Does a delivery-app marketplace owe Tennessee sales tax on the fees it charges sellers and delivery drivers (as opposed to the sales it facilitates to shoppers)?

Plain-English summary

A delivery-app company runs a marketplace: it connects sellers of goods with shoppers, and connects shoppers with delivery drivers ("service providers"). Shoppers browse and order through the company's free website or app. The company had elected to be a marketplace facilitator, so it collects and remits Tennessee sales tax on the taxable goods sold through it. This ruling addressed a different question: are the fees the company charges to its sellers and delivery drivers (its "Seller Fee" and "Service Fee") themselves subject to sales tax?

The Department ruled no — neither fee is taxable. The fees pay for lead generation (connecting sellers and drivers with shoppers) and payment processing, and neither of those is a taxable service in Tennessee. The platform also gives sellers and drivers access to its web interface/app, which counts as taxable remotely accessed software. But under the true-object test, the real purpose of the fees is the non-taxable connection-and-payment service; the software is merely the incidental tool for delivering it (its limited features would be worthless without the actual connections to paying shoppers). So the fees aren't taxed.

The ruling was careful to note its limits: it only covers the fees charged to sellers and drivers — not the platform's duty, as a marketplace facilitator, to collect tax on the goods it sells to shoppers.

What this means for you

Marketplace and delivery platforms

The commissions and fees you charge sellers and gig drivers for connecting them and processing their payments are generally not taxable in Tennessee — even though buyers reach everything through your app. Lead generation and payment processing are non-taxable services, and your software is treated as the incidental delivery mechanism. This is separate from your marketplace-facilitator duty to collect tax on the underlying goods.

The true-object line for software-delivered services

As in Tennessee's other platform rulings, the result turns on the customer (here, the seller or driver) not really buying software — they're buying access to shoppers and to payment handling, with the app as the means. A product customers pay to license and operate themselves could be taxed as software instead.

Accountants and tax professionals

The fees ride on non-taxable lead generation and payment processing (payment processing expressly non-taxable under § 67-6-231(b)); the interface is remotely accessed software (§ 67-6-102(18), § 67-6-231(b)) but incidental under the true-object test (prior Ruling 14-10; Commerce Union Bank v. Tidwell). The delivery-network-company and marketplace-facilitator-election provisions are § 67-6-102(26) and § 67-6-102(56)(B)(iv). The ruling does not address tax on the goods sold to purchasers.

Common questions

Q: Does a delivery or marketplace app owe sales tax on its seller commissions and driver fees?
A: Generally no. Those fees are for non-taxable lead generation and payment processing. The app itself is taxable software, but under the true-object test it's merely incidental to the non-taxable services, so the fees aren't taxed.

Q: Isn't the app taxable software?
A: It's taxable in the abstract as remotely accessed software, but here it's just the tool sellers and drivers use to connect with shoppers and get paid. Because those non-taxable services are the true object and the software is incidental, the fees aren't taxed.

Q: Does this mean the platform owes no Tennessee sales tax at all?
A: No. This ruling only addresses the fees charged to sellers and drivers. As a marketplace facilitator, the platform still collects and remits Tennessee sales tax on the taxable goods sold to shoppers.

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. If your customers license and operate your software themselves, the result could differ. Tennessee sales tax is state-administered, so there's no separate self-collected city tax.

Citations and references

Statutes:
- Tenn. Code Ann. § 67-6-231(b) (remotely accessed software is taxable; payment-processing and otherwise-non-taxable services are not)
- Tenn. Code Ann. § 67-6-102(18) (definition of "computer software")
- Tenn. Code Ann. § 67-6-102(26) (definition of "delivery network company") and § 67-6-102(56)(B)(iv) (election to be a marketplace facilitator)

Cases and rulings:
- Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976) (taxable medium merely incidental to a non-taxable object)
- Tenn. Dep't of Revenue Letter Ruling 14-10 (bundling and the true-object test)

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/22-02.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 22-02
Letter rulings are binding on the Department only with respect to the individual taxpayer being
addressed in the ruling. This ruling is based on the particular facts and circumstances
presented and is an interpretation of the law at a specific point in time. The law may have
changed since this ruling was issued, possibly rendering it obsolete. The presentation of this
ruling in a redacted form is provided solely for informational purposes and is not intended as
a statement of Departmental policy. Taxpayers should consult with a tax professional before
relying on any aspect of this ruling.
SUBJECT
The application of the Tennessee sales and use tax to certain charges to third parties made by a
delivery network company electing to be a marketplace facilitator.
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

A company (the “Taxpayer”) connects third-party sellers (“Sellers”) of tangible personal property to
persons seeking to purchase tangible items (“Purchasers”). It also connects Purchasers to third-party
service providers (”Service Providers”) to deliver the items sold by Sellers. The Taxpayer connects
Sellers, Service Providers, and Purchasers via its website (“web-based interface”) or downloadable
mobile application (“App”). Purchasers use the web-based interface or App to view available items for

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sale by Sellers and to place an order. The web-based interface is accessed free of charge, and the App
is downloaded and accessed free of charge.
The Taxpayer states it is a “delivery network company” as defined in TENN. CODE ANN. § 67-6-102(26)
(Supp. 2020), excluded from registering with the Tennessee Department of Revenue (the
“Department) as a marketplace facilitator unless it chooses to elect to be a marketplace facilitator
pursuant to TENN. CODE ANN. § 67-6-102(56)(B)(iv) (Supp. 2020). 1
The items sold by Sellers are taxable as tangible personal property in Tennessee. The Taxpayer elected
to be a marketplace facilitator and is responsible for remitting Tennessee sales tax to the State on its
taxable sales. The delivery of the tangible personal property is separately provided by Service
Providers to Purchasers.
The Taxpayer charges a fee to the Sellers (the “Seller Fee”) for connecting the Sellers to Purchasers
and for processing the payment for the purchase of the items. The Taxpayer characterizes the Seller
Fee as a fee for the Taxpayer’s lead generation and payment processing services. The Taxpayer is
only paid the Seller Fee when the Sellers connect with Purchasers who purchase the Sellers’ tangible
personal property. The Seller Fee is computed based on a percentage of the payments made by
Purchasers to Sellers.
Sellers also have access to the Taxpayer’s web-based interface or App. The Taxpayer does not provide
the web-based interface as a separate product, and it does not charge a separate fee to access the
web-based interface. Using the web-based interface, Sellers list their items for sale, add new items,
adjust the price and availability of items, add pictures or descriptions of items, and adjust the hours
of the Sellers. Sellers also use the web-based interface to view orders from Purchasers, accept and
confirm orders from Purchasers, be notified of orders, and view other transaction activity. The webbased interface also provides Sellers the ability to print a receipt showing charges for items ordered
by Purchasers, pause, delay, or cancel orders, notify Purchasers and Service Providers when an item
is ready to be delivered or picked-up and delivered, track the progress of orders, and view order
history. The web-based interface also provides some data analytics features that cannot be
customized or manipulated by the Seller. The Sellers may not change or manipulate the web-based
interface.
The Taxpayer also charges a fee to the Service Providers (the “Service Fee”). The Taxpayer
characterizes the Service Fee as a charge to the Service Providers for connecting them with Purchasers
and processing the payment for the delivery service. The Taxpayer is only paid a Service Fee if the
connection successfully occurs, and a Service Provider delivers the tangible item to the Purchaser. The
Service Fee is a variable fee charged by the Taxpayer to the Service Providers for connecting the
Service Providers to Purchasers and processing the payment.
Service Providers have access to the web-based interface. Using the web-based interface they can
accept requests for delivery service, receive the address of Sellers for pick-up, receive the address of

The facts herein assume that the Taxpayer is properly defined as a delivery network company, and the ruling contains no
analysis regarding whether the Taxpayer comes within the scope of this definition, or whether fees charged to Purchasers for
goods and services are subject to sales tax. The ruling solely addresses whether the fees charged to the Sellers and Service
Providers are independently subject to sales tax.

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Purchasers for delivery, receive notification that an order is ready for pick-up from Sellers, gain access
to GPS tracking which provides directions to the Sellers and Purchasers (the Service Providers are not
required to use this and can use other mapping functionality if preferred), confirm delivery to
Purchasers, report any issues, access trip and earnings information, and access Form 1099s, if
applicable.
The Taxpayer also acts as a limited collection agent for processing payments from the Purchasers.
The Taxpayer charges sales tax on the full amount charged to Purchasers. The Taxpayer then pays
the Sellers and Service Providers from the processed transaction. The Taxpayer retains its Seller Fee
and Service Fee out of the amount that it pays to the Sellers and Service Providers. Retaining the Seller
Fee and Service Fee eliminates a separate step where the Taxpayer would otherwise require the
Sellers and Service Providers to pay the fees directly to the Taxpayer. The Taxpayer sends a statement
to the Sellers and Service Providers showing the fees that they were charged by the Taxpayer.

RULINGS
1.

Is the Seller Fee subject to the Tennessee sales and use tax?
Ruling: No, the Seller Fee is not subject to the Tennessee sales and use tax.

2.

Is the Service Fee subject to the Tennessee sales and use tax?
Ruling: No, the Service Fee is not subject to the Tennessee sales and use tax.
ANALYSIS

Neither the Seller Fee nor the Service Fee are subject to the Tennessee sales and use tax because the
Taxpayer’s non-taxable lead generation and payment processing services are the true object of the
transactions covered by these fees, and the taxable web-based interface and App are merely
incidental. When a transaction involves taxable and non-taxable components, Tennessee uses the
true object test to determine if the transaction is taxable. 2 If the transaction’s true object is subject to
sales tax, the entire transaction is subject to sales tax. 3 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. 4 To
begin this analysis, we first determine which components of the transaction are subject to sales and
use tax.
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 March 1,
2022).
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Id.

See Commerce Union Bank v. Tidwell, 538 S.W. 2d 405 (Tenn. 1976) (finding that transfer of non-taxable information on magnetic
tapes was not taxable because the tapes were merely incidental to the purchase of the intangible information; superseded by
statute to the extent that previous non-taxable information is considered taxable tangible personal property).
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The Seller Fee and Service Fee
The Tennessee sales and use tax applies to services that are specifically enumerated in the Retailers’
Sales Tax Act. 5 The Taxpayer contends that the Seller Fee and the Service Fee are for non-taxable
services, claiming that the Seller Fee and the Service Fee are fees for the Taxpayer’s lead generation
and payment processing services. (These fees are separate transactions from the transactions with
Purchasers, which are not addressed in this ruling.)
Sellers use the software to connect with Purchasers who wish to buy their items, and Service Providers
use the software to connect with Purchasers who need their items delivered. The Taxpayer
characterizes making these connections as lead generation. Connecting these entities is not an
enumerated taxable service. The Taxpayer also performs a limited payment processing role between
the Sellers, Service Providers, and Purchasers. Payment processing is also not a taxable service. 6
The Web-Based Interface or App
Computer software is a set of coded instructions designed to cause a computer to perform a task, 7
and it is subject to Tennessee sales tax even when the software is accessed remotely. 8 Sellers use the
limited functionality of the Taxpayer’s web-based interface or App to list items and make sales; Service
Providers may use the Taxpayer’s web-based interface to track deliveries with GPS, confirm deliveries,
accept delivery requests, and report issues. To the extent that the software is in the possession of the
Taxpayer and is accessed by users in Tennessee, the use of the web-based interface or App is properly
characterized as remotely accessed software.
The True Object of the Transaction
Now, the analysis turns on whether the non-taxable lead generation and payment processing services
are the true object of the transaction, and if so, whether the use of the software is merely incidental
to those services. When Sellers use the software, their objective is to connect with Purchasers who
wish to buy their items. When Service Providers use the software, their objective is to connect with
Sellers who need their items delivered. Sellers and Service Providers also have the objective of getting
paid. The Taxpayer’s objective is to facilitate these connections and process payments. Considering
the objectives of all the parties, the true object of the transaction comprises non-taxable lead
generation and payment processing services.
The software that grants the Sellers and Service Providers access to the platform merely facilitates
lead generation and payment processing. Without connecting to Purchasers who pay for items and
have them delivered, the software would be of little to no use to the Sellers and Service Providers. The
limited functionality of the software supports the notion that the software is a merely incidental mode
TENN. CODE ANN. § 67-6-231(b) (“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….”); see generally Tennessee Retailers’ Sales Tax Act (codified at TENN. CODE ANN. §§ 676-101 to -907 (2018 & Supp. 2020)).

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6

TENN. CODE ANN. §67-6-231(b).

7

TENN. CODE ANN. § 67-6-102(18) (Supp. 2021).

8

TENN. CODE ANN. § 67-6-231(b) (2018).

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or mechanism for delivering lead generation and payment processing services. Accordingly, the Seller
Fee and the Service Fee are not subject to the Tennessee sales and use tax.

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

4/11/2022

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