Tennessee Rulings Regarding Software & Services

A recent ruling by the Tennessee Department of Revenue states sales of information services, electronic storage services, electronic delivery services and payment services are nontaxable.

The Department of Revenue has also ruled that the seller is not obligated to collect sales tax on a sale of remotely accessed software if a purchaser provides a Remotely Accessed Software Direct Pay Permit.  However, the seller is obligated to collect sales tax if the purchaser provides a Streamlined Certificate of Exemption.  The amount of tax would then be determined based on the percentage of Tennessee located users.

When a sale of remotely accessed software is made and nothing in addition is provided, the sale is taxable.  However if a sale of business services is made (i.e. management operations services) and incidental to that sale is the purchaser’s remote access to software, the sale is not taxable.  The Tennessee Department of Revenue uses the true object test to determine taxability in this scenario.  As the primary purpose of the sale was to purchase management operation services and not software, the sale is not taxable.

The true object test is often used for bundled transactions where two or more items are sold for a single price and at least one of them is taxable.  Therefore when the true object or essential element of the sale is a taxable one, the entire transaction is taxable. 

If the true object, primary purpose of the sale is not a taxable item or service, then other secondary items which are part of the bundled sale and are merely incidental and do not impact taxability.  The sale would not be taxable.  The true object test focuses on the primary purpose or essential element of the bundled sale and its taxability impacts the entire value of the sales transaction.

To ensure correct taxability is applied to your business activities a review of any bundled sales transactions in Tennessee along with related regulations would be beneficial.

For more details on this subject please contact us at tax@allynintl.com.  You can read more details regarding these rulings on the Tennessee Department of Revenue website (Tennessee Letter Ruling No. 15-07, 11/23/2015, Tennessee Letter Ruling No. 15-08, 12/17/2015, Tennessee Letter Ruling No. 15-09, 12/17/2015).

 

Tips for the Taxpayer

Vendors who collect and remit tax from customers for remotely accessed software or bundled transactions need to review the requirements in Tennessee to verify how recent rulings and changes to the law will impact them. 

For More Information

If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events at www.allynintl.com.

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Contact us and we can provide a customized cost-effective solution to meet your company’s needs.  For further information on Allyn Tax services, please contact: tax@allynintl.com.

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Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance.  Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North America, Europe and Asia and Allyn regional headquarters are strategically located in Fort Myers FL USA, Shanghai P.R. CHINA and Prague, CZECH REPUBLIC. For more information, log on to www.allynintl.com.