Does an out-of-state company that licenses billing software to wireless carriers, and also provides billing services and arranges third-party printing/mailing, owe Tennessee sales and use tax on any of its fees?

Subject

Sales and use tax treatment of software licensing and out-of-state billing services provided to wireless carriers.

Plain-English summary

The Tennessee Department of Revenue split a billing-system provider's three revenue streams into taxable and non-taxable buckets. The taxpayer, based outside Tennessee with no in-state locations, licenses proprietary billing software to wireless carriers and processes their subscriber data into invoices that a third-party out-of-state printer mails out.

The one-time software licensing fee is taxable. The software is "prewritten computer software" (not custom-built for one customer), which Tennessee law treats as tangible personal property, and licensing it functions as a lease — a taxable "sale" regardless of where the software runs.

The monthly billing-service fees are not taxable. Two things save them: (1) specifically taxable services (like the list in Tenn. Code Ann. § 67-6-205(c)) are only taxed when performed in Tennessee, and this taxpayer performs its billing service outside the state; and (2) even though the service involves electronically transmitting data (which technically fits the definition of "telecommunication service"), the true object of what the customer is buying is the billing/information service itself, not telecommunications — telecommunications is just the incidental delivery mechanism, the same reasoning a Tennessee court applied to a check-guarantee service in Equifax Check Services v. Johnson.

The printing/mailing reimbursements and administrative fees are also not taxable, for the same true-object reason: they're part of the non-taxable billing service, not a separate sale of tangible personal property (the printed invoices) or a taxable service. The ruling flags one wrinkle, though: the taxpayer may owe Tennessee use tax on the printed billing statements and envelopes it imports into Tennessee for its own use in providing the service (with credit for any sales tax already paid to another state).

What this means for you

Software and SaaS/billing-service providers

Splitting your revenue into "software license" vs. "service" isn't just a billing convenience — it changes your Tennessee tax exposure. A prewritten-software license is taxable no matter what; a genuinely separate service is taxed only if it's on Tennessee's specific taxable-services list and performed in-state, or if the true object of what the customer buys is really tangible property. Data transmission alone doesn't make a service "telecommunications" for tax purposes — ask what the customer is actually paying to get.

Accountants and tax professionals

This is a solid worked example of Tennessee's "true object" test (see also Equifax Check Services, Inc. v. Johnson) for distinguishing a taxable telecommunications sale from a non-taxable information/data-processing service that merely uses telecommunications as a delivery method, plus the in-state-performance limit on Tenn. Code Ann. § 67-6-205(c) services from LeTourneau Sales and Service, Inc. v. Olsen. Also worth flagging for out-of-state service providers: even fully non-taxable services can generate a use tax liability on the tangible materials (paper, envelopes) the provider itself imports and consumes in Tennessee while performing the service, per Nashville Mobilphone Co. v. Woods.

Common questions

Q: Is a software license fee taxable even if the software is used to provide a non-taxable service?
A: Yes. The license/lease of prewritten computer software is a taxable sale of tangible personal property in Tennessee regardless of how the licensee later uses it.

Q: Does transmitting data over telecommunications lines make a service a taxable "telecommunications service"?
A: Not necessarily. If the true object of the transaction is something else (like an information or billing service), the telecommunications component is treated as merely incidental and isn't separately taxed.

Q: Can an out-of-state company avoid Tennessee sales tax entirely by performing services outside the state?
A: For "specifically taxable services" under Tenn. Code Ann. § 67-6-205(c), yes — those are only taxed when performed in Tennessee. But watch for use tax on any tangible property (like printed materials) the company imports into Tennessee to perform the service.

Q: Does this ruling apply to my software/billing business?
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 it illustrates how the Department applies the true-object and situs-of-performance tests.

Citations and references

Statutes and cases:

• Tenn. Code Ann. § 67-6-102(68), (70)(A) & (D) (2007) (definitions of "retail sale" and "sale")
• Tenn. Code Ann. § 67-6-102(60), (80)(A) (2007) (prewritten computer software as taxable tangible personal property)
• Tenn. Code Ann. § 67-6-205(c) (2007) (list of specifically taxable services, taxed only if performed in Tennessee)
• Tenn. Code Ann. § 67-6-102(81)(A) (2007) (definition of "telecommunication service")
• Tenn. Code Ann. § 67-6-102(71)(A)(iii) (2007) (services necessary to complete a taxable sale)
• Tenn. Code Ann. § 67-6-210(a) (2007); TENN. COMP. R. & REG. 1320-5-1-.91 (use tax on imported property, with credit for tax paid to another state)
• LeTourneau Sales and Service, Inc. v. Olsen, 691 S.W.2d 531 (Tenn. 1985) (services taxed where performed)
• Equifax Check Services, Inc. v. Johnson, 2000 WL 827963 (Tenn. Ct. App. 2000) (true-object test)
• Nashville Mobilphone Co., Inc. v. Woods, 655 S.W.2d 934 (Tenn. 1983) (service provider as consumer of property used to render the service)

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/08-16.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #08-16

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 the Tennessee sales and use tax to billing services performed out-of-state.
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 retroactive revocation of the ruling must inure to the Taxpayer's
detriment.
FACTS
[TAXPAYER] owns and operates a proprietary customer billing system. The Taxpayer is based
outside of Tennessee and does not have any locations in Tennessee. The Taxpayer grants users
access to the billing system in exchange for an initial one-time fee and a monthly fee based on
system usage. Prior to accessing the system, users must install the Taxpayer’s software, which is
transmitted to users either by remote telecommunications from the Taxpayer’s place of business

or accessed from the Taxpayer’s servers. The software serves as an interface allowing users and
the Taxpayer to communicate on an ongoing basis. The Taxpayer receives a one-time fee for
provision of the software interface.
At the most basic level, the Taxpayer’s billing system provides wireless telecommunication
carriers (“carriers”) a means of producing invoices for their wireless subscribers. The
carriers/users provide the Taxpayer with static data inputs (subscriber name, address, credit, rate
plan, etc.); the Taxpayer pulls and accepts dynamic data from the carriers’ systems; the Taxpayer
processes the data creating new data which is sent to an out-of-state third-party printer in
electronic form; and the third-party printer prints and mails the new data in the form of billing
invoices to the carriers’ subscribers. The Taxpayer receives the following monthly fees: a) a fee
based on the type and volume of data processed; b) a reimbursement relating to expenditures
made on behalf of its carriers for procurement of printing and mailing services; and c) an
administrative fee for acting as the intermediary between the carrier and the third-party printer.
These items are separately stated on the Taxpayer’s monthly invoices to its carriers.
QUESTIONS
1.

Must the Taxpayer charge Tennessee sales and use tax on a one-time licensing fee
related to the licensing of computer software?

2.

Must the Taxpayer charge Tennessee sales and use tax on a monthly fee related to the
provision of billing services?

3.

Must the Taxpayer charge Tennessee sales and use tax on reimbursements and
administrative fees related to the procurement of printing and mailing services?
RULINGS

1.

Yes. The one-time licensing fee related to the licensing of computer software is
subject to Tennessee sales and use tax.

2.

No. The provision of billing services by the Taxpayer is not subject to Tennessee
sales and use tax.

3.

No. The reimbursements and administrative fees related to the procurement of
printing and mailing services are not subject to Tennessee sales and use tax.
ANALYSIS

Retail sales in Tennessee are subject to sales and use tax under Tenn. Code Ann. § 67-6-101 et
seq. Tenn. Code Ann. § 67-6-102(68) (2007) defines a “retail sale” to include any “sale, lease or
rental for any purpose other than for resale, sublease or subrent.” A “sale” is defined as “any
transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise,
in any manner or by any means whatsoever of tangible personal property for a consideration,”
and includes “the furnishing of any of the things or services taxable” under the Tennessee sales

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and use tax laws. Tenn. Code Ann. § 67-6-102(70)(A)&(D) (2007). The sale of prewritten
computer software is considered a sale of tangible personal property under Tenn. Code Ann.
§ 67-6-102(80)(A) (2007). The sale of telecommunications services is subject to sales tax
pursuant to Tenn. Code Ann. § 67-6-205(c)(3) (2007).

1. Licensing Fee.
   The one-time licensing fee related to the licensing of computer software is subject to the
   Tennessee sales and use tax.
   The software program licensed by the Taxpayer meets the definition of “prewritten computer
   software” for purposes of the Tennessee sales and use tax. “Prewritten computer software” is
   computer software that “is not designed and developed by the author . . . to the specifications of
   a specific purchaser.” Tenn. Code Ann. § 67-6-102(60) (2007). Prewritten computer software
   includes “software designed and developed by the author . . . to the specifications of a specific
   purchaser when it is sold to a person other than the purchaser.” Id. Under the facts presented,
   the Taxpayer’s software is not designed and developed to the specifications of a specific
   purchaser, and therefore comes within the definition of “prewritten computer software.”
   The software program licensed by the Taxpayer qualifies as tangible personal property for the
   purposes of the Tennessee sales and use tax. Tenn. Code Ann. § 67-6-102(80)(A) specifically
   includes “prewritten computer software” in the definition of tangible personal property.
   Additionally, the Taxpayer’s software license agreement constitutes a lease of tangible personal
   property. The lease or rental of tangible personal property, including prewritten computer
   software, is included in the definition of “sale” under Tenn. Code Ann. § 67-6-102(70)(A) and is
   subject to sales and use tax. Therefore, the payments made to the Taxpayer pursuant to the
   license agreement for leasing the software are subject to the Tennessee sales and use tax.
2. Billing Services.
   The provision of billing services by the Taxpayer is not subject to Tennessee sales and use tax.
   Tenn. Code Ann. § 67-6-205(c) (2007) lists the services that are specifically taxable in the State
   of Tennessee. However, specifically taxable services are not subject to taxation if performed
   out-of-state. See LeTourneau Sales and Service, Inc. v. Olsen, 691 S.W.2d 531 (Tenn. 1985)
   (holding that services are taxable where they are performed). Charges for any services necessary
   to complete a sale of tangible personal property or taxable services are also subject to sales tax.
   Tenn. Code Ann. § 67-6-102(71)(A)(iii) (2007). Therefore, a service is subject to Tennessee
   sales and use tax if it is: 1) a specifically taxable service rendered in Tennessee, or 2) a service
   necessary to complete a sale of tangible personal property or taxable services.
   According to the facts provided, the Taxpayer provides billing services to carriers. The
   Taxpayer’s billing service is subject to the Tennessee sales and use tax only if it is specifically
   listed in the Tennessee Code as a taxable service, and is performed in Tennessee. Under Tenn.
   Code Ann. § 67-6-205(c), the following services are subject to tax in Tennessee:

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(1) The sale, rental, or charges for any rooms, lodgings or accommodations
furnished to transients by any hotel, inn, tourist court, tourist camp . . . .
(2) Charges for services rendered by persons operating or conducting a garage,
parking lot, or other place of business for the purpose of parking or storing motor
vehicles . . .
(3) The furnishing, for a consideration, of either intrastate or interstate
telecommunication services . . .
(4) The performing for a consideration of any repair services . . .
(5) The laundering or dry cleaning of any kind of tangible personal property . . .
(6) The installing of tangible personal property which remains tangible personal
property after installation . . .
(7) The enriching of uranium materials . . .
(8) The renting or providing of space to a dealer or vendor without a permanent
location in this state . . .
(9) The furnishing, for a consideration, of ancillary services.
With the possible exception of telecommunication services, discussed below, the Taxpayer does
not provide these or any other services in Tennessee.
The Taxpayer pulls dynamic data from its customers; therefore, intrastate or interstate
telecommunications services do in fact take place in order for the Taxpayer to provide its service.
The term “telecommunication service” is defined under Tenn. Code Ann. § 67-6-102(81)(A)
(2007) as the “electronic transmission, conveyance, or routing of voice, data, audio, video, or any
other information or signals to a point, or between or among points.” The term includes
transmission, conveyance, or routing “in which computer processing applications are used to act
on the form, code or protocol of the content for purposes of transmission, conveyance or routing
without regard to whether such service is referred to as voice over Internet protocol services or is
classified by the Federal Communications Commission as enhanced or value added.” Id.
However, under the facts provided, there is no sale of telecommunications from the Taxpayer to
its customers, because the true object of the Taxpayer’s service is not to provide
telecommunications services. The true object of the Taxpayer is to provide the billing service;
similarly, it is the billing service, and not telecommunications services, that the customer seeks
to purchase. In the present case, the product created and sold by the Taxpayer was information,
not telecommunications services. Telecommunication was merely the method of transmitting
this information to the Taxpayer’s customers. Stated another way, the true object of the
transactions was not telecommunications services, but was rather the information itself. See
Equifax Check Services, Inc. vs. Johnson, 2000 WL 827963 (Tenn.Ct.App. 2000) (holding that
check guarantee service, and not telecommunications services, was true object of transaction).
Telecommunications services are only a means incidental to the provision of the Taxpayer’s
service. This is clearly different from a situation in which the telecommunication is one of the
primary objectives of the transaction. Accordingly, under these facts, there is no sale of
telecommunications from the Taxpayer to its customers.
Since the Taxpayer does not sell telecommunications services and does not provide another
taxable service in Tennessee, its monthly fees are not subject to Tennessee sales and use tax.

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3. Reimbursements and Administrative Fees.
The reimbursements and administrative fees related to the procurement of printing and mailing
services are not subject to Tennessee sales and use tax.
The Taxpayer pays a third-party printer to print and mail the billing invoices to the carriers’
subscribers. The third-party is located outside of Tennessee. The Taxpayer purchases the
printing and mailing services as part of its agreement to provide billing services to its customers.
The Taxpayer is reimbursed by its customers and receives administrative fees for contracting
with the third-party printer.
These reimbursements and administrative fees could be taxable if they accompanied the sale of
tangible personal property in the State of Tennessee. Charges for any services necessary to
complete a sale of tangible personal property or taxable services are also subject to sales tax.
Tenn. Code Ann. § 67-6-102(71)(A)(iii).
However, under the facts provided, the billing service provided by the Taxpayer is not incidental
to the sale of tangible personal property or taxable services. As such, the reimbursement and
administrative fees are not subject to sales and use tax in Tennessee. See Tenn. Code Ann. § 676-102(71)(A)(iii). The Taxpayer’s primary purpose in contracting with the third-party to print
the statements is to provide billing services for its customers. The customers do not purchase
statements so much as billing services, which include the printing and mailing of billing
statements. The use of tangible personal property such as billing statements and envelopes is an
essential component of this service, and does not change its nature as a service. The billing
service remains non-taxable despite the use of tangible personal property in providing those
services.
Note that the Taxpayer may incur use tax liability for printed materials distributed in Tennessee.
Tennessee imposes the use tax on tangible personal property imported from other states and used
by a dealer in Tennessee. Tenn. Code Ann. § 67-6-210(a) (2007). The Tennessee Supreme Court
has held that “[w]hen the primary function and purpose of the Taxpayer is to provide services,
the ownership, use and maintenance of certain types of personal property and equipment are
necessary in order to enable it to furnish the services so that the Taxpayer, not its customer, is the
ultimate user or consumer within the meaning of sales and use tax statutes.” Nashville
Mobilphone Co., Inc. v. Woods, 655 S.W.2d 934, 935-37 (Tenn. 1983). Consequently, the
Taxpayer is the user or consumer of the billing statements and envelopes necessary to provide
the billing service. To the extent the Taxpayer imports or causes such items to be imported into
Tennessee, the Taxpayer must pay Tennessee use tax on the items pursuant to Tenn. Code Ann.
§ 67-6-210(a). However, the Taxpayer will receive credit against its Tennessee use tax liability
for any properly imposed sales tax paid to another state. TENN. COMP. R. & REG. 1320-5-1-.91.
In summary, the Taxpayer is reimbursed by its customers and receives administrative fees for
contracting with the third-party printer. However, since the billing service provided by the
Taxpayer is not incidental to the sale of tangible personal property, the reimbursement and
administrative fees are not subject to Tennessee sales and use tax.

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Tony Greer
Tax Counsel

APPROVED: Reagan Farr
Commissioner

DATE: 2/29/08

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