Posted on June 07, 2015
Sales & Use Tax Impact
Effective July 1, 2015, the Revenue Modernization Act (the Act) (H.B. 0644) includes several modifications to Tennessee law. The modifications affect sales tax nexus determination and the application of sales tax to remotely accessed software. Technology based companies and online gaming organizations may want to review the law changes to better understand the sales tax impact.
Remotely Accessed Software
Presently, computer software sales are subject to Tennessee sales and use tax regardless of the delivery method (i.e. electronic, tangible storage media, loaded, other). As of July 1, 2015, computer software now includes remotely accessed software as well as use of software that remains in the possession of the dealer or in the possession of a third party on behalf of a dealer.
If a 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 or licensing of the software and electronic delivery of the software for use in this state. (http://www.tn.gov/governor/legislation/files/SB0603.pdf)
For sales where the price includes users both inside and outside of the state, the taxable value would be determined based on the portion of the sales price associated with Tennessee users. Dealers purchasing computer software for the purposes of reselling access and use are exempt. Exemption is also available for the use of computer software developed and created by an affiliated company.
Changes to the Tennessee law will also affect digital goods which currently include electronically transferred digital audio-visual works, digital audio works, and digital books. The legislation expands the types of digital goods subject to sales and use tax to include online gaming. Video game digital products will include “the right to access and use computer software that facilitates human interaction with a user interface to generate visual feedback for amusement purposes, when possession of the computer software maintained by a seller or third party (TENN. CODE ANN § 67-6-102(88)).” (http://www.tn.gov/governor/legislation/files/SB0603.pdf)
Regulations and more specifics related to the taxation of software are not expected to be released by the Tennessee Department of Revenue until after the effective date of the law changes. Therefore, it is important that companies review the new legislation now to understand how it may impact their business.
The Revenue Modernization Act implements click-through nexus provisions for sales and use tax purposes effective July 1, 2015 in Tennessee.
Many states currently tax sellers with click-through nexus in an effort to keep up with technology advancements and business changes. In order for a state to impose sales and use tax collection requirements on an out-of state seller, they must have substantial nexus within the state. Many state governments now assert sales and use tax registration and collection responsibilities based not only on a seller’s physical presence but also on the location of a seller’s affiliates in other states.
With the new legislation in Tennessee, dealers are presumed to have substantial nexus in the state if the following two requirements are met:
A dealer enters into an agreement with a person located in Tennessee whereby a person refers potential customers to the dealer by an internet link, website, or other means.
A dealer’s cumulative gross receipts from retail sales created in Tennessee by this agreement exceed $10,000 in the preceding twelve months. (http://www.tn.gov/governor/legislation/files/SB0603.pdf)
Changing nexus definitions by states makes it challenging for companies to ensure compliance. A regular nexus review is recommended for large, multi-state businesses to ensure reporting and compliance requirements are maintained.
Taxpayers who have a significant presence in Tennessee would be wise to review the legislation changes to ensure all compliance and reporting requirements are met. Legislation changes also affect income, franchise and excise taxes.
Tips for the Taxpayer
Conduct regular nexus reviews to ensure sales tax reporting and compliance requirements are being met in all necessary jurisdictions. Regularly review business and tax law changes where companies have a significant presence to ensure applicable updates and registrations are made in affected jurisdictions and accurate tax collection and reporting processes are in place.
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