United States

Tennessee: Department Rules Vendor Used Software to Provide Non-Taxable Service

Nov 16, 2015
From KPMG TaxWatch

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In a recent ruling, the Tennessee Department of Revenue addressed whether a record management service provider’s use of software to connect incompatible record management systems was subject to sales tax. The taxpayer, an independent testing lab, utilized a web-based platform through which its clients ordered and received test results. The taxpayer electronically delivered the lab results directly from the taxpayer’s record management system to its client’s record management system. To facilitate communication between the taxpayer’s and client’s unique record management systems, the taxpayer paid the record management vendors to provide services to connect the systems. These vendors developed computer programs to manipulate the format of the data containing the lab test results, so that each party’s respective systems would correctly read it. Neither the taxpayer nor its clients had access or rights to the translation program developed and used by the vendor.

Under Tennessee law, the sale of computer software is taxable regardless of the medium of delivery. Under legislation effective July 1, 2015, the taxable use of computer software includes access to software that remains in the possession of the dealer that provides the software. The legislation made clear, however, that it was not intended to impose tax on any services not currently taxable in Tennessee, including information or data processing services. Nontaxable data processing services include the service of converting, managing, and distributing digital products. In this case, the vendor’s program constituted computer software for Tennessee sales and use tax purposes. However, the Department concluded that the program was not subject to tax as remote access software because the taxpayer purchasing the services did not use the program. Rather, the record management vendor used the software to provide the nontaxable service of converting data from one form to another. As a result, the taxpayer’s charges for purchases of the service were not subject to Tennessee sales and use tax as sales of remotely-accessed software. For more information on Tennessee Ltr. Ruling 15-04 (Oct. 19, 2015), please contact Justin Stringfield at (615) 248-5510.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.