Nov 20, 2017
From KPMG TaxWatch
The Tennessee Department of Revenue recently ruled that an annual subscription fee for access to a cloud-based scheduling interface was subject to sales tax. The taxpayer charged customers for access to an interface that helped customers manage employee schedules. When the taxpayer acquired a new customer, the customer sent a “rule book” of each employee’s schedule, and the taxpayer populated the rules into its interface. After setup, the employees could access the interface to view their work schedules, request to swap shifts with other employees, and request days off. Employers used the interface to approve or deny schedule requests and run reports.
The Department ruled that charges for the scheduling product were subject to tax because the true object of the transaction was to obtain access to the remote interface software. Under Tennessee law, sales and use tax is imposed on the “use of computer software” in the state, which includes “access and use of software that remains in the possession of the dealer who provides the software.” When the Tennessee legislature adopted this law in 2015, the bill specified that this language was not to be construed to impose a tax on any services that were not currently subject to tax. The issue in the ruling at hand was whether the taxpayer was selling a non-taxable scheduling service or access to remotely-housed software. The Department concluded that under the true object test, the subscribers were not purchasing scheduling services, but were purchasing access to the software. The Department’s rationale appeared to be that the interface, once programmed by the taxpayer with the initial set of rules, was then used autonomously by customers. In the Department’s view, the interface was not merely incidental to the services; it is a necessary component, without which the services would be of no value to subscribers. For more information on this ruling, 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.