Are the consulting, setup, and website fees a company charges to run an employee-rewards program taxable in Tennessee — and what about the transaction fees, merchandise, and gift cards?

Plain-English summary

A company runs employee-recognition rewards programs for its corporate customers. It consults with each customer's HR team to design a program, builds and maintains a custom website the customer's employees use to nominate and reward each other, and lets employees redeem points ("Certificates") for merchandise or gift cards. It charges three kinds of fees: one-time consulting/startup/website-design fees, per-Certificate transaction fees, and (separately) for the merchandise and gift cards employees redeem.

The Tennessee Department of Revenue ruled:

• Consulting, startup, and website fees: not taxable. Even though building a website can involve taxable computer software, the true object of the deal is the company administering the rewards program for the customer — and program administration is not an enumerated taxable service. The website is merely incidental: the customer can't change anything on it and has no use for it apart from the program the company runs.
• Per-Certificate transaction fees: not taxable. Charging a fee when a reward Certificate is issued is an administrative service, not a sale of goods or an enumerated taxable service.
• Merchandise: taxable. Gift cards: not taxable. Physical merchandise is tangible personal property and is taxed. Gift cards are not tangible personal property — their true object is the intangible value they carry, not the plastic card — so selling them is not subject to sales tax.

What this means for you

Companies that run rewards, incentive, or loyalty programs

If your real product is running a program for the customer — and any software or website is just the means of delivering that service, with the customer unable to operate it independently — Tennessee is likely to treat your service fees as non-taxable under the true-object test. The more control you keep over the platform (customers submit change requests rather than self-serve), the stronger the "incidental software" argument.

Businesses selling merchandise and gift cards

Merchandise you sell (here, drop-shipped to employees) is taxable tangible personal property. Gift cards are not taxable on sale because they represent stored value, not goods; tax is collected later when the cardholder buys taxable property with the card.

SaaS and platform vendors — a caution

This ruling cuts in the taxpayer's favor because the customer never controls the website. Remotely accessed software is generally taxable in Tennessee, so a product the customer logs into and operates itself (configuring rewards, running the program) could be taxed as software. The line is whether the software is the product or merely the delivery mechanism for a non-taxable service.

Accountants and tax professionals

The decision applies the true-object test (Qualcomm, AOL, prior Ruling 14-10) against the broad software rules in § 67-6-102(18) and § 67-6-231(b). The gift-card holding follows Barnes & Noble Superstores and prior Ruling 18-08 (gift card = intangible value, not TPP).

Common questions

Q: Are consulting and website-setup fees taxable in Tennessee?
A: Not when the true object of the engagement is a non-taxable service (here, administering an employee-rewards program) and the website is merely incidental — the customer can't operate it independently and has no use for it apart from the service. Pure sales of computer software or remotely accessed software are a different story and are generally taxable.

Q: Are gift cards subject to sales tax?
A: No. A gift card is not tangible personal property; its value is the intangible amount it carries. Tennessee does not tax the sale of the card itself. Sales tax applies later, if and when the card is used to buy taxable goods.

Q: Is the merchandise employees redeem taxable?
A: Yes. Physical merchandise is tangible personal property and is subject to sales and use tax on its retail sales price, even when it is drop-shipped to the employee.

Q: Can I rely on this ruling for my own rewards platform?
A: Not directly. A Tennessee letter ruling binds the Department only as to the taxpayer and the exact facts it addressed and cannot be relied on by anyone else. If your customers control or operate the software themselves, the analysis could come out differently. Tennessee sales tax is state-administered, so there is no separate self-collected city tax.

Citations and references

Statutes:
- Tenn. Code Ann. § 67-6-102(18) (definition of "computer software")
- Tenn. Code Ann. § 67-6-231(b) (remotely accessed software is taxable, but not when used merely to access an otherwise non-taxable service)
- Tenn. Code Ann. § 67-6-205 (enumerated taxable services)

Cases and rulings:
- Qualcomm, Inc. v. Chumley, No. M2006-01398-COA-R3-CV, 2007 WL 2827513 (Tenn. Ct. App. Sept. 26, 2007) (true-object / primary-purpose test)
- AOL, Inc. v. Roberts, No. M2012-01937-COA-R3-CV, 2013 WL 4067977 (Tenn. Ct. App. Aug. 12, 2013) (totality-of-the-circumstances)
- Ryder Truck Rental, Inc. v. Huddleston, No. 91-3382-III, 1994 WL 420911 (Tenn. Ct. App. Aug. 12, 1994) (only enumerated services are taxed)
- Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976) (incidental taxable component)
- Barnes & Noble Superstores, Inc. v. Huddleston, No. 01A01-9604-CH-00149, 1996 WL 596955 (Tenn. Ct. App. Oct. 18, 1996) (discount membership = intangible right, not taxable)
- Tenn. Dep't of Revenue Letter Ruling 14-10 (true-object test) and Letter Ruling 18-08 (gift cards = intangible value, not TPP)

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/24-10.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.

Applicability of the Tennessee sales and use tax to consulting, startup, and website design fees, as
well as merchandise and gift cards sold under an employee recognition program.

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.

[REDACTED] (the “Taxpayer”) is a privately held multinational company [REDACTED]. The Taxpayer
offers its customers with various services to assist them in providing employee recognition incentives
that allow a customer’s employees to recognize and reward each other for performing well, reaching

employment milestones, and/or exhibiting behaviors that demonstrate company values. The
Taxpayer’s wholly owned subsidiary is named [REDACTED] (“Sub”).
In providing its services, the Taxpayer, through Sub, works with its customers to develop successful
incentives. Sub works closely with customers, consulting with their human resources departments to
develop employee recognition incentives that meet the specific needs of each customer. These
services include identification of the types of behavior the customers seek to reward and discussions
surrounding the specific types of rewards the customer would like to provide to its employees.
Employee recognition incentives come in several varieties, such as acknowledging employment
milestones and allowing other employees to nominate fellow workers for rewards (subject to
approval). The Taxpayer’s employees also negotiate directly with various vendors to supply an array
of potential rewards that can be offered to the customer’s employees. If a customer would like a
specific type of reward that is not currently available, the Taxpayer’s employees will work to identify
vendors that can provide the specific type of rewards sought by the customer.
For customers who use [PLATFORM], the Taxpayer provides a free application programming interface
(“API”) to connect [PLATFORM] with the website. The Taxpayer does not charge for this API and it does
not provide [PLATFORM] licenses to customers.
For a one-time fee, Sub creates a website that facilitates the administration of employee incentives.
Sub also configures and maintains the website. Each website is custom designed and configured for
each individual customer. The website is hosted by and links to the Taxpayer’s online marketplace
platform. Customers and their employees go to the website to participate in employee incentives. In
addition, the customer may have its employees access the website through an application available
for mobile devices. There is no additional charge for this mobile application.
Customers can never change any of the parameters of the rewards solutions on the website
themselves. All changes must be made by Sub. Changes to the incentives, such as modifying reward
values or content or the addition or subtraction of employees, are submitted to Sub and then Sub’s
employees will make the changes to the website. The Taxpayer’s customers never have control over
the website. More specifically, the customer cannot directly implement, change, or manipulate any
functionality of the website. All changes must be made by the Taxpayer or Sub. The customers’ human
resources personnel can go to the website to retrieve custom reports on how the employee incentives
are working, but that is the extent of the customers’ interaction with the website.
When given an award, employees receive reward points called [REDACTED] (“Certificates”). Certificates
may be redeemed for gift cards or merchandise from the Taxpayer’s marketplace website. Questions
regarding the spending of a Certificate or the shipment of merchandise or gift cards are made to the
Taxpayer’s call center. Employees can track their orders on the website. Per the Taxpayer’s contracts,
the Taxpayer is required to provide a wide selection of merchandise and gift cards upon which its
customers’ employees can spend Certificates. The manner in which the Taxpayer meets this obligation
is the sole responsibility of the Taxpayer. Customers may request certain vendors or merchandise,
but the Taxpayer has the ultimate decision on what is offered via its marketplace.
To acquire items for the marketplace, the Taxpayer negotiates with various US distributors. It
negotiates directly with retailers for gift cards and merchandise. Merchandise items are purchased at
wholesale prices with Sub as the U.S. purchasing agent of the Taxpayer. Sub provides a resale
certificate to its merchandise suppliers. The Taxpayer has suppliers drop ship merchandise to its
customers’ employees upon redemption of employees’ Certificates. The redemption price of the

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merchandise (inclusive of shipping, handling, and sales tax) is set by the Taxpayer and is displayed on
its marketplace website. Gift cards are usually purchased at a discounted rate from the gift card
redemption value and are sold on the Taxpayer’s marketplace website for the gift card’s face value
plus shipping and handling. Vendor gift cards are purchased and held in inventory. Upon redemption
of employees’ Certificates, Sub ships the retailer gift card directly to the employee.
In the US, the value of a Certificate is stated in either US dollars or in points that are tied to US dollars
(e.g., one point equals $0.05). Multiple Certificates can be combined to purchase a single item (e.g., an
employee can receive four Certificates each worth $25 and use all the Certificates to purchase
merchandise/gift card with a redemption price of $100). Currently, sales tax is collected and remitted
on the retail sales value of the taxable merchandise sold to Tennessee customers paid with the
employees’ Certificates. The retail sales price of merchandise and associated shipping and handling is
determined by backing out state sales tax from the total value of Certificates used to purchase the
item. This retail sales price is the gross sales amount contained in the sales tax submission to the
state.
There is no separate invoice sent to customers when an employee redeems a Certificate. The Taxpayer
invoices its customers when Certificates are awarded, not when the Certificates are redeemed. The
Taxpayer invoices its customers for the value of the Certificate in US dollars plus a transaction fee
based on the certificates’ values. All sales associated with redemption of Certificates and the required
amount of sales tax to remit are contained in the Taxpayer’s database. There is no sales tax collected
or remitted associated with the awarding of Certificates to customers or use of a Certificate to
purchase gift cards.
The Taxpayer recognizes three types of revenue streams associated with managing employee
recognition incentives: 1) services associated with the creation of customer specific employee
recognition solutions, which include consulting, startup, and website design fees; 2) transaction fees
for each Certificate issued; and 3) a one-time fee for training customers’ employees on how to use the
website most effectively.
The services associated with the creation of customer specific employee recognition solutions are for:
1) discussions regarding specific needs for employee recognition incentives; 2) creation of the
customer’s recognition and rewards website; and 3) training for customer’s employees on how to use
the website most effectively. This is a one-time charge.
The transaction fees are calculated as a percentage of the US dollar value of the Certificates and are
incurred upon each issuance of a Certificate. If no Certificates are issued in a particular period, the
Taxpayer does not charge any transaction fees during that period.
Revenue on the sale of gift cards and merchandise is recognized when employees redeem their
Certificates on the Taxpayer’s marketplace website. Sales tax is currently collected and remitted on
the retail sales price when merchandise is sold to Tennessee’s residents through the redemption of
Certificates.

1.

Are the services associated with the creation of customer specific employee recognition
solutions which include consulting, startup, and website design fees subject to Tennessee
sales and use tax?

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Ruling: No. The true object of the transaction is the Taxpayer’s administration of the employee
recognition program, which is not an enumerated taxable service.
2.

Are the transaction fees charged by the Taxpayer to its customers when Certificates are
rewarded subject to Tennessee sales and use tax?
Ruling: No. The transaction fees are not subject to sales and use tax because they are incurred
for the issuing of rewards, which are not tangible personal property or an enumerated taxable
service.

3.

Are merchandise and gift cards sold by the Taxpayer under the employee recognition program
subject to sales and use tax?
Ruling: Merchandise is tangible personal property subject to sales and use tax, while gift cards
are not tangible personal property subject to sales and use tax.

In Tennessee retail sales of tangible personal property and computer software are subject to sales
and use tax.1 Computer software, which is defined as a set of coded instructions designed to cause a
computer to perform a task,2 is subject to Tennessee sales and use tax even when the software is
accessed remotely.3 However, the use of remotely accessed software merely to access an otherwise
non-taxable service is not subject to sales tax.4 The taxability of remotely accessed software is not
intended to impose a tax on any services not currently subject to sales and use tax. 5
Some transactions that involve taxable and non-taxable components do not readily lend themselves
to classification for sales tax purposes. In such transactions, the true object of the transaction must
be ascertained to determine if the transaction is subject to sales and use tax. 6 The totality of the facts
and circumstances are looked at to determine what objective is really being accomplished by the
transaction.7 When a transaction involves taxable and nontaxable components and the transaction’s
true object or a crucial, essential, necessary, consequential, or integral element of the transaction is
subject to sales tax, the entire transaction is subject to the tax 8 If the true object of the transaction is
not independently subject to sales tax and the components that would be subject to sales tax are
“merely incidental” to the true object, then the transaction is not subject to sales tax. 9
Tennessee Retailer’s Sales Tax Act, Ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts Ch. 22 §§ 22-54 (codified as amended at T ENN. CODE
ANN. §§ 67-6-101 to -907 (2022 & Supp. 2023).
1

2

TENN. CODE ANN. § 67-6-102(18) (2022).

3

TENN. CODE ANN. § 67-6-231(b) (2022).

TENN. CODE ANN. § 67-6-231(b); Ryder Truck Rental, Inc. v. Huddleston, No. 91-3382-III, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug.
12, 1994) (stating that the sales tax does not apply to all services; it applies only to those services specifically enumerated by
the statute). Taxable services are enumerated at TENN. CODE ANN. § 67-6-205 (2022).
4

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TENN. CODE ANN. § 67-6-231(b).

See generally Qualcomm, Inc. v. Chumley, No. M2006-01398-COA-R3-CV, 2007 WL 2827513, at *4-5 (Tenn. Ct. App. Sept. 26, 2007)
(giving a synopsis of the “true object” or “primary purpose” test in Tennessee).
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See, e.g., AOL, Inc. v. Roberts, No M2012-01937-COA-R3-CV, 2013 WL 4067977, at *6 (Tenn. Ct. App. Aug. 12, 2013) (basing the
holding on the “totality of the circumstances”).
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8

See Tenn. Dept. Rev. Ltr. Rul. No. 14-10 (Oct. 13, 2014) for a full discussion of the true object test.

9

Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976).

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1. The fees for consulting, startup, and website design and configuration are not subject to Tennessee
sales and use tax.
The Taxpayer’s consulting and startup services are related to the consultation between the Taxpayer
and its customers, typically the customers’ human resources department, to design an employee
recognition program that meets the specific needs of the customer. These services are not among
those enumerated as taxable in Tennessee. As such, the consulting and startup services are not, on
their own, subject to sales and use tax. However, given Tennessee’s broad definition of computer
software, there are some aspects of the website design and configuration that implicate the sale of
computer software. Because the transaction is not readily classified for sales and use tax purposes,
we apply the true object test.
Here, the website is merely incidental to the provision of the Taxpayer’s administration of the
employee recognition program because the customer has no use for the website other than to take
part in the employee recognition program. Without the Taxpayer creating and issuing Certificates,
providing for the redemption of Certificates for merchandise and gift cards, drop shipping
merchandise and mailing gift cards, the website has no value to the customer. The website is not a
tool that the customer can use to administer its own employee recognition program.
The customer and its employees use the website for limited purposes. A customer’s employees can
use the website to nominate fellow workers for rewards, track orders, and link to the Taxpayer’s online
marketplace platform. The customer never has control of the website and cannot directly implement,
change, or manipulate any functionality of the website. Instead, the Taxpayer’s employees are the
ones who configure the parameters of the employee recognition program into the website and modify
the website when needed.
Under the totality of the circumstances, the true object of the transaction is the Taxpayer’s
administration of the employee recognition program, which is not an enumerated taxable service, not
the procurement of software functionality inherent in a website. Accordingly, the fee related to
consulting, startup, and website design and configuration is not subject to sales and use tax.
2. The transaction fees are not subject to sales and use tax.
The transaction fees are incurred upon the issuance of the Certificates. The act of issuing a Certificate
is not a sale of tangible personal property but is rather more akin to an administrative service, which
is not an enumerated taxable service. When employees win an award, the Taxpayer issues Certificates
to them. After the employees redeem the Certificates on the Taxpayer’s website, the Taxpayer then
dropships the merchandise to the employees, and if the employees have any questions, they may call
the Taxpayer’s call center for assistance. Charging a fee for such services is not subject to sales and
use tax.
3. The merchandise is subject to sales and use tax while the gift cards are not taxable.
The merchandise provided by the Taxpayer is tangible personal property subject to sales and use tax.
Gift cards that have a nominal value attached are not tangible personal property. In Barnes and Noble
Superstores Inc. v. Huddleston, the Tennessee Court of Appeals held that sales of discount
memberships are not subject to sales tax because the “true object” of the transaction is to “bestow

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upon club members the intangible right to receive a discount on merchandise.” 10 In Tenn. Dept. Rev.
Ltr. Rul. 18-08 (Oct. 10, 2018), the Department stated that the true object of the sale of gift cards to
consumers is not the physical card itself, but rather the intangible value the gift card contains. The gift
cards provided by the Taxpayer are transferring an intangible value and are not subject to sales and
use tax.

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APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

November 26, 2024

No. 01A01-9604-CH-00149, 1996 WL 596955 at *2 (Tenn. Ct. App. Oct. 18, 1996).

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