For an IT consulting firm whose employees sometimes telecommute across state lines, which computer services (development, design, installation, maintenance, consulting, training, documentation) are subject to Tennessee sales tax, and does it matter where the employee is physically sitting versus where the client's server is located?

Subject

Sales tax treatment of computer consulting, development, installation, and maintenance services, including telecommuting scenarios.

Plain-English summary

The Tennessee Department of Revenue sorted a broad menu of IT consulting services — development, design, installation, maintenance, analysis, coordination, administration, management, training, documentation, and customer support — into taxable and non-taxable buckets, and clarified a key situs rule for remote/telecommuting work.

Location of the server, not the employee, controls the tax. Software development and modification are a "sale" of customized software, delivered instantaneously the moment the employee alters code on the client's server. So if a Tennessee-based employee remotely edits software running on an out-of-state server, no Tennessee sale occurs — the sale happens where the server sits. Conversely, if an out-of-state employee remotely edits software on a server located in Tennessee, that IS a taxable Tennessee sale, regardless of where the employee is physically sitting. The same location-of-performance rule applies to services like installation and maintenance (following LeTourneau Sales and Service, Inc. v. Olsen): maintenance is taxed based on where the software/server is located, not where the technician is.

Development, programming, design, installation, and maintenance/repairs are always taxable when performed in Tennessee — these count either as a sale of customized software (tangible personal property) or as specifically taxable installation/repair services. Pure computer consulting is not taxable on its own, but frequently loses that status: analysis, coordination, administration, and management activities are non-taxable ONLY if they're genuinely optional, invoiced separately, AND actually sold independently from the software/installation/maintenance work — if they're part of the broader software engagement, they get swept into the taxable sale (following Creasy Systems Consultants, Inc. v. Olsen, where consulting to determine client needs, design, and write software were all taxable as one package). The same separate-and-optional test governs documentation, training, and customer support: documentation sold with software is taxable as part of that sale, but if invoiced and sold as a truly independent service, it escapes tax — with a footnote that a standardized manual sold to multiple customers is itself tangible personal property regardless. Notably, services relating to a third-party vendor's software (not the taxpayer's own sale) stay non-taxable even if otherwise similar, since they aren't tied to any sale of software by this taxpayer.

What this means for you

IT consulting and software development firms with remote/telecommuting employees

Track where your client's server sits, not where your employee is working from — that's what determines Tennessee tax exposure for both software sales and services like maintenance. A remote employee editing a Tennessee-hosted system creates a taxable Tennessee transaction even from another state; the reverse also holds, meaning a Tennessee-based remote worker touching an out-of-state server generally doesn't trigger Tennessee tax.

Accountants and tax professionals

This ruling collects the "separate and optional" test across several service categories (consulting, documentation, training, customer support) under Tenn. Code Ann. § 67-6-102(a)(35) and Creasy Systems Consultants, Inc. v. Olsen / Thomas Nelson, Inc. v. Olsen, plus the situs-of-performance rule from LeTourneau Sales and Service, Inc. v. Olsen applied specifically to remote/telecommuting fact patterns — useful precedent for any modern distributed IT services business. Note the practical bar for "separate and optional": it's not enough to invoice separately; the service must actually be sold independently of the taxable software/installation/maintenance engagement.

Common questions

Q: If a Tennessee employee remotely maintains software hosted on an out-of-state server, is that taxable in Tennessee?
A: No. Both software sales and services like maintenance are taxed based on where the software/server is located, not where the employee performing the work is physically located.

Q: Are computer consulting services always exempt from Tennessee sales tax?
A: Not automatically. Standalone consulting is not taxable, but if analysis, coordination, administration, management, training, or documentation are provided as part of a software sale (rather than genuinely optional and separately sold), they become taxable along with the software.

Q: Does invoicing a service as a separate line item make it non-taxable?
A: Not by itself. The service must actually be sold independently and optionally from the taxable software/installation/maintenance work — separate invoicing alone isn't sufficient if the service is still effectively part of that engagement.

Q: Are services related to a third-party vendor's software taxable?
A: No, if they're genuinely standalone services not tied to a sale of software by this taxpayer — they remain non-taxable consulting.

Q: Does this ruling apply to other IT consulting businesses?
A: No. A Tennessee letter ruling binds the Department only for the specific taxpayer and facts addressed and cannot be relied on by others, though the situs and separate-and-optional principles it applies are of general use.

Citations and references

Statutes and cases:

• Tenn. Code Ann. § 67-6-102(a)(34)(A)-(B) (definitions of "sale" and customized/packaged computer software as tangible personal property)
• Tenn. Code Ann. § 67-6-102(a)(32)(A), (F)(iv), (vi), (ix) (retail sale; installation and repair/warranty services taxable)
• Tenn. Code Ann. § 67-6-102(a)(35) (services taxable when part of the sale of tangible personal property)
• TENN. COMP. R. & REGS. 1320-5-1-.54(2) (definition of "repair services," incl. maintenance)
• Creasy Systems Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986) (consulting/design/writing software all taxable as one sale)
• Volunteer Val-Pak v. Celauro, 767 S.W.2d 635 (Tenn. 1989) (definition of "sale" — transfer of title/possession)
• LeTourneau Sales and Service, Inc. v. Olsen, 691 S.W.2d 531 (Tenn. 1985) (services taxed where performed)
• Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987) (services as part of a tangible property sale)
• The Austin Company v. Woods, 620 S.W.2d 73 (Tenn. 1981) (standalone nontaxable services not tied to a taxable sale)

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/06-09.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 06-09
WARNING
Letter rulings are binding on the Department only with respect to the individual
taxpayer being addressed in the ruling. 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 Department policy.

SUBJECT
Application of sales tax to computer consulting services.

SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a
specific set of existing facts furnished to the department by the taxpayer. The rulings
herein are binding upon the Department and are applicable only to the individual
taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such
revocation or modification shall be effective retroactively unless the following conditions
are met, in which case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in
the transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon
the ruling; and a revocation of the ruling must inure to the taxpayer’s detriment.

FACTS
[TAXPAYER] is a corporation located in Tennessee that provides information
technology services to clients both in Tennessee and out-of-state. The Taxpayer provides
a variety of services to its clients whereby the Taxpayer’s employees either go to the
client’s site to work on the client’s systems directly or the employees telecommute from
home.

Depending on the client’s needs, some or all of the following services are provided by the
Taxpayer:
1.

Development/Programming – Development of applications, systems and
transaction environments. Specifically, this includes:
a. Coding of business applications.
b. Development of large-scale batch or high volume transaction
environments that require IBM/MVS mainframe processing power.
c. Programming in business-oriented languages such as COBOL and CICS,
or fourth generation languages.
d. Development of enterprise-oriented applications or general business
applications.
e. Programming in business-oriented languages such as COBOL and
RPG/400 or fourth generation languages on IBM AS/400 computers.
f. Development and implementation of computer software in Windows or
UNIX using C/C++, Assembly and other low-level operating system
software.
g. Development of GUI-based applications, systems software and embedded
software.
h. Development of all aspects of major information systems.

2.

Design – Design of applications, software, and information systems.
Specifically, this includes:
a. Design of programming applications for a client/server architecture.
b. Design of computer software in Windows or UNIX using C/C++,
Assembly and other low-level operating system software.
c. Design of all aspects of major information systems.

3.

Installation – Installation of network hardware and software. Specifically, this
includes:
a. Installation of local area networks’ hardware and software.
b. Installation of PCs and various printer, graphics and storage peripherals.
c. Installation of operating systems, database management systems,
compilers and utilities.
d. Installation of data networks.
e. Installation of wide area networks.
f. Installation of mainframe operating systems, communications systems,
database management software, compilers and utility programs.

4.

Analysis – Analysis of applications and operations. Specifically, this
includes:
a. Analysis of business requirements.
b. Analysis of data usages within an application area.
c. Analysis of system function and operations to determine adequate security
and controls.
d. Analysis of computer operations.

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5.

Coordination – Coordination of resources. Specifically, this includes:
a. Coordination of processing and transmission schedules.
b. Coordination of personal computers within a company to ensure
compatibility and integration with company strategies.
c. Coordination of resources, schedules and communications for systems
development projects.

6.

Administration – Administration of organization’s resources, budgets, and
operations. Specifically, this includes:
a. Administration of organization’s data resources.
b. Administration of department budgets and review of project managers.
c. Planning and overseeing of research.
d. Administration of development of systems within Information Systems on
both mainframes and PCs.
e. Administration of performance appraisals, salaries, hiring and budgets.

7.

Management – Management of all computer and communication activities
within the company. Specifically, this includes:
a. Maintenance of integrity of all electronic and optical books, including
review of computerized and manual systems; information processing
equipment and software for acquisition, storage and retrieval; and
definition of the strategic direction of all information processing and
communication systems and operations.
b. Overall management and definition of all computer and communication
activities within the company, including responsibility for providing a
leadership role in the day-to-day operations of the Information Services
functions as well as providing direction as the enterprise expands through
internal growth and external acquisition.
c. Management of pre-sales and post-sales support, the help line and
documentation.
d. Planning and direction of all computer and peripheral machine operations,
data entry, data control scheduling and quality control.
e. Oversight of ongoing development, implementation, maintenance and
overall strategy of a company’s website.

8.

Training and Customer Support – Training of new users and user support.

9.

Documentation – Writing and editing of program and systems documentation,
user manuals, training courses and procedures.

10.

Maintenance – Maintenance of computers, hardware, and software.
Specifically, this includes:
a. Maintenance of local area networks’ hardware and software.
b. Maintenance of personal computers within a company to ensure
compatibility and integration with company strategies.

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c. Maintenance of data networks.
d. Maintenance of wide-area networks.
e. Maintenance of mainframe operating systems, communications software,
database management software, compilers and utility programs.
f. Maintenance of communications network operations.

QUESTIONS
1.

With regard to the taxable activities, is the activity still taxable if the employee
telecommutes from another state for a Tennessee client? What if the employee
telecommutes from Tennessee for a client in another state?

2.

Which of the described activities are subject to sales and use tax if performed in
Tennessee?

RULINGS
1.

The location of the sale or service determines whether or not a taxable activity is
subject to tax in Tennessee. If an employee is located out-of-state and performs a
taxable activity related to software located on a server in Tennessee, then that
activity is performed in Tennessee and taxable in Tennessee. If an employee is
located in Tennessee and performs a taxable activity related to software located
on a server out-of-state, that activity is not taxable in Tennessee.

2.

The transfer of software is subject to tax. Thus, the development, programming,
and design of software for customers constitute the sale of customized software,
which is a taxable sale of tangible personal property. Installation of software and
maintenance are taxable services. The following are not taxable services if they
are optional and sold separately from the programming, installation, or
maintenance services: analysis, coordination, administration, and management.
The foregoing services are taxable if they are performed as part of the
development and sale of programming or if performed as part of the installation
or maintenance services provided by the Taxpayer to its client. Documentation,1
training and customer support are typically sold with customized software, and
therefore, are taxable as part of a sale of tangible personal property. However, if
the documentation, training, and customer support were sold separately and
independent of a sale of tangible personal property, they would not be taxable.

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If the documentation consists of a standard manual that is sold to multiple customers then it qualifies as
tangible personal property and is subject to sales tax. However, if the documentation was developed
specifically for one particular customer, it qualifies as a service and is not subject to sales and use tax if not
sold as part of a sale of tangible personal property. Nevertheless, if the Taxpayer sells multiple copies of a
custom-designed manual for its customers, those copies may be subject to tax.

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ANALYSIS
1.

The location of the sale or service determines whether or not a taxable activity is
subject to tax in Tennessee.

For Tennessee sales and use tax purposes, the transfer of computer software is
specifically defined as a sale of tangible personal property. Tenn. Code Ann. § 67-6102(a)(34)(B); Creasy Systems Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986).
A sale consists of the transfer of title or possession, or both, of tangible personal property
for a consideration. Tenn. Code Ann. § 67-6-102(a)(34)(A); Volunteer Val-Pak v.
Celauro, 767 S.W.2d 635, 636 (Tenn. 1989). Thus, the place in which title to or
possession of the software first passes to the client is the location of the sale.
The important factor in determining whether there is a taxable sale of tangible personal
property is the location where the sale takes place. When an employee in one state alters
software on a customer’s server by remote means, a sale has occurred. If that customer’s
server is located in Tennessee then a taxable sale has taken place in Tennessee. It is not
relevant where the employee is located when he is performing the work. As long as the
employee is altering the customer’s software directly (i.e. the work is not saved on the
employee’s computer, only on the customer’s server), then there is an instantaneous
delivery of software to the customer. The location of the sale is where the delivery takes
place, i.e. the customer’s server. If the customer’s server is located outside of Tennessee,
the sale has occurred outside of Tennessee; thus, the sale is not subject to sales tax in
Tennessee. However, if the server is later moved into Tennessee, a use tax obligation
would be incurred. Similarly, if the software was transferred onto a server in Tennessee,
a use tax obligation would be incurred.
In regards to a taxable service, such as installation or maintenance, the determination of
whether the service is taxable depends on where the service occurs. In LeTourneau Sales
and Service, Inc. v. Olsen, 691 S.W.2d 531 (Tenn. 1985), the Court ruled that a service is
taxable where it is performed. In this situation, an employee located in Tennessee
performs maintenance on software located on a server out-of-state. This service is not
taxable in Tennessee because the service of software maintenance is considered to be
performed where the software is located, even if the maintenance is done by remote
access. Similarly, if an employee located out-of-state performs maintenance on software
on a server located in Tennessee, that service is subject to Tennessee sales tax because
the service is performed in Tennessee.
2.

Development, Programming, Design, Installation of Software and Maintenance
are Taxable Services. The Remaining Services are Taxable if Sold as Part of the
Sale of Tangible Personal Property.

Retail sales in Tennessee are subject to sales and use tax under Tenn. Code Ann. § 67-6101 et. seq. Tenn. Code Ann. § 67-6-102(a)(32)(A) defines a retail sale to include a
“taxable sale of tangible personal property or specifically taxable services to a consumer

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or to any person for any purpose other than resale.” Also subject to tax are “any services
that are a part of the sale of tangible personal property....” Tenn. Code Ann. § 67-6102(a)(35).
Development, Programming and Design Activities
In some instances the taxpayer will provide its client with computer programming
services designed to support third party software or integrate that software into the
client’s computer system. The term “sale” is defined to include:
[the] transfer of customized or packaged computer software, which is
defined to mean, information and directions loaded into a computer which
dictate different functions to be performed by the computer whether
contained on tapes, discs, cards, or other device or material. For such
purpose, computer software shall be considered tangible personal
property; however, the fabrication of software by a person for such
person’s own use or consumption shall not be considered a taxable
“use”....
Tenn. Code Ann. § 67-6-102(a)(34)(B). The customization or modification of the
client’s computer software is a sale within the definition set forth in this section. Creasy
Systems Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986). Thus, writing programs
or command language scripts to support or integrate third party software within the
client’s computer system constitutes a taxable sale of tangible personal property from the
taxpayer to its client. Therefore, in regards to this Taxpayer, its development,
programming, and design activities would constitute a sale of tangible personal property
and are thus subject to sales and use tax so long as the activity is performed in Tennessee.

Installation of Software
Tenn. Code Ann. § 67-6-102(a)(32)(F)(vi) defines a retail sale as the installation of
tangible personal property which remains tangible personal property after installation.
Since software is defined as tangible personal property under §67-6-102(a)(34)(B), and
remains tangible personal property after installation, any charge made for the installation
of software is subject to tax.

Repairs and Maintenance
Tenn. Code Ann. § 67-6-102(a)(32)(F)(iv) and (ix) provides that a sale at retail includes
“performing for a consideration of any repair services with respect to any kind of tangible
property” and the “[c]harges for warranty or service contracts warranting the repair or
maintenance of tangible personal property; provided, that any repairs to the extent
covered by the contract shall not also be subject to tax.” Furthermore, TENN. COMP. R. &
REGS. 1320-5-1-.54(2) states:

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for the purposes of this rule, “repair services” and “repairs” of tangible
personal property shall mean and include any one or all of the following
for a user and consumer: work done to preserve or restore to or near the
original condition made necessary by wear, normal use, wastage, injury,
decay, partial destruction, or dilapidation; amending, correction, or
adjustment made for any defect or defective portion; alterations;
refinishing; maintenance, preventive maintenance, or warranty contract;
any cleaning that is a necessary part of any repair work; “service calls”
where any repair work is done or contemplated; and changes in the size,
shape, or content.
Pursuant to Tenn. Code Ann. § 67-6-102(a)(32)(F), repairs, which include maintenance,
and contracts for maintenance, are defined as a sale at retail and as such are subject to
sales tax. Therefore, any maintenance work performed by the Taxpayer in Tennessee is
taxable.

Consulting Services
Computer consulting services alone are not taxable. However, such services are
frequently sold in conjunction with the transfer of software and taxable services.
Otherwise nontaxable consulting services become subject to tax if they are performed as
part of the sale of tangible personal property. Tenn. Code Ann. § 67-6-102(a)(35);
Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 623 (Tenn. 1987). Thus, any charges for
services that are performed as part of the sale of software are subject to tax. For example,
in Creasy Systems Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986), the Tennessee
Supreme Court held that hourly consulting charges for determining the needs of a client,
designing a software program to meet those needs, and then writing the software program
were all subject to sales tax. Thus, if consulting services are not provided as additional
services, separate and optional from the sale of software or taxable services, they are
subject to tax in Tennessee.
Based upon the foregoing reasoning, the analysis, coordination, administration and
management activities performed by the Taxpayer would be subject to tax if they are
services sold as part of the sale of software. If the services are optional and are sold
separately from the taxable sale of software, they are not subject to sales tax. However,
the services would not only need to be invoiced separately, but would actually need to be
sold independently from the taxable software.
It appears that the Taxpayer may sometimes provide services that relate to software sold
by a third-party vendor to the taxpayer’s client. In this instance, the stand alone
nontaxable services are clearly not being sold as part of the sale of taxable software.
Thus, it should be noted that these services remain nontaxable. The Austin Company v.
Woods, 620 S.W.2d 73, 76 (1981).

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Documentation, Training and Customer Support
Documentation, training and customer support may be taxable if they are performed as
part of the sale of software. Documentation is typically sold with the software and would
therefore, be subject to tax as part of a sale of software. Training and customer support
may be taxable if they were provided as part of the sale of software or other tangible
personal property. Tenn. Code Ann. § 67-6-102(a)(35). In regards to training, if the
Taxpayer can show that training is provided as a separate, optional service that is
invoiced separately from the sale of software, it is not subject to tax. Whether or not
customer support is taxable would depend on the type of service provided. If the
customer support contemplates any kind of repair work2, then it would be taxable as a
sale at retail. However, if the customer support is similar in nature to training and if it is
provided as a separate, optional service that is invoiced separately from the sale of
software, then it would not be subject to tax.

Deborah A. Toon
Tax Counsel

Approved:

Loren L. Chumley
Commissioner of Revenue

Date:

4/7/06

2

Pursuant to Tenn. Code Ann. § 67-6-102(a)(32)(F), repair, installation, and charges for warranty or
service contracts are specifically subject to tax.

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