Is a computer software maintenance contract sold to a Tennessee customer taxable, and does it matter where the vendor and customer are located or where repairs are performed?

Plain-English summary

An out-of-state Vendor sells computer software maintenance contracts — standalone contracts for future software updates, upgrades, and support, not bundled with a software sale — to Customers in Tennessee. The Customer signs the contract in Tennessee; the Vendor signs it outside Tennessee. The Vendor asked the Department a series of questions about how Tennessee sales and use tax applies. The bottom line: it's the location of the computers running the software, not where the contract was signed or where repairs happen, that controls.

1. Where the contract is signed doesn't matter. Tennessee taxes the contract based on where the covered computers are located (§ 67-6-231(b)(1)). If the maintenance contract applies to software installed on a computer in Tennessee, the contract is taxable — full stop, regardless of where the paperwork was executed.

2-3. Where repairs happen doesn't matter either. A maintenance contract covering Tennessee-located software is taxable whether the Vendor performs the covered repairs in Tennessee or out of state. And the sale of the contract is taxable even if no repairs are ever actually performed under it — the taxable event is the sale of the contract itself (Covington Pike Toyota v. Cardwell). Once the contract is taxed, no additional tax is due on the repairs, updates, or upgrades it covers (§ 67-6-231(b)(2)) — unless the Vendor makes a separate charge for them.

4. If the Vendor doesn't collect tax, the Customer owes it. The Vendor (a "dealer" under Tennessee law) is legally required to collect Tennessee sales or use tax on contracts covering Tennessee-located software. If it fails to, the Customer becomes liable for Tennessee use tax on the contract.

5. Parts and labor NOT covered by a maintenance contract. If repair or replacement parts aren't covered by any maintenance contract, and they're sold and the repair performed outside Tennessee, the Vendor doesn't owe Tennessee sales tax on the sale (it didn't happen in Tennessee) — but it DOES owe Tennessee use tax once those parts are shipped to the Customer in Tennessee, because Tennessee taxes the use of tangible property here regardless of where it was purchased. If the Vendor doesn't collect that use tax, the Customer owes it directly. Repair labor performed entirely outside Tennessee, by contrast, isn't taxed at all — Tennessee's use tax reaches property, not services performed elsewhere.

6. No double tax. If repairs or parts ARE covered by a maintenance contract that's already been taxed, and the Vendor makes no separate charge for them, the Customer owes nothing further — the tax on the contract itself covers it.

What this means for you

Out-of-state software vendors selling maintenance/support contracts to Tennessee customers

Source your tax obligation to where the customer's covered computers sit, not to where you sign contracts or where your support staff is based. If any computer covered by a maintenance contract is in Tennessee, register, collect, and remit Tennessee sales/use tax on that contract — and don't assume performing the repair work out of state changes that.

Tennessee customers buying maintenance contracts from out-of-state vendors

If your vendor doesn't charge Tennessee tax on a contract covering your Tennessee-based systems, you're still on the hook for use tax yourself. The same goes for uncovered repair parts shipped to you from out of state.

Accountants and tax professionals

This ruling is a clean illustration of Tennessee's destination/use-based sourcing for computer software maintenance contracts (§ 67-6-231(b)(1)) layered with the dealer-liability doctrine (Beare Co. v. Olsen; Sam Carey Lumber; Smoky Mountain Canteen) and the separate use-tax exposure on out-of-state-sold tangible property shipped into the state (§§ 67-6-203(a), -210). Note that a "computer software maintenance contract" under § 67-6-102(21) excludes optional, separately invoiced support services that involve no software transfer/repair/maintenance — relevant if a vendor's offering is more limited than the one in this ruling.

Common questions

Q: Is a software maintenance contract taxable based on where it was signed?
A: No. Taxability depends on where the covered computers are located — if they're in Tennessee, the contract is taxable.

Q: Does it matter where the vendor actually performs the repairs?
A: No. The contract is taxable based on computer location regardless of whether repairs happen inside or outside Tennessee.

Q: Is the contract taxable even if no repairs are ever performed?
A: Yes — the taxable event is the sale of the contract itself, not the repairs (Covington Pike Toyota v. Cardwell).

Q: What if the vendor doesn't collect Tennessee tax on the contract?
A: The Tennessee customer becomes liable for use tax on the contract.

Q: Are repair parts and labor not covered by any maintenance contract taxable?
A: Parts shipped into Tennessee owe Tennessee use tax even if sold out of state; labor performed entirely outside Tennessee is not taxed.

Q: Can I rely on this ruling?
A: No. It's a Revenue Ruling, which is advisory only and not binding on the Department for any taxpayer, including the one who requested it.

Citations and references

Tennessee statutes (Tenn. Code Ann.; 2011 codification):

• §§ 67-6-101 to -907 (Retailers' Sales Tax Act); § 67-6-202(a) (only retail sales made in Tennessee are subject to Tennessee sales tax)
• § 67-6-231(b)(1) (retail sale, use, or subscription to a computer software maintenance contract taxable; sourced to the location of the computer on which the covered software is installed); § 67-6-231(b)(2) (no additional tax on repairs/modifications/updates/upgrades under an already-taxed contract, absent a separate charge)
• § 67-6-102(21) (definition of "computer software maintenance contract"; excludes optional, separately invoiced support services involving no software transfer/repair/maintenance)
• § 67-6-102(78) (definition of "retail sale"); § 67-6-102(80)(A), (D) (definition of "sale," including furnishing of taxable things/services); § 67-6-102(91)(A) (definition of "tangible personal property")
• § 67-6-205(c)(4) (repair services to TPP/software taxable)
• §§ 67-6-203(a), -210 (use tax on the use of tangible personal property, computer software, and certain other items in Tennessee)
• § 67-6-501(a) (dealer liable for collection/payment of sales tax); § 67-6-102(25)(H) (definition of "dealer"); §§ 67-6-504(b), -517, -522 (interest and penalties for failure to collect/remit)

Cases cited by the ruling:

• Covington Pike Toyota v. Cardwell, 829 S.W.2d 132 (Tenn. 1992) (sale of a maintenance contract taxable even if no repairs are performed under it)
• Beare Co. v. Olsen, 711 S.W.2d 603 (Tenn. 1986); Sam Carey Lumber Co. v. Sixty-One Cabinet Shop, Inc., 773 S.W.2d 252 (Tenn. Ct. App. 1989); Smoky Mt. Canteen Co. v. Kitzer, 247 S.W.2d 69 (Tenn. 1952) (dealer ultimately liable for uncollected tax, regardless of failure or inability to collect from the customer)

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/12-20.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 12-20
WARNING
Revenue rulings are not binding on the Department. This presentation of the ruling in a
redacted form is informational only. Rulings are made in response to particular facts
presented and are not intended necessarily as statements of Departmental policy.
SUBJECT
The applicability of the Tennessee sales and use tax to the sale of computer software
maintenance contracts and to repair or replacement parts and/or repair labor under such
contracts.
SCOPE
Revenue Rulings are statements regarding the substantive application of law and statements of
procedure that affect the rights and duties of taxpayers and other members of the public. Revenue
Rulings are advisory in nature and are not binding on the Department.
FACTS
The Vendor is located outside of Tennessee but sells computer software maintenance contracts to
Customers located in Tennessee. The computer software maintenance contracts are not sold as
part of a sale of computer software. Rather, these are sales consisting solely of computer
software maintenance contracts. The Customer signs the contract in Tennessee; the Vendor
signs the contract outside of Tennessee. The Vendor is registered for sales and use tax in
Tennessee.
RULINGS
1.

Does the location where the Vendor’s computer software maintenance contract is made
determine whether the contract is subject to the Tennessee sales tax?
Ruling: No. Whether a computer software maintenance contract is subject to the
Tennessee sales tax is determined by the location of the computers on which the
computer software is installed. If the Customer purchases a computer software
maintenance contract that applies to software installed on computers located in
Tennessee, then that contract will be subject to the Tennessee sales tax.

2.

Is the sale of a computer software maintenance contract to a Customer in Tennessee
subject to the Tennessee sales tax if the Vendor performs any repairs required under such
contract in Tennessee?

1

Ruling: Yes. The sale of a computer software maintenance contract to a Tennessee
Customer is subject to the Tennessee sales tax, regardless of whether the Vendor
performs any repairs covered under such contract in Tennessee or outside of Tennessee.
3.

Is the sale of a computer software maintenance contract to a Customer in Tennessee
subject to the Tennessee sales tax if the Vendor performs any repairs required under such
contract outside of Tennessee?
Ruling: Yes. The sale of a computer software maintenance contract to a Customer in
Tennessee is subject to the Tennessee sales tax, regardless of whether the Vendor
performs any repairs covered under such contract in Tennessee or outside of Tennessee.

4.

If the Vendor does not collect Tennessee sales tax on the sale of a computer software
maintenance contract to a Customer in Tennessee, will the Customer be subject to the
Tennessee use tax on the contract?
Ruling: The Vendor is required by law to collect Tennessee sales or use tax on its sales
of computer software maintenance contracts to Customers in Tennessee. If the Vendor
fails to collect Tennessee sales or use tax on the sale of a computer software maintenance
contract that pertains to software installed on computers in Tennessee, the Customer will
be subject to the Tennessee use tax on the contract.

5.

Will charges for and the use of repair or replacement parts and/or repair labor not covered
by a computer software maintenance contract, when such repairs are performed outside
of Tennessee, be subject to the Tennessee sales and use tax?
Ruling: The Vendor is not required to collect Tennessee sales tax on repair or
replacement parts not covered by a computer software maintenance contract, when such
parts are sold outside of Tennessee, but it is required to collect Tennessee use tax on such
repair or replacement parts shipped to the Customer in Tennessee. If the Vendor fails to
collect Tennessee use tax on the repair or replacement parts, the Tennessee Customer will
be subject to the Tennessee use tax for repair or replacement parts. The repair labor
performed outside of Tennessee will not be subject to the Tennessee sales or use tax.

6.

If the Vendor does not charge a Tennessee Customer for repair or replacement parts
and/or repair labor under a computer software maintenance contract, will the Customer
be subject to the Tennessee use tax on such repair or replacement parts and/or repair
labor?
Ruling: No. If the Vendor makes no charge for repair or replacement parts and/or repair
labor under a computer software maintenance contract upon which tax has been paid, the
Customer will not be subject to the Tennessee use tax on such repair or replacement parts
and/or repair labor.

2

ANALYSIS
Under the Retailers’ Sales Tax Act, TENN. CODE ANN. §§ 67-6-101 to -907 (2011), retail sales of
tangible personal property and specifically enumerated items and services in Tennessee are
subject to the sales and use tax.1
In particular, TENN. CODE ANN § 67-6-231(b)(1) (2011) provides that “the retail sale of, use of,
or subscription to a computer software maintenance contract shall be subject to the tax levied”
under the Retailers’ Sales Tax Act.2 The sale of a computer software maintenance contract is
taxable even if no repairs are ever performed under the contract. See Covington Pike Toyota v.
Cardwell, 829 S.W.2d 132 (1992). TENN. CODE ANN. § 67-6-231(b)(2) provides that no
additional sales and use tax shall be due “on any repairs, modifications, updates or upgrades
provided pursuant to a computer software maintenance contract that is subject to tax under”
TENN. CODE ANN § 67-6-231(b), unless the seller makes an additional charge for the repairs
modifications, updates, or upgrades.
1.

Location where a contract is made

Whether a computer software maintenance contract is subject to the Tennessee sales and use tax
is determined by the location of the computers on which the computer software to which the
contract applies is installed.
Charges for retail sales of computer software maintenance contracts that apply to software
installed on computers located in Tennessee are taxable under TENN. CODE ANN. § 67-6231(b)(1)(B). Thus, if the Customer purchases from the Vendor a computer software
maintenance contract that applies to software installed on computers located in Tennessee, then
that contract will be subject to the Tennessee sales tax.

1

TENN. CODE ANN. § 67-6-102(78) (2011) defines a “retail sale” as a “sale, lease, or rental for any purpose other
than for resale, sublease, or subrent.” A “sale” is defined in pertinent part as “any transfer of title or possession, or
both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever of
tangible personal property for a consideration,” and includes “the furnishing of any of the things or services taxable”
under the Tennessee sales and use tax laws. TENN. CODE ANN. § 67-6-102(80)(A)&(D). TENN. CODE ANN. § 67-6102(91)(A) defines the term “tangible personal property” in relevant part as “personal property that can be seen,
weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.”
2

TENN. CODE ANN. § 67-6-102(21) defines “computer software maintenance contract” as “a contract that obligates a
person to provide a customer with future updates or upgrades to computer software, support services with respect to
computer software, or both.” The definition excludes “telephone or other support services that are optional and are
sold separately and invoiced separately and do not include any transfer, repair or maintenance of computer software
on the part of the seller.”
3

2-3. Taxation of the Vendor’s computer software maintenance contracts and the location
where repairs under the contract are performed
The Vendor’s sale of a computer software maintenance contract that applies to software installed
on a computer located in Tennessee is subject to the Tennessee sales and use tax, regardless of
whether the Vendor performs repairs covered under such contract in Tennessee or outside of
Tennessee.
If the repairs performed are covered by the maintenance contract, then no additional tax will be
collected on such repairs. TENN. CODE ANN. § 67-6-231(b)(2). Furthermore, the sale of the
contract is taxable even if no repairs are ever performed under the contract. See Covington Pike
Toyota v. Cardwell, 829 S.W.2d 132 (1992).
4.
Non-collection of Tennessee sales tax on the sale of computer software maintenance
contracts
The Vendor is required by law to collect Tennessee sales or use tax on its sales of maintenance
contracts to Customers in Tennessee. If the Vendor fails to collect Tennessee sales or use tax on
the sale of a computer software maintenance contract that pertains to software installed on
computers in Tennessee, the Customer will be subject to the Tennessee use tax on the contract.
In Tennessee, every dealer3 making sales of tangible personal property or taxable items or
services is liable for the payment of Tennessee sales tax. TENN. CODE ANN. § 67-6-501(a)
(2011); Beare Co. v. Olsen, 711 S.W.2d 603, 605 (Tenn. 1986). While the dealer may charge the
consumer the appropriate tax, as between the dealer and the consumer, it is the dealer that is
ultimately liable to the State. Sam Carey Lumber Co. v. Sixty-One Cabinet Shop, Inc., 773
S.W.2d 252 (Tenn. Ct. App. 1989). Neither a dealer’s failure, nor its inability, to collect the tax
from its customer will relieve the dealer of this duty. Smoky Mt. Canteen Co. v. Kitzer, 247
S.W.2d 69 (Tenn. 1952). In the event that the dealer does not collect and remit Tennessee sales
tax on the sales of taxable services or tangible personal property, it will be subject to interest and
penalties. See TENN. CODE ANN. §§ 67-6-504(b) (2011), 67-6-517 (2011), 67-6-522 (2011). The
Vendor is a dealer for Tennessee sales tax purposes. Therefore, the Vendor must collect
Tennessee sales or use tax on the sale of its computer software maintenance contracts, and it will
be liable to the State if it does not.
However, TENN. CODE ANN. § 67-6-231(b)(1) provides that the “retail sale of, use of or
subscription to a computer software maintenance contract” is subject to the Tennessee sales and
use tax. (Emphasis added.) Because the use of a computer software maintenance contract is
specifically taxable under the statute, if the Vendor fails to collect Tennessee sales or use tax on
the sale of the computer software maintenance contract as required by law, then the Customer
will be liable for Tennessee use tax on its purchase of the contract.

3

A “dealer” is defined in pertinent part as every person who “furnishes any of the things or services taxable” under
the Retailer’s Sales Tax Act. TENN. CODE ANN. § 67-6-102(25)(H). The Vendor clearly qualifies as a dealer under
this broad definition.
4

5.
Vendor’s and Customer’s tax collection/remittance responsibilities on repair parts and
labor not covered under a computer software maintenance contract, when such parts and labor
are sold and performed outside of Tennessee
The Vendor is not required to collect Tennessee sales tax on repair or replacement parts not
covered by a computer software maintenance contract, when such parts are sold outside of
Tennessee, but it is required to collect Tennessee use tax on such repair or replacement parts. If
the Vendor fails to collect Tennessee use tax on the repair or replacement parts, the Tennessee
Customer will be subject to the Tennessee use tax for repair or replacement parts. The repair
labor performed outside of Tennessee will not be subject to the Tennessee sales or use tax.4
If the repair or replacement parts sold or the repairs performed are not covered by a computer
software maintenance contract, then the sale of such repairs is a sale separate from that of the
contract. The retail sales of tangible personal property and certain enumerated items and
services are subject to the Tennessee sales tax under the Retailer’s Sales Tax Act. Specifically,
charges for repairs to tangible personal property or computer software are taxable under TENN.
CODE ANN. § 67-6-205(c)(4) (2011). However, only sales at retail in Tennessee are subject to
the Tennessee sales tax. TENN. CODE ANN. § 67-6-202(a) (2011). Accordingly, if the sale of
repair or replacement parts and repair labor occurs outside of Tennessee, then it is not subject to
the Tennessee sales tax.
However, the Tennessee use tax is levied on the use of tangible personal property, computer
software and certain other items. TENN. CODE ANN. §§ 67-6-203(a) & 210 (2011). Therefore, if
no sales tax was collected on the sale of the repair or replacement parts, then Tennessee use tax
is owed on the use of such parts in Tennessee. Because the Vendor is registered for sales and use
tax in Tennessee, it is responsible for collecting the use tax on the repair and replacement parts
from the Customer. But if the Vendor fails to collect the Tennessee use tax at the time of the
sale, the Customer will owe Tennessee use tax on the purchase price of the parts. Note that
services, including repair labor, are not subject to the Tennessee use tax.
Notwithstanding the above analysis, if the repairs performed are covered by a computer software
maintenance contract upon which tax has been paid, then even such repairs performed in
Tennessee will not be subject to further taxation. TENN. CODE ANN. § 67-6-231(b)(2) provides
that “[n]o additional tax shall be due under this chapter on any repairs, modifications, updates or
upgrades provided pursuant to a computer software maintenance contract” on which tax has been
paid. Thus, if the repairs performed are covered by the computer software maintenance contract
sold by the Vendor, then the Vendor need only collect and remit Tennessee sales and use tax on
the sale of the computer software maintenance contract at the time of the sale.
6.

Tax on repairs covered under a computer software maintenance contract

If the Vendor makes no charge for repair or replacement parts and/or repair labor under a
computer software maintenance contract upon which tax has been paid, the Customer will not be
subject to the Tennessee use tax on such repair or replacement parts and/or repair labor.
4

Note that the tax consequences discussed in this analysis would also apply to parts and labor that are covered by a
computer software maintenance contract, if no Tennessee sales or use tax was paid on the sale or use of such
contract.
5

As discussed in the analysis to Ruling #2-3, when a Vendor sells a computer software
maintenance contract to a Customer, the taxable event is the sale of the contract, not any repairs
performed subsequently under the contract. TENN. CODE ANN. § 67-6-231(b)(2) provides that no
additional tax is due on any repairs to the extent they are covered by the computer software
maintenance contract, including use tax.

Elizabeth Henderson
Tax Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

10-15-12

6