing other data provided to the Taxpayer from third parties. The Taxpayer uses software to perform these services. In order to utilize the Taxpayer’s Digital Report Services and Consulting Services, the Taxpayer’s customers must send the Taxpayer their data for processing and analysis. Customers are able to view the digital reports online. Although software 15 is used to give customers access to these reports, which may be accessed from locations within Tennessee, this method of delivering the results of the Taxpayer’s services is merely incidental to the data analytics services. Accordingly, the data analytics service is the true object of the Taxpayer’s Digital Report Services and Consulting Services.

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).

8

9
Id.; see also AT&T Corp. v. Johnson, No. M2000-01407-COA-R3-CV, 2002 WL 31247083, at *9 (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). 10

See supra note 8.

11
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”). 12

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

See generally Tenn. Dept. of Rev. Ltr. Rul. 14-10 (Oct. 14, 2014) (discussing Tennessee law regarding bundling and the “true object” test), available at https://www.tn.gov/ content/ dam/tn/revenue/ documents/ rulings/sales/14-10.pdf (last visited December 3, 2020). 13

14

See generally id.

15

See TENN. CODE ANN. § 67-6-102(18).

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Similarly, the Taxpayer may provide customers with access to a web-based dashboard that allows customers to use data to generate specialized reports. Although the Dashboard Components constitute computer software for Tennessee sales and use tax purposes, 16 the storage of the customer’s data and capability of the Taxpayer’s customers to access and analyze its historical data via the dashboard from locations within Tennessee, are merely incidental to the Taxpayer’s data analytics services. Stated another way, the Dashboard Components are simply a means to view the end results of the data analytics services that customers purchase from the Taxpayer. It is the expressed intent of Tennessee law to tax software regardless of how it is delivered. However, Tennessee law also clearly states the legislature’s intent not to tax an otherwise nontaxable service merely because it is enhanced by the seller’s use of software to deliver the service. One of the nontaxable services listed in the statute as an example of this distinction is “information or data processing services, including the capability of the customer to analyze such information or data provided by the dealer.” 17 Conclusion The Taxpayer’s data analytics services, which consist of Digital Report Services, Dashboard Components, and Consulting Services, are not specifically enumerated in TENN. CODE ANN. § 67-6-205 and are not subject to tax under TENN. CODE ANN. § 67-6-231. This conclusion is premised on the facts as described indicating that crucial to the Taxpayer’s data analytics services are the expertise of and actions taken by the Taxpayer’s employees on behalf of its customers. To the extent the Taxpayer licenses software to customers who use the software’s functionality with no additional services provided by the Taxpayer, the sale is a taxable sale of remotely accessed software. 18

16

Id.

17

TENN. CODE ANN. § 67-6-231(b).

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

1/8/2021

TENN. CODE ANN. § 67-6-231(a). The Taxpayer’s website includes an offering of [REDACTED]. These software products are not the subject of this ruling.

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