Are fees a company charges to manage clients' cooperative advertising funds — tracking balances, processing reimbursement claims, and reporting — subject to Tennessee sales tax?

Plain-English summary

A company manages cooperative advertising funds for its Clients. Here's how co-op advertising works: a Client and a Third Party (often a retailer or dealer the Client supplies) agree to share certain promotional costs — the Client puts money into a Co-op fund, and the Third Party submits claims for reimbursement of advertising expenses it incurs. The Taxpayer runs that program for its Clients, providing four services (the "Co-op Services"): Database Management (tracking Co-op data and balances — the Client never gets access to the database or any software); Information (answering phone calls about fund rules, usage, and claim forms — the Taxpayer doesn't itself provide the phone/telecom service used for these calls); Administration (receiving and processing claims — checking fund availability, verifying compliance, flagging questionable claims to the Client, cutting reimbursement checks to the Third Party); and Reporting (quarterly, year-end, and on-request usage reports, all delivered electronically). No tangible property changes hands, and the Co-op Services are billed to the Client separately from anything else the Taxpayer sells them. The Taxpayer asked whether these services are taxable. The Department said no.

Why it's not taxable. Tennessee taxes retail sales of tangible personal property and computer software, plus a list of specifically enumerated services (Retailers' Sales Tax Act, §§ 67-6-101 to -907; § 67-6-102(80)(A), (78)). None of that fits here: there's no transfer of title or possession of any tangible property; the Client never gets access to, or a license to use, the Taxpayer's database or software; and electronic delivery of reports doesn't itself transfer tangible property. As for services, only services Tennessee specifically lists as taxable are subject to the tax (Ryder Truck Rental, Inc. v. Huddleston) — and database management, fielding informational phone calls, claims administration, and reporting are not on that list. Finally, because the Co-op Services are sold stand-alone, billed separately from any other goods or services, there's no taxable transaction for them to be bundled into (which would otherwise pull a nontaxable service into a taxable sales price under § 67-6-102(81)(A)).

What this means for you

Companies that administer co-op advertising, rebate, or incentive-fund programs for clients

Pure program-management fees — tracking balances, processing and approving claims, fielding informational calls, and reporting — are not taxable in Tennessee, as long as you don't transfer tangible property or software access to the client and the fees are billed stand-alone, not bundled with a taxable good or service. Keep your billing structured that way to preserve the exemption.

Marketing, rebate, and back-office service providers generally

This reinforces the basic Tennessee rule: a service is taxable only if it's specifically enumerated in § 67-6-205, or it's effectively a delivery mechanism for taxable property/software, or it's bundled into a taxable charge. Program administration, claims processing, and reporting services — standing alone — generally fall outside all three categories.

Accountants and tax professionals

Note the footnote distinguishing this from a taxable telecommunications service: because the Taxpayer doesn't itself furnish the telecom service used for the informational phone calls, that piece can't be separately taxed under § 67-6-205(c)(3). Also note the general three-year recordkeeping duty (§ 67-6-523) still applies even though the underlying services are nontaxable.

Common questions

Q: Are cooperative-advertising fund management fees taxable in Tennessee?
A: No, under these facts — no transfer of tangible property or software, no enumerated taxable service, and the fees are billed stand-alone, not bundled with anything taxable.

Q: Does it matter that reports are delivered electronically?
A: No — electronic delivery of reports/data doesn't itself transfer tangible personal property to the client.

Q: Why isn't this a taxable telecommunications service, since it involves fielding phone calls?
A: Because the Taxpayer doesn't provide the underlying telecommunications service used for those calls — it just answers questions; someone else's network carries the call.

Q: What if these services were bundled with something else the company sells?
A: That could change the answer — if a nontaxable service is sold together with a taxable good or service for one charge, the whole charge can become taxable (§ 67-6-102(81)(A)). Here, the Co-op Services are billed separately and stand alone.

Q: Can I rely on this letter ruling?
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. Confirm your own situation with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.; 2011 codification):

• § 67-6-101 et seq. (Retailers' Sales Tax Act)
• § 67-6-102(78) (definition of "retail sale" — sale other than for resale); § 67-6-102(80)(A) (definition of "sale" — transfer of title/possession for consideration); § 67-6-102(80)(D) (sale includes furnishing of taxable things/services)
• § 67-6-102(91)(A) (TPP includes prewritten computer software); § 67-6-231(a) (retail sale/lease/license/use of computer software taxable)
• § 67-6-102(81)(A) (sales price = total consideration; bundling rule)
• § 67-6-205(c)(3) (telecommunications services taxable — inapplicable here)
• § 67-6-523 (general dealer recordkeeping requirement — three-year retention)

Cases cited by the ruling:

• Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. Aug. 12, 1994) (only specifically enumerated services are subject to Tennessee sales tax)

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/12-14.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 12-14
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 services relating to the management of
cooperative advertising funds.
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] (the “Taxpayer”), a [STATE OF INCORPORATION] corporation, has multiple
clients (the “Clients”) who have entered into cooperative advertising arrangements with [THIRD
PARTY]. Pursuant to these arrangements, the Clients and [THIRD PARTY] share certain
promotional expenditures. The Client provides cooperative advertising funds (the “Co-ops”) that
the [THIRD PARTY] may utilize in its advertising. The Co-ops are structured on a

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reimbursement model, whereby the [THIRD PARTY] must submit a claim for reimbursement
from the Co-op for promotional expenses that it has incurred.1
The Taxpayer provides the following services (the “Co-op Services”) to the Clients with respect
to the Co-ops:
Database Management. The Taxpayer maintains, manages, and updates a database
containing Co-op data and balances. The Clients do not have access to the database and
do not receive any transfer of, or license to use, the database or other software.
Information. The Taxpayer fields phone calls regarding Co-op funds usage, rules, and
requests for additional claim forms. The Taxpayer does not provide the
telecommunications services used for this service.
Administration. The Taxpayer receives and processes Co-op claims. This includes
ascertaining the availability of funds to ensure coverage of the claim; ensuring that claims
comply with the Co-op rules; contacting the Client for decisions on questionable claims;
and issuing checks to [THIRD PARTY] for approved claims.
Reporting. The Taxpayer prepares the following reports, which are all delivered solely
via electronic means: quarterly reports of [THIRD PARTY] claims; year end reports of
Co-op funds usage; and specific reports, as requested.
The Taxpayer provides no tangible personal property to the Clients in conjunction with the Coop Services.
The Co-op Services are provided on a stand-alone basis, independent of any other goods or
services that may be sold by the Taxpayer. The Taxpayer bills the Client for the Co-op Services
separately and apart from any other goods or services that it may provide the Client.
RULING
Are the Co-op Services subject to the Tennessee sales and use tax?
Ruling: No. The Co-op Services are not subject to the Tennessee sales and use tax.
ANALYSIS
Under the Retailers’ Sales Tax Act, TENN. CODE ANN. §§ 67-6-101 to -907 (2011), the retail sale
in Tennessee of tangible personal property is subject to the sales and use tax. TENN. CODE ANN.
§ 67-6-102(78) (2011) provides that the term “retail sale” means “any sale, lease, or rental for
any purpose other than for resale, sublease, or subrent.” TENN. CODE ANN. § 67-6-102(80)(A)
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Generally speaking, cooperative advertising is an arrangement between a manufacturer, wholesaler, or distributor
and another business, typically a retailer, whereby one party helps to pay for some or all of the other party’s
advertising. The cooperative advertising arrangement will include certain requirements, such as the specific
placement of a manufacturer’s product in an advertisement. Cooperative advertising funds are generally structured
on a reimbursement model, rather than as an up-front payment. The party running the advertising campaign must
therefore submit a claim for reimbursement from the cooperative advertising fund.
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defines the term “sale” in pertinent part to mean “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(91)(A) defines “tangible personal property” to include prewritten
computer software. Additionally, TENN. CODE ANN. § 67-6-231(a) (2011) specifically provides
that the “retail sale, lease, licensing or use of computer software” in Tennessee 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.”
TENN. CODE ANN. § 67-6-102(80)(D) defines the term “sale” to include “the furnishing of any of
the things or services taxable” under the Retailers’ Sales Tax Act. 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(81)(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,” with no deduction for the seller’s costs or charges by the seller for
services necessary to complete the sale. 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.
Accordingly, the Co-op Services will be subject to the Tennessee sales and use tax if the
transaction constitutes 1) the sale of tangible personal property or computer software in
Tennessee; 2) the furnishing of a taxable service; and/or 3) the furnishing of an otherwise
nontaxable service that is sold as part of the sale of a taxable good or service.
First, no sale or transfer of tangible personal property occurs in conjunction with the Taxpayer’s
furnishing of the Co-op Services. Additionally, the Taxpayer does not sell, lease, license, or
otherwise provide the use of computer software to its Clients in conjunction with these services.2
The Taxpayer does provide various reports to the Clients; however, the facts indicate that such
reports are always delivered electronically. In the case of the electronic transmission of
documents or data, no transfer of tangible personal property occurs between the Taxpayer and
the Client.3 Additionally, no transfer of tangible personal property is considered to have taken
2

While software may be used by the Taxpayer to maintain the Co-op database, the Client does not itself have access
to or otherwise use the software. The Clients do not have access to the database and do not receive any transfer of,
or license to use, the database or other software.
3

Note that the transfer of certain items via electronic means is subject to the sales and use tax. For example, the
“retail sale, lease, licensing or use of specified digital products transferred to or accessed by subscribers or
consumers” in Tennessee is subject to the sales and use tax. TENN. CODE ANN. § 67-6-233(a) (2011). “Specified
digital products” is defined as “electronically transferred digital audio-visual works, digital audio works and digital
books.” TENN. CODE ANN. § 67-6-102(88). Additionally, TENN. CODE ANN. § 67-6-231(a) (2011) provides that the
retail sale, lease, licensing or use of computer software in Tennessee is subject to the sales and use tax, regardless of
whether the software is delivered electronically or via a tangible storage medium.
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place if the Client subsequently prints out or otherwise creates tangible copies of the
electronically transferred documents for its own use.
Second, the Co-op Services do not constitute taxable services for Tennessee sales and use tax
purposes. As noted above, only specifically enumerated services are subject to the Tennessee
sales and use tax. The Co-op Services include database management, information,
administrative, and reporting services; none of these functions are properly characterized as
being among the services enumerated under the Retailers’ Sales Tax Act.4
Third, no part of the transaction can be described as the furnishing of an otherwise nontaxable
service that is sold as part of the sale of a taxable good or service. The Taxpayer does not make
sales of tangible personal property in conjunction with the Co-op Services, and does not provide
a taxable service. Additionally, the Co-op Services are provided on a stand-alone basis,
independent of any other goods or services that may be sold by the Taxpayer. The Taxpayer bills
the Client for the Co-op Services separately and apart from any other goods or services that it
may provide the Client.
Accordingly, charges for the Co-op Services are not subject to the Tennessee sales and use tax.
Note that the Retailer’s Sales Tax Act does not require that the Taxpayer maintain specific
documentation with respect to its sales of nontaxable services. However, there is a general
requirement that each dealer keep records of its sales and purchases. TENN. CODE ANN. § 67-6523 (2011) requires all taxpayers to establish and maintain records that are adequate for auditors
to use in determining the correct amount of the taxpayer’s tax liability. The Taxpayer should
therefore keep sufficient records of its sales and purchases, including copies of invoices and
purchase orders. Records of business transactions must be retained for a minimum of three years
from December 31 of the year in which the associated Tennessee sales and use tax return was
filed.

Kristin Husat
General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

8-2-2012

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Importantly, the Taxpayer does not provide the telecommunications services used in the communications portion
of the Co-op Services. Thus, that function cannot be characterized as a taxable telecommunications service under to
TENN. CODE ANN. § 67-6-205(c)(3) (2011).
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