Are software 'configuration' consulting services -- setting toggles and building tables within already-installed software, without writing new code -- taxable in Tennessee, and can a vendor bill them tax-free separately from software development work?

Plain-English summary

A company was consolidating its internal systems onto an already-purchased, already-installed enterprise software platform. To keep the system running well, it separately bought a lot of software consulting services, split into two clearly separate categories:

• Custom development consultants, who write and modify code to build add-ons for the standard software (their taxability was NOT at issue in this ruling).
• Software configuration consultants, who have no authority to write or change any code -- they just set predefined toggles/switches and build tables that direct how the standard software behaves (sometimes loosely called "customizing," even though no code is touched). They also troubleshoot issues and coordinate with the software vendor. The company kept these two groups organizationally, contractually, and security-wise separate: different people, different technology-management groups, and configuration services were purchased under their own separate statements of work, independent of any software license or maintenance agreement.

The company asked three things: (1) are the configuration services taxable; (2) if a vendor separately and correctly charges for both taxable and nontaxable items, can it still charge sales tax on the nontaxable portion; and (3) if tax was mistakenly charged in the past, how does a refund work.

The Department's answers:

1. Configuration services are NOT taxable, because to be taxed they'd have to be (a) a sale of software, (b) fabrication/customized modification of software, (c) sold as part of a software sale, or (d) repair/maintenance/installation of software -- and configuration meets none of those. The consultants don't sell software (only the platform vendor does that), don't touch or modify code (they just flip existing switches and build tables), aren't bundled with any software sale or license (bought separately, under independent statements of work, sometimes from vendors who don't even sell the underlying software), and don't repair, maintain, or install anything (that's covered by the platform's own license agreement).
2. No, a vendor can't charge tax on a genuinely separate, optional, nontaxable service just because it also sells taxable goods or services to the same customer -- if the nontaxable service is independently sold and separately charged, sales tax doesn't apply to that piece.
3. Refunds of any sales tax mistakenly charged and paid on these nontaxable services follow the normal Tenn. Code Ann. § 67-1-1802 procedure: the vendor must first refund/credit the customer, then file its own claim with the Department within three years of December 31 of the year the tax was paid.

The Department flagged one important trap: if a single statement of work bundles configuration services together with development, repair, upgrade, or installation work, the whole thing becomes taxable as part of that software sale. The nontaxable result here depended entirely on keeping configuration work in its own, cleanly separate contract lane.

What this means for you

Software consulting and IT services firms

"Configuration" work -- flipping existing settings, building tables, using the software's built-in tools without touching code -- is not automatically taxable just because it's software-adjacent. But the exemption is fragile: it only holds if configuration is sold as its own separate, optional service, invoiced under its own statement of work, independent of any license, maintenance, development, or installation work. Combine configuration with any code-touching or install/repair work on the same engagement, and the whole thing likely becomes taxable.

Businesses buying software configuration services

Ask your vendor to keep configuration work on its own, separately priced statement of work if you want to avoid sales tax on it — bundling it with development or installation invites tax on the whole bill.

Accountants and tax professionals

This is a clean "true object" / bundling analysis: the four-part test the Department applied (sale of software / fabrication or customized modification / sold as part of a software sale / repair-maintenance-installation) is a useful checklist for any software-adjacent service question, and the refund mechanics under § 67-1-1802 apply broadly whenever a vendor discovers it has over-collected Tennessee sales tax.

Common questions

Q: Is all software consulting work taxable in Tennessee?
A: No. Only consulting that amounts to selling software, creating/modifying code, being bundled with a software sale, or repairing/maintaining/installing software is taxable. Pure configuration -- using existing settings/tools without touching code -- is not.

Q: Can a vendor mix taxable and nontaxable software services on one invoice tax-free?
A: Only if the nontaxable service is genuinely optional, independently sold, and separately charged. If a single statement of work bundles configuration with development or installation, the whole charge becomes taxable.

Q: How does a vendor get back sales tax it mistakenly charged on nontaxable configuration services?
A: It must first refund or credit the tax to the customer, then file its own refund claim with the Department under Tenn. Code Ann. § 67-1-1802 within three years from December 31 of the year the tax was paid; a denied claim can be challenged in chancery court within one year.

Q: Can another company rely on this ruling for its own software consulting contracts?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified by the Commissioner. Contract structure and vendor practices vary, so confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-101 et seq. (Retailers' Sales Tax Act)
• § 67-6-102(79) (Supp. 2010) ("retail sale"); § 67-6-102(81)(A) ("sale"); § 67-6-102(92)(A) ("tangible personal property," including prewritten software)
• § 67-6-231(a) (Supp. 2010) (computer software -- prewritten and custom -- taxable however delivered); § 67-6-102(71) ("prewritten computer software")
• § 67-6-205(c)(4) (repair services taxable); § 67-6-205(c)(6) (installation services taxable)
• § 67-6-102(82)(A) ("sales price," including services necessary to complete a taxable sale)
• § 67-6-387 (Supp. 2010) (use tax exemption for self-fabricated software for one's own use)
• § 67-1-1802 (Supp. 2010) (sales tax refund claim procedure -- 3-year filing window, 6-month deemed-denial rule, 1-year suit deadline)

Tennessee cases cited by the ruling:

• Creasy Sys. Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986) (fabrication/customized modification of software is a taxable sale of software)
• Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994) (sales tax on services applies only to specifically enumerated services)
• Austin Co. v. Woods, 620 S.W.2d 73 (Tenn. 1981) (sales price of tangible personal property does not include related services provided by a third party)

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/11-29.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 11-29

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 application of the Tennessee sales and use tax to software configuration 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
[TAXPAYER] is [REDACTED INFORMATION].
[REDACTED INFORMATION], the Taxpayer has for [TIME PERIOD] been in the process of
consolidating its various [REDACTED] systems into a single centralized system at its [LOCATION
IN TENNESSEE]. This centralization of functions involves the [SYSTEM] offered by
[COMPANY]. The initial necessary [COMPANY] software was purchased by the Taxpayer in
[REDACTED]; the software is located on the Taxpayer’s servers in Tennessee. The Taxpayer paid

Tennessee sales tax on the purchase and installation of this software. Repair, maintenance, and
installation of the software is covered by the [COMPANY] software license agreement.
The Taxpayer also purchases a significant amount of software consulting services in order to
maintain an optimal level of functionality. Consultants working with the Taxpayer assist in utilizing
the functionalities in the software to best meet a particular business unit’s needs. The consultants also
input data and access capabilities present within the software that are most advantageous to the
Taxpayer’s business requirements in general.
The software configuration services are purchased by the Taxpayer from many vendors, including
[COMPANY]. When purchased from [COMPANY], the software configuration services are acquired
at the Taxpayer’s option, separate and apart from software licenses or maintenance agreements. The
[COMPANY] license agreement contains no provision regarding the furnishing of software
configuration services to the Taxpayer.
Professional service agreements are generally entered into at the outset of the Taxpayer’s relationship
with a vendor and cover statements of work for various services as well as schedules of deliverables.
Multiple statements of work for services or other deliverables may be executed under a single
professional service agreement. Each statement of work operates independently and separately from
other statements of work under a single professional service agreement. Each statement of work is
invoiced separately.
Many of the Taxpayer’s software consulting contracts are related to [REDACTED]. The Taxpayer
contracts with two categories of consultants to work on this project.
The first category of consultants, custom [SOFTWARE] development consultants, includes those
individuals with authority to develop additional code complimentary to the [COMPANY] standard
delivered software.1 These consultants work during the development phase of a project to create or
customize programming to fit the Taxpayer’s particular needs. The taxability of software
development services provided by the custom [SOFTWARE] development consultants is not at issue
in this letter ruling.
The second category of consultants, software configuration consultants, is comprised of persons who
do not have the authority to create new code or to amend or alter existing code. Software
configuration [REDACTED], which some software services contracts may refer to as “customizing,”
is the act of setting pre-defined software toggles or switches or building tables that give direction
within the standard delivered application software. Software configuration consultants do not
develop, modify, or create software code. In addition, the software configuration services include
troubleshooting and resolving customer issues, as well as coordinating discussions between
[COMPANY] and the Taxpayer’s customers to help resolve product issues.
Persons who are authorized to perform software configuration services are not authorized to perform
custom [SOFTWARE] development work. The Taxpayer has imposed security authorizations to
control this distinction. Furthermore, from an organization viewpoint, one technology management
group controls software configuration work, and a separate group controls software development
work.

1

[REDACTED].

2

QUESTIONS

1. Are the services provided by the software configuration consultants subject to the Tennessee
   sales and use tax?
2. To the extent the Taxpayer and its vendors are able to separate nontaxable services from taxable
   services purchased, is the vendor permitted to charge Tennessee sales and use tax on the portion
   of the sales attributable to the nontaxable services?
3. If a vendor has incorrectly charged Tennessee sales and use tax on previous sales of nontaxable
   services, what procedures must be employed in the event that the Taxpayer requests a refund of
   sales taxes previously paid?
   RULINGS
4. No. The services provided by the software configuration consultants as described herein are not
   subject to the Tennessee sales and use tax.
5. No. If a vendor sells an optional nontaxable service independent of the sale of taxable goods or
   services and separately charges for the various goods and services sold, the vendor may not
   charge sales tax with respect to the independent nontaxable service.
6. In the event that the Taxpayer requests a refund of sales taxes previously paid with respect to
   nontaxable services, the Taxpayer’s vendors must follow the procedure for claiming refunds set
   forth under TENN. CODE ANN. § 67-1-1802 (Supp. 2010).
   ANALYSIS
   1.

Services provided by the software configuration consultants

The services provided by the software configuration consultants as described herein are not subject to
the Tennessee sales and use tax.
For the reasons discussed below, to be subject to the Tennessee sales and use tax, the services
provided by the software configuration consultants must constitute: 1) a sale of prewritten or custom
computer software; 2) services involving the fabrication of, or customized modifications or
enhancements to, computer software; 3) services sold as part of the sale of computer software; and/or
4) services involving the repair, maintenance, or installation of computer software.
Retail sales of tangible personal property in Tennessee are subject to the sales and use tax under the
Retailers’ Sales Tax Act, 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 . . . 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,

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measured, felt, or touched,” and specifically includes prewritten computer software.2 Additionally,
TENN. CODE ANN. § 67-6-231(a) (Supp. 2010) specifically provides that the “retail sale, lease,
licensing or use of computer software in this state, including prewritten and custom computer
software,” is subject to the sales and use tax, “regardless of whether the software is delivered
electronically, delivered by use of tangible storage media, loaded or programmed into a
computer, created on the premises of the consumer or otherwise provided.” Finally, the Tennessee
Supreme Court has stated that the fabrication of, or customized modification or enhancement to,
computer software is considered a taxable sale of computer software.3 See Creasy Sys. Consultants,
Inc. v. Olsen, 716 S.W.2d 35, 36 (Tenn. 1986).
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. Aug. 12,
1994). Even if a service is not specifically enumerated by the statute, however, 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 of 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.
With respect to particular enumerated services, TENN. CODE ANN. § 67-6-205(c)(4) (Supp. 2010)
imposes the sales tax on the service of repairing tangible personal property. Similarly, TENN. CODE
ANN. § 67-6-205(c)(6) imposes the sales tax on the service of installing tangible personal property
that remains tangible personal property following installation. Accordingly, the repair or installation
of software is a taxable service for purposes of the Tennessee sales and use tax. While consulting
services are not enumerated under the Retailers’ Sales Tax Act and are generally not subject to the
sales tax, the consulting services will nevertheless be subject to taxation if the services involve the
repair, upgrade, maintenance, or installation of computer software. Additionally, as explained above,
charges for consulting services will be subject to taxation when the sale of the services is part of the
sale of computer software.
In summary, to be subject to the Tennessee sales and use tax, the services provided by the software
configuration consultants must constitute: 1) a sale of prewritten or custom computer software; 2)
services involving the fabrication of, or customized modifications or enhancements to, computer
software; 3) services sold as part of the sale of computer software; and/or 4) services involving the
repair, maintenance, or installation of computer software. In the Taxpayer’s case, none of these
requirements is met.
First, the services provided by the software configuration consultants do not constitute the sale of
prewritten or custom computer software to the Taxpayer. [COMPANY] is the only party that makes
sales of software to the Taxpayer.
2

“Prewritten computer software” is “computer software … that is not designed and developed by the author or other
creator to the specifications of a specific purchaser” and includes prewritten upgrades. TENN. CODE ANN. § 67-6102(71).
3

Note that TENN. CODE ANN. § 67-6-387 (Supp. 2010) exempts from the Tennessee use tax the fabrication of
computer software by a person for that person’s own use and consumption.

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Second, the software configuration consultants do not create or otherwise fabricate computer
software for the Taxpayer, nor do they perform customized modifications or enhancements to the
[COMPANY] software. Rather, the consultants set pre-defined software toggles or switches and
build tables that give direction within the [COMPANY] application software. Significantly, these
activities do not involve the modification or enhancement of software code; the consultants simply
activate features already coded within the existing software, configuring the software to optimize its
functionality.
Third, the services provided by the software configuration consultants are not purchased as part of
the sale of a software product or license. This is obviously the case when the software configuration
consultant is employed by a vendor that does not sell software to the Taxpayer. See Austin Co. v.
Woods, 620 S.W.2d 73, 76 (Tenn. 1981) (holding that sales price of tangible personal property does
not include related services provided by third party). Under the facts provided, this conclusion is
likewise applicable in instances where the software configuration consultant is employed by a vendor
that also makes sales of software to the Taxpayer. The sale of software may occur when
[COMPANY] sells its prewritten software to the Taxpayer or when custom [SOFTWARE]
development consultants develop additional code complimentary to [COMPANY] prewritten
software.
In the case of [COMPANY], the software configuration services are acquired at the Taxpayer’s
option, separate and apart from [COMPANY]’s software licenses or maintenance agreements. The
[COMPANY] license agreement in fact makes no mention of software configuration services.
Rather, the Taxpayer and [COMPANY] enter into a separate agreement for the purchase of services;
specific orders for services are made pursuant to individual statements of work. Importantly, each
statement of work operates independently and separately from the others under the service
agreement. The sale of software configuration services is therefore not dependent upon, or otherwise
connected with, the sale of other types of services, some of which may involve the sale of software.
Additionally, the Taxpayer may, and in fact does, opt to acquire software configuration services from
a vendor other than [COMPANY]; this fact further indicates that [COMPANY]’s sale of software
and [COMPANY]’s sale of configuration services are separate and distinct transactions.
In the case of other vendors, as with [COMPANY], a professional service agreement is generally
entered into at the outset of the Taxpayer’s relationship with the vendor. The professional service
agreement covers statements of work for various services as well as schedules of deliverables.
Multiple statements of work for different services may be executed under a single professional
service agreement. Thus, a single vendor may provide software configuration services pursuant to
one statement of work and custom [SOFTWARE] development services pursuant to another.
Importantly, each statement of work operates independently and separately from the others under the
professional service agreement; the sale of software configuration services is therefore not dependent
upon or otherwise connected with the sale of custom [SOFTWARE] development services. The
vendor’s sale of software (in the form of custom [SOFTWARE] development services) and the
vendor’s sale of configuration services are thus properly characterized as separate and distinct
transactions.
The distinctness of the sales is further underscored by the fact that a single person will never perform
both custom [SOFTWARE] development services and software configuration services. Persons who
are authorized to perform software configuration services are not authorized to perform custom
[SOFTWARE] development work. Similarly, from an organization viewpoint, one technology
management group controls software configuration work, and a separate group controls software

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development work. There is therefore no overlap of software development services and software
configuration services.
Fourth, the software configuration consultants do not repair, maintain, or install the [COMPANY]
software for the Taxpayer. Repair, maintenance, and installation of the [COMPANY] software is
covered by the [COMPANY] software license agreement.
Accordingly, the services provided by the software configuration consultants are not subject to the
Tennessee sales and use tax. Note, however, that if a statement of work were to include both software
configuration services and custom [SOFTWARE] development services (or any other service that
involves the creation, fabrication, installation, upgrade, or repair of software), the software
configuration services would be subject to taxation as part of the sale of software.
2.

Charges for services

The Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et seq., imposes the sales tax on the sales
price of certain services enumerated by the statute. Ryder Truck Rental, Inc. v. Huddleston, 1994 WL
420911 (Tenn. Ct. App. Aug. 12, 1994). Charges for a service that is not enumerated by the statute
may nevertheless be subject to the sales tax if such charges are included in the sales price of taxable
services or tangible personal property. TENN. CODE ANN. § 67-6-102(82)(A) provides in pertinent
part that the “sales price” of taxable services or tangible personal property is the “total amount of
consideration . . . for which personal property or services are sold,” including any services necessary
to complete the sale, with no deduction for the seller’s costs, labor, and so on.
Thus, if the seller charges a lump sum for all the goods and services sold, the sales price of the
taxable goods and services will be the total amount of consideration paid. However, when the vendor
sells an optional nontaxable service independent of the sale of taxable goods or services and
separately charges for the various goods and services sold, the seller may not charge sales tax with
respect to the independent nontaxable service.
Accordingly, in the Taxpayer’s case, if a vendor separately charges for the software configuration
services, the software configuration services are optional and sold independent of any taxable goods
or services, and the software configuration services are not subject to taxation for the reasons set
forth in the response to Question #1, the vendor may not charge Tennessee sales and use tax with
respect to those services.
3.

Procedure for claiming refunds of Tennessee sales tax paid

In the event that the Taxpayer desires a refund of sales taxes previously paid with respect to the
services provided by the software configuration consultants, the Taxpayer’s vendor must follow the
procedure for claiming refunds set forth under TENN. CODE ANN. § 67-1-1802 (Supp. 2010).
With respect to a refund of sales taxes paid, TENN. CODE ANN. § 67-1-1802(a)(1) requires that the
vendor first refund or credit the sales tax to its customer (in this case, the Taxpayer). TENN. CODE
ANN. § 67-1-1802(a)(1) also requires that the vendor submit its claim for refund within three years
from December 31 of the year in which the tax payment was made. The claim must set forth each
ground upon which a refund is claimed, the amount of such refund, the tax period, the tax type, and
any other information reasonably sufficient to apprise the Commissioner of Revenue of the general

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basis for the refund claim.4 It is recommended that the vendor include a copy of this letter ruling with
any claims for refund of sales taxes paid with respect to the services provided by the software
configuration consultants.
If a claim is not determined within the six-month period following receipt of the claim by the
Commissioner, the claim shall be deemed denied for the purpose of filing suit in chancery court.
TENN. CODE ANN. § 67-1-1802(b)(2). The vendor must file suit on a denied refund claim in the
appropriate Tennessee chancery court within one year from the date that the refund claim was filed
with the Department. TENN. CODE ANN. § 67-1-1802(b)(1).

Kristin Husat
Senior Tax Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

06/23/2011

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A Tennessee sales and use tax refund claim form is available on the Department’s website at
http://state.tn.us/revenue/forms/sales/f1403301.pdf.

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