For an online database and a long menu of related Internet services accessed remotely over the web, which charges are subject to Tennessee sales and use tax?

Plain-English summary

The Taxpayer runs an Internet-based information system: a database of listings (with photos, reporting tools, and search features) that customers reach remotely over the web for a monthly fee, plus a long menu of optional add-on services. It asked the Department to sort the whole catalog into taxable and non-taxable.

The bottom line: almost nothing is taxable. The only taxable charges are for the lease of server rack space, two redacted items, and hard copies of records — because in each of those the customer actually receives or controls tangible personal property. Everything else came out non-taxable.

The Department applied seven recurring principles (the same explanations it tagged each line of its taxability chart with):

1. Non-enumerated services sold separately aren't taxable. Tennessee taxes only services the statute specifically lists (or services bundled into a taxable sale). Because each add-on is optional and separately sold, an unlisted service isn't pulled into tax.
2. Electronic delivery isn't a transfer of tangible personal property. Digital photos and other items delivered only electronically don't transfer TPP, so there's no taxable sale — though the Department flagged two carve-outs: software is taxable regardless of delivery method (§ 67-6-231), and "specified digital products" are taxable (§ 67-6-233), but digital photographs are not specified digital products.
3. Data processing and information services are excluded from taxable "telecommunication services." Where the customer's primary purpose is the processed data itself (as with database access), § 67-6-102(93)(B)(i) takes it out of the telecom tax.
4. Internet access isn't taxable — barred both by the federal Internet Tax Freedom Act (47 U.S.C. § 151 note) and by Tennessee's own exclusion in § 67-6-102(93)(B)(vi).
5. Remotely accessed software isn't a taxable sale of software. The database/software stays on the Taxpayer's servers; customers only reach it over the Internet, so there's no transfer of title, possession, or control (§ 67-6-102(52)) and thus no taxable sale.
6. Granting a right to use information/IP isn't taxable. Permission to use data, without transferring possession or control of tangible property, is an intangible and not taxed.
7. Sales of tangible personal property are taxable. The rack-space lease, hard copies, and the two redacted items each transfer possession/control of TPP, so they're taxed.

The Department also held that the ten extra services bundled into the monthly database fee (a linked records lookup, an email account, training/support, WAP access, framing the public site, marketing exposure, auto-notifications, FTP search access, the first digital photo, etc.) are merely incidental to the non-taxable database service and don't convert it into a taxable sale — citing Thomas Nelson and Commerce Union Bank.

What this means for you

SaaS, data, and web-services businesses — but mind the date

This ruling is a clean illustration of pre-2015 Tennessee law: if your software and data live on your servers and customers only reach them remotely, in 2011 there was no taxable transfer. Important caveat: Tennessee changed this. Effective in 2015, the state began taxing the use of remotely accessed software (access to and use of software that stays on the seller's servers). So the specific "remote access to software/database isn't taxable" conclusions here should not be assumed to hold today — the disclaimer's "may have been superseded" warning is doing real work for this ruling. The data-processing, information-services, advertising, and Internet-access exclusions, and the "electronic-only delivery isn't a TPP transfer / digital photos aren't specified digital products" points, are more durable, but always check current law.

Accountants and tax professionals

The analytical spine is the telecommunications-service definition (§ 67-6-102(93)(A)) and its statutory exclusions (data processing/information services, Internet access) — that's how Tennessee keeps most online services out of tax — combined with the transfer-of-control test for software/TPP (§ 67-6-102(52), (81)(A)). The "incidental services" holding (Thomas Nelson; Commerce Union Bank) is the tool for bundled freebies. Re-run any remote-access-software conclusion against the post-2015 statute and TENN. CODE ANN. § 67-6-231 as amended.

Common questions

Q: Did the company have to charge sales tax on access to its online database?
A: No. Under 2011 law, remote access to the database (software stays on the company's servers, customer's primary purpose is the data) was a non-taxable data-processing/information service.

Q: Which charges were taxable?
A: Only the lease of server rack space, two redacted items, and hard copies of records — each a transfer of tangible personal property.

Q: Were the digital photos taxable?
A: No. Delivered electronically, they weren't a transfer of tangible personal property, and digital photographs aren't "specified digital products" under § 67-6-233. (A tangible copy would change that.)

Q: Does this still reflect current Tennessee law?
A: Not entirely. Tennessee began taxing remotely accessed software in 2015, so the SaaS/remote-access conclusions here may no longer hold. And in any event a letter ruling binds the Department only as to the taxpayer and facts it was issued to. This summary is informational only, not legal or tax advice.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-202(a) (sales tax on retail sales of tangible personal property, including computer software); § 67-6-231 (computer software taxable regardless of delivery method)
• § 67-6-205(c)(3) (telecommunication services taxable); § 67-6-102(93)(A) (definition); § 67-6-102(93)(B)(i) (data processing/information services excluded); § 67-6-102(93)(B)(vi) (Internet access excluded)
• § 67-6-233 (specified digital products taxable; digital photographs excluded)
• § 67-6-102(81)(A) (definition of "sale"); § 67-6-102(52) (definition of "lease or rental" — transfer of possession or control)
• § 67-6-102(92)(A) (definition of "tangible personal property," including prewritten software); § 67-6-102(71) (definition of "prewritten computer software")
• § 67-6-102(79) (definition of "retail sale"); § 67-6-102(82)(A), (A)(iii) (definition of "sales price")
• § 67-6-101 et seq. (Retailers' Sales Tax Act)

Federal law and case law:

• 47 U.S.C. § 151 note (Internet Tax Freedom Act, Pub. L. No. 105-277, as amended — bars state taxation of Internet access)
• Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994) (only enumerated services are taxable)
• Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987); Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976) (property/service incidental to a non-taxable sale doesn't make it taxable)

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/11-21.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 11-21

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
The applicability of the Tennessee sales and use tax to an online database and other Internet based
information 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 retroactive revocation of the ruling must inure to the taxpayer’s detriment.
FACTS
[NAME OF TAXPAYER] (the “Taxpayer”) is a [REDACTED] that provides [TYPE OF SERVICES].
[REDACTED]. The main service offered by the Taxpayer is an Internet based information system known
as [MAIN SERVICE], which serves [CUSTOMERS IN] Tennessee. [MAIN SERVICE] consists of a
database maintained by the Taxpayer that contains information regarding [REDACTED]. The [MAIN
SERVICE] offers a [REDACTED] service to manage and access [DESCRIPTIONS OF ITEMS FOR
SALE], create reports regarding [REDACTED] and other custom reports, track [REDACTED] statistics,
and a host of other functions. In order to access this data and manipulate the same (including the creation
of reports, etc.), the Taxpayer’s customers are required to obtain a user name and password that allows
them to gain access to the information database and the software tools located on the Taxpayer’s servers.
Each user is charged a monthly fee for access to the [MAIN SERVICE] database.

The Taxpayer provides the following services:
1.

Services included in the monthly fee for access to the [MAIN SERVICE] database

In addition to access to the [MAIN SERVICE] database, the Taxpayer provides customers who pay the
monthly fee for access to certain additional information services, including the following:

2.

a.

Access to [REDACTED] records through a link on the database;

b.

An e-mail account;

c.

Training and technical support via on-site visits, a help desk, and training sessions;

d.

A wireless application protocol site that provides wireless access to [MAIN SERVICE]
data directly from wireless application protocol (“WAP”) and web-enabled phones
[REDACTED];

e.

The ability to frame the [MAIN SERVICE] public site on a subscriber’s own website so
as to provide a direct link with that site;

f.

Marketing [REDACTED] exposure [REDACTED];

g.

Providing up to [NUMBER] auto-notifications to potential [CUSTOMERS] that
[REDACTED];

h.

Access to File Transfer Protocol (“FTP”) [REDACTED] to allow [TAXPAYER’S
CLIENTS] to create searches of the [MAIN SERVICE] database from their own
websites;

i.

A digital photograph of each [ITEM FOR SALE]; and

j.

[REDACTED].

Optional services provided for an additional fee

In addition to the [MAIN SERVICE], the Taxpayer provides a variety of other services and products, with
each such additional service or product offered on an optional basis and for a separately stated fee. As
discussed below, those separately stated fees can take the form of charges as a per-item fee, a one-time
fee, a monthly fee or some combination thereof.
a. Input of [MAIN SERVICE] data
For separately stated per-item fees, the Taxpayer will input data in the [MAIN SERVICE]
database, change data in the database, and scan images into the database.
b. Replacement photos
The Taxpayer will take a replacement digital photograph of [ITEM FOR SALE] and download it
into the database for a fee. (The first digital photograph is included in the [MAIN SERVICE]
database fee.) Once the photograph is in the database, the digital photograph of [ITEM FOR
SALE] becomes part of the [MAIN SERVICE] data.

2

c. Third-party photo sales
The Taxpayer provides digital photographs for [ITEMS FOR SALE], or [MAIN SERVICE] data,
to third parties for purposes such as [REDACTED]. The Taxpayer provides these digital
photographs for a per-photo fee. [REDACTED].
d. [REDACTED] service
The Taxpayer will auto-notify potential buyers of [ITEMS FOR SALE] [REDACTED] for a fee
that will entitle the subscriber up to [NUMBER] notifications. (The first [NUMBER]
notifications come free with the [MAIN SERVICE] database.)
To use this service,
[TAXPAYER’S CLIENT] sets up the search parameters and an e-mail address for a potential
buyer in the [MAIN SERVICE] database, and [MAIN SERVICE] automatically notifies the
potential buyer of the new [ITEMS FOR SALE] by e-mail.
e. [INTERNET DATA EXCHANGE]
For a one time set up fee and a monthly subscriber fee, the Taxpayer will provide access to
[INTERNET DATA EXCHANGE], which allows [TAXPAYER’S CLIENTS] to include
searches of [ITEMS FOR SALE] on their own websites.
f. License for [MAIN SERVICE] data
The Taxpayer offers a worldwide license to use the [MAIN SERVICE] data for a specifically
approved purpose pursuant to a Third Party Data Access Agreement. [REDACTED].
g. Charges to limit and maintain the accuracy of [MAIN SERVICE] data on the database
[REDACTED].
h. Access to online records
Customers can access online records including [DATABASE NAMES] for a monthly fee, which
is a pass through cost from these databases. [REDACTED].
i. Web templates
To facilitate the creation of a customer’s own website, the Taxpayer sells web templates for a fee.
[REDACTED]. There are a limited number of web templates to choose from, with each template
allowing the customer to [REDACTED]. There is no downloading of software involved with the
sale or set up of the template; it is completely browser based.
j. Domain registration
The Taxpayer will provide domain registration for a fee. [REDACTED].
k. Hosting
The Taxpayer offers website and e-mail hosting on its servers for a monthly fee. To provide
these hosting services, the Taxpayer provides space on its server and a fast Internet connection for
use by its customers to establish their own websites or e-mail service.

3

l. Additional e-mail accounts
For a monthly fee, the Taxpayer will provide additional e-mail accounts to its customers, which
reside on a server owned by the Taxpayer. (The first account is provided free with the
subscription to the [MAIN SERVICE] database.)
m. Routable IP address blocks
For a monthly fee, the Taxpayer will provide a block of static internet protocol (“IP”) addresses.
[REDACTED].
n. Network connections
Another service provided by the Taxpayer is facilitating access to and managing [REDACTED]
high-speed data and telecommunications connections, including ADSL, T1 and frame relay
connections for [REDACTED]. In providing access to these connections, the Taxpayer acquires
the ADSL, T1, and frame relay lines from [NAME OF COMPANY]. The frame relay connection
can only be used for data. While the ADSL and T1 line can be used for Voice Over Internet
Protocol (“VoIP”) as well as data, the Taxpayer sets up the connection so that it is only used to
access the Internet. If the customer wants to use the ADSL and/or T1 line for VoIP, the customer
must arrange for and contract with another service provider, such as [NAME OF COMPANY], to
obtain that service. The Taxpayer charges monthly fees for the ADSL, T1, and frame relay
connections. In addition, an installation fee may apply. The installation charge may consist of a
pass through fee from [NAME OF COMPANY] relating to initiating the connection and/or a
charge relating to onsite work performed by the Taxpayer, which involves a Taxpayer staff
member going to a customer’s premises and verifying connectivity with the Internet by hooking
up a laptop to an Internet router.
o. Lease of rack space for servers
For a monthly fee, the Taxpayer leases server rack space in the data center to customers or other
third parties.
p. Internet connection
The Taxpayer will also provide an Internet connection for servers of customers or other thirdparties using the leased rack space for a monthly charge.
q. [REDACTED]
[REDACTED].
r. [REDACTED]
[REDACTED].
s. [HARD COPIES] of [REDACTED]
The Taxpayer will provide hard copies of [REDACTED] for a charge.

4

QUESTION
Which of the Taxpayer’s products and services listed above are subject to the Tennessee sales and use
tax?
RULING
Charges for the [REDACTED – ITEM LISTED UNDER Q, ABOVE], the [REDACTED – ITEM
LISTED UNDER R, ABOVE], the lease of rack space for servers, and [HARD COPIES] of
[REDACTED] are subject to the Tennessee sales and use tax. Charges for the remainder of the listed
services offered by the Taxpayer are not subject to the Tennessee sales and use tax.
ANALYSIS
Under the Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et seq., retail sales of tangible personal
property in Tennessee are subject to sales and use tax. TENN. CODE ANN. § 67-6-102(79) (Supp. 2010)
defines a “retail sale” as a “sale, lease, or rental for any purpose other than for resale, sublease, or
subrent.” The term “sale” is defined under the Tennessee sales and use tax laws in pertinent part as “any
transfer of title or possession, or both . . . of tangible personal property for a consideration.” TENN. CODE
ANN. § 67-6-102(81)(A). TENN. CODE ANN. § 67-6-102(92)(A) defines “tangible personal property” in
pertinent part as “personal property that can be seen, weighed, measured, felt, or touched,” and
specifically includes prewritten computer software.1 Additionally, TENN. CODE ANN. § 67-6-231 (Supp.
2010) specifically provides that the sale or use of computer software is subject to the sales and use tax,
regardless of whether the software is delivered electronically or via tangible storage media.
The Retailers’ Sales Tax Act also imposes the sales tax on certain services. The sales tax does not apply
to all services; rather, it only applies to retail sales of those services specifically enumerated by the
statute. Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994).2 In particular,
TENN. CODE ANN. § 67-6-205(c)(3) (Supp. 2010) imposes the sales tax on retail sales of the service of
“furnishing, for a consideration, of intrastate, interstate or international telecommunication services.”
“Telecommunications service” is defined 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.” TENN.
CODE ANN. § 67-6-102(93)(A). However, the definition of “telecommunication service” specifically
excludes data processing and information services and Internet access services. TENN. CODE ANN. § 67-6102(93)(B)(i),(vi).
1.

[MAIN SERVICE] database service

Charges for access to the [MAIN SERVICE] database are not subject to the Tennessee sales and use tax.

1

“Prewritten computer software” is “computer software … that is not designed and developed by the author or other
creator to the specification of a specific purchaser” and includes prewritten upgrades. TENN. CODE ANN. § 67-6102(71).
2

Note that even if a service is not specifically enumerated by the statute, the service may be subject to the sales tax
where charges for the service are included in the sales price of a taxable good or service. Specifically, TENN. CODE
ANN. § 67-6-102(82)(A) provides that the sales price of a good or service equals the “total amount consideration . . .
for which personal property or services are sold.” Thus, when the sale of a non-enumerated service is part of the
sale of a taxable good or service, the charges for the non-enumerated service are included in the sales price of the
taxable good or service and as such are subject to taxation.

5

The retail sale of tangible personal property, including computer software, is subject to the Tennessee
sales and use tax. TENN. CODE ANN. § 67-6-202(a) (Supp. 2010). TENN. CODE ANN. § 67-6-102(81)(A)
(Supp. 2010) defines the term “sale” in pertinent part 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.” (Emphasis added.) A “lease or rental” occurs when there
is a “transfer of possession or control” of tangible personal property for a fixed or indeterminate term for
a consideration. TENN. CODE ANN. § 67-6-102(52). Thus, if the Taxpayer transfers title, possession, or
control of the [MAIN SERVICE] database software to its customers, then such transfer will be subject to
the Tennessee sales and use tax.
However, the facts indicate that the Taxpayer does not transfer software to its customers. The database
software always remains on the Taxpayer’s servers and the Taxpayer maintains control of the software at
all times. For a monthly fee, the Taxpayer’s customers may gain access to the database, but this access is
only gained remotely via the Internet. Therefore, no retail sale of the [MAIN SERVICE] software takes
place.
Additionally, the Taxpayer’s service of providing access to the [MAIN SERVICE] database is not a
taxable service. As stated previously, only certain services are subject to the Tennessee sales tax. In
particular, the service of “furnishing, for a consideration, of intrastate, interstate or international
telecommunication services” is taxable under TENN. CODE ANN. § 67-6-205(c)(3) (Supp. 2010).
“Telecommunications service” is defined 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.” TENN.
CODE ANN. § 67-6-102(93)(A). However, the definition of “telecommunication service” specifically
excludes “data processing and information services that allow data to be generated, acquired, stored,
processed, or retrieved and delivered by electronic transmission to a purchaser, where such purchaser’s
primary purpose for the underlying transaction is the processed data or information.” TENN. CODE ANN.
§ 67-6-102(93)(B)(i) (emphasis added).
The [MAIN SERVICE] database is a collection of data that is stored on the Taxpayer’s servers and is
retrieved by or delivered to the Taxpayer’s customer. The customer’s primary purpose in paying the
monthly fee for the [MAIN SERVICE] service is the processed data itself. Therefore, this service is
excluded from the definition of “telecommunications service” as data processing or information services.
Because no other enumerated service is applicable to the [MAIN SERVICE] database service, and the
charges for the [MAIN SERVICE] database service are not included as part of the sale of a taxable good
or service, the provision of access to and use of the [MAIN SERVICE] database is not a taxable service.
Furthermore, the additional information services that are provided by the Taxpayer to customers who pay
the monthly [MAIN SERVICE] database service fee are incidental to the [MAIN SERVICE] service.
The customers who pay the monthly fee are purchasing access to and use of the [MAIN SERVICE]
database. The ten additional services are included as part of the fee and are merely incidental to the
database service that is being purchased; the incidental services are therefore not subject to the sales and
use tax. When tangible personal property or taxable service is transferred to a customer incidental to the
sale of a non-taxable service, such incidental property or service does not transform the otherwise nontaxable sale into a taxable sale of tangible personal property or taxable service. See Thomas Nelson, Inc.
v. Olsen, 723 S.W.2d 621 (Tenn. 1987); Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn.
1976).
Because the Taxpayer does not sell the [MAIN SERVICE] software to its customers, nor does it provide a
taxable service by providing access to the [MAIN SERVICE] database, the charges for use of the [MAIN
SERVICE] database service are not subject to the Tennessee sales and use tax.
2.

Additional products and services offered by the Taxpayer

6

As stated in the facts above, in addition to the [MAIN SERVICE] database, the Taxpayer also offers a
number of additional optional services or items. The following chart lists each additional service or item,
states whether the service or item is taxable, and gives a numerical explanation as to the service’s or
item’s taxability. A description of each explanation is given below the chart.

Service/Item

Taxable?

Explanation

Input of [MAIN SERVICE] data

No

1

Replacement photos

No

2

Third-party photo sales

No

2

[REDACTED] Service

No

3

[INTERNET DATA EXCHANGE]

No

3, 4, 5

License for [MAIN SERVICE] Data

No

6

Charges to limit and maintain the accuracy of [MAIN SERVICE] No
data on the database

1

Access to online records

No

3, 4

Web templates

No

5

Domain registration

No

1

Hosting

No

1, 4

Additional email accounts

No

4, 5

Routable IP address blocks

No

4

Network connections

No

3, 4

Lease of rack space for servers

Yes

7

Internet connection
[REDACTED – ITEM LISTED UNDER Q, ABOVE]

No

4

Yes
Yes

7
7

[REDACTED – ITEM LISTED UNDER R, ABOVE]

Yes

7

[HARD COPIES] of [REDACTED]

Yes

7

1) Non-taxable service
Services are subject to the Tennessee sales and use tax only if they are enumerated under the Retailers’
Sales Tax Act or are included as part of a taxable sale of tangible personal property or a service. Because
each of the Taxpayer’s additional services is optional and the Taxpayer sells the services separately, the
charges for the services are not part of a taxable sale. Thus, any service sold by the Taxpayer that is not
included among the taxable services enumerated under the Retailer’s Sales Tax Act is not subject to the
sales and use tax.

7

2) Electronic transfer is not a transfer of tangible personal property
As noted above, the Tennessee sales and use tax is imposed on the retail sale of tangible personal property
in Tennessee. TENN. CODE ANN. § 67-6-102(81)(A) (Supp. 2010) defines the term “sale” in part 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.” (Emphasis
added.) In the case of the electronic transmission of an item, no transfer of tangible personal property
occurs between the Taxpayer and its customers.3 4 There is therefore no taxable sale of tangible personal
property.
Note, however, that the transaction is subject to the Tennessee sales and use tax if at any time the
Taxpayer transfers the item to its customers in tangible form.
3) Data processing and information services
The retail sale of data processing and information services is not subject to the Tennessee sales and use
tax.
As stated previously, only certain services are subject to the Tennessee sales tax. In particular, the service
of “furnishing, for a consideration, of intrastate, interstate or international telecommunication services” is
taxable under TENN. CODE ANN. § 67-6-205(c)(3) (Supp. 2010). “Telecommunications service” is
defined 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.” TENN. CODE ANN. § 67-6-102(93)(A)
(Supp. 2010). However, the definition of “telecommunication service” specifically excludes “data
processing and information services that allow data to be generated, acquired, stored, processed, or
retrieved and delivered by electronic transmission to a purchaser, where such purchaser’s primary
purpose for the underlying transaction is the processed data or information.” TENN. CODE ANN. § 67-6102(93)(B)(i) (emphasis added).
Thus, if a service allows data to be generated or delivered to a customer by electronic transmission, and
the customer’s primary purpose in purchasing that service from the Taxpayer is the processed data itself,
then the service is excluded from the definition of “telecommunications service” as data processing or
information services.
4) Internet access
Under both the Internet Tax Freedom Act (“ITFA”), 47 U.S.C. § 151 note,5 and the Tennessee sales and
use tax laws, the retail sale of Internet access services to end-user customers is not subject to Tennessee
sales and use taxation.

3

Note, however, that TENN. CODE ANN. § 67-6-231 (Supp. 2010) specifically provides that the sale or use of
computer software is subject to the sales and use tax, regardless of whether the software is delivered electronically
or via tangible storage media. See response #5, below, for information regarding sales of software.
4

Additionally, TENN. CODE ANN. § 67-6-233 (Supp. 2010) provides that the sale of specified digital products also
are subject to the sales and use tax. However, digital photographs are not included within the definition of specified
digital products.
5

Internet Tax Freedom Act (Pub. L. No. 105-277, §§ 1100-1104, 112 Stat. 2681-719 (1998) (set out at note to 47
U.S.C. § 151), amended by Pub. L. No. 107-75, § 2, 115 Stat. 703 (2001), Pub. L. No. 108-435, §§ 2-6, 6A, 118
Stat. 2615 (2004), Pub. L. No. 110-108, §§ 2-6, 121 Stat. 1024 (2007)).

8

First, the ITFA prohibits Tennessee from imposing the Tennessee sales and use tax upon the retail sale of
Internet access services. The ITFA is federal legislation that preempts any Tennessee laws relating to the
taxation of Internet access or telecommunications services purchased by Internet access providers.
ITFA § 1105(5), 47 U.S.C. § 151, note, provides that the term “Internet access:”
(A) means a service that enables users to connect to the Internet to access
content, information, or other services offered over the Internet;
(B) includes the purchase, use or sale of telecommunications by a provider of a
service described in subparagraph (A) to the extent such telecommunications are
purchased, used or sold—
(i) to provide such service; or
(ii) to otherwise enable users to access content, information or other services
offered over the Internet;
(C) includes services that are incidental to the provision of the service described
in subparagraph (A) when furnished to users as part of such service, such as a home page,
electronic mail and instant messaging (including voice- and video-capable electronic mail
and instant messaging), video clips, and personal electronic storage capacity;
(D) does not include voice, audio or video programming, or other products and
services (except services described in subparagraph (A), (B), (C), or (E)) that utilize
Internet protocol or any successor protocol and for which there is a charge, regardless of
whether such charge is separately stated or aggregated with the charge for services
described in subparagraph (A), (B), (C), or (E); and
(E) includes a homepage, electronic mail and instant messaging (including voiceand video-capable electronic mail and instant messaging), video clips, and personal
electronic storage capacity, that are provided independently or not packaged with Internet
access.
The ITFA was amended in 2004 with passage of the Internet Tax Nondiscrimination Act, Pub. L. No.
108-435, 118 Stat. 2615, in which Congress clarified the definition of “Internet access” under the ITFA to
include telecommunications services “to the extent that such services are purchased, used, or sold by a
provider of Internet access to provide Internet access.”
Second, the retail sale of Internet access services by the Taxpayer is not subject to Tennessee sales and
use taxation, pursuant to the Retailers’ Sales Tax Act. As stated above, “telecommunication services” is
taxable under TENN. CODE ANN. § 67-6-205(c)(3). However, “internet access service” is also specifically
excluded from the definition of the term. TENN. CODE ANN. § 67-6-102(93)(B)(vi).
5) Software
The retail sale of tangible personal property, including computer software, is subject to the Tennessee
sales and use tax. TENN. CODE ANN. § 67-6-202(a) (Supp. 2010). TENN. CODE ANN. § 67-6-102(81)(A)
(Supp. 2010) defines the term “sale” in pertinent part 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.” (Emphasis added.) A “lease or rental” occurs when there
is a “transfer of possession or control” of tangible personal property for a fixed or indeterminate term for

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a consideration. TENN. CODE ANN. § 67-6-102(52). Thus, if the Taxpayer transfers title, possession, or
control of any computer software to its customers, then such transfer will be subject to the Tennessee
sales and use tax.6
However, the Taxpayer does not transfer any software to its customers. All software always remains on
the Taxpayer’s servers, and the Taxpayer always maintains control of the software. For specific fees, the
Taxpayer’s customers may gain access to the different forms of software, but this access is only gained
remotely via the Internet. Therefore, no taxable retail sale of software occurs.
6) Right to use intellectual property/information
The retail sale of tangible personal property and specifically enumerated services in Tennessee is subject
to the Tennessee sales and use tax. TENN. CODE ANN. § 67-6-102(81)(A) (Supp. 2010) defines a “sale”
in part 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.”
(Emphasis added.) The sale of intangible intellectual property, on the other hand, is not subject to the
Tennessee sales and use tax.
Additionally, when a Taxpayer merely grants its customer permission to use certain information, rather
than transferring possession or control of tangible personal property, the permission to use the
information is not subject to the sales and use tax.
7) Sale of tangible personal property
Retail sales of tangible personal property in Tennessee are subject to the sales and use tax under TENN.
CODE ANN. § 67-6-101 et seq. TENN. CODE ANN. § 67-6-102(79) (Supp. 2010) defines a “retail sale” as
any “sale, lease or rental for any purpose other than for resale, sublease or subrent.” The term “sale” is
defined under the Tennessee sales and use tax laws in pertinent part 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.” TENN. CODE ANN. § 67-6-102(81)(A).
“Lease or rental” is defined as “any transfer of possession or control of tangible personal property for a
fixed or indeterminate term for consideration.” TENN. CODE ANN. § 67-6-102(52). Additionally, TENN.
CODE ANN. § 67-6-102(92)(A) defines “tangible personal property” in pertinent part as “personal
property that can be seen, weighed, measured, felt, or touched.”
TENN. CODE ANN. § 67-6-202(a) (Supp. 2010) imposes the sales tax on the “sales price” of the tangible
personal property sold. The term “sales price” is defined under TENN. CODE ANN. § 67-6-102(82)(A)(iii)
in pertinent part as “the total amount of consideration, including cash, credit, property, and services, for
which personal property or services are sold, leased, or rented, valued in money,” with no deduction for
“[c]harges by the seller for any services necessary to complete the sale.”
Thus, if the Taxpayer transfers title, possession, or control of tangible personal property for a
consideration to a customer, that transaction will be subject to the Tennessee sales and use tax.
Specifically, the Taxpayer leases server rack space to its customers, sells the [REDACTED – ITEM
LISTED UNDER Q, ABOVE] to its customers for a fee, and sells [REDACTED – HARD COPIES] to its
customers for a fee. Each of these items constitute tangible personal property, and the Taxpayer transfers
title, possession, or control of each of the items to its customers for a consideration. Therefore, the sale or

6

Note that TENN. CODE ANN. § 67-6-231 specifically provides that the sale or use of computer software is subject to
the sales and use tax, regardless of whether the software is delivered electronically or via tangible storage media.

10

lease of server rack space, the [REDACTED – ITEM LISTED UNDER Q, ABOVE], and [REDACTED –
HARD COPIES] are subject to the sales and use tax.
Additionally, the Taxpayer charges a fee for its customers’ use of the [REDACTED – ITEM LISTED
UNDER Q, ABOVE], which is also a transfer of tangible personal property and thus subject to the sales
and use tax. [REDACTED].

Elizabeth Henderson
Tax Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

6/10/2011

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