A Tennessee company gives customers free web access to their account information, separately sells access to a rebranded third-party online platform, and uses remotely accessed software to run its own operations. Which of these are subject to Tennessee sales tax, and how does it handle software its employees use both inside and outside Tennessee?

Plain-English summary

A Tennessee-headquartered service company (its identity and industry are redacted) asked the Department how Tennessee sales and use tax applies to four different software-related pieces of its business. The four answers together are a clear map of how Tennessee taxes remotely accessed software after the 2015 law that put internet-hosted software on the same footing as software you download or buy on a disc.

1. Free website access bundled with the company's services — not taxable. The company lets customers log in to a website to view and adjust information about their own accounts, at no separate charge and only as part of buying the company's main services. The website is computer software, and customers use it from Tennessee. But the Department applied the true-object test: what customers are really paying for is the company's underlying (nontaxable) service, and using the website is "merely incidental" to that. So the company is treated as the user of its own website in delivering its service, and the bundled access is not taxed.

2. The company can buy the third-party "System" software tax-free for resale. The company licenses a web-based platform (the "System") from a third party that hosts it, rebrands it with the company's own name and logo, and resells access to its customers in a separate, separately itemized transaction. Crucially, the company does not use the System to deliver its own services — it buys it solely to resell it. Because that is a genuine sale for resale, the company may give the third party a resale certificate and buy the license exempt.

3. The company's charges to customers for access to the System — taxable. When the company turns around and sells its customers access to that same System, it is selling remotely accessed software. The System sits on the third party's servers and the company's customers reach it from Tennessee, so those charges are subject to Tennessee sales and use tax (§ 67-6-231(a)(2)).

4. Software the company's own employees use in multiple states — pay only Tennessee's share. To run its business, the company buys remote access to software used by employees both inside and outside Tennessee. Tennessee tax applies only to the in-state portion. The company has two ways to handle it: present the seller a Remotely Accessed Software Direct Pay Permit and remit tax directly to the Department on the Tennessee-user percentage; or present a fully completed Streamlined certificate of exemption and pay the seller tax on the Tennessee-user percentage. Either way it allocates by dividing Tennessee users by total users (using each user's home or business address) and updates the percentage when the mix materially changes.

The throughline of Questions 2 and 3 is the heart of this ruling: the same piece of remotely accessed software can be bought tax-free (as a resale) and then taxed when resold — what matters is whether you use the software to furnish your own service (you're the taxable end user) or resell access to it (you're a reseller who collects the tax from the buyer).

What this means for you

Software resellers and white-label / rebranded SaaS

If you license a platform from a vendor, rebrand it, and resell access to your customers without using it yourself to deliver a separate service, Tennessee treats that as a sale for resale: you can buy the license tax-free with a resale certificate, and you collect tax from your customers on the access you sell. The dividing line is use — the moment you use the software to provide your own service, you become the end user and owe tax on your purchase (see Tennessee LR 17-01, the flip side of this point).

Businesses that bundle a free portal with a service

Giving customers free web or portal access as part of a larger service usually isn't separately taxable, because the true object is the service and the portal is incidental. But that depends on the portal not being the thing customers are really buying, and on it not being charged for separately. If the software itself is the true object, the charge is taxable (compare Tennessee LR 17-15, where access to a scheduling platform was the true object and was taxed).

Companies buying SaaS used by employees in several states

When you buy remote access to software your employees use in multiple states, you owe Tennessee tax only on the Tennessee share. Use a Direct Pay Permit (and self-remit) or a Streamlined certificate of exemption, and allocate by the percentage of users whose residential or business address is in Tennessee. Keep records supporting the percentage, and revisit it when your headcount mix shifts.

Accountants and tax professionals

The analysis tracks the 2015 remote-software law (§ 67-6-231(a)(2); 2015 Tenn. Pub. Acts Ch. 514, § 22): (1) remotely accessed software is taxed where the customer accesses it; (2) the dealer-resale carve-out lets a reseller buy access tax-free (§ 67-6-231(a)(2); "resale," § 67-6-102(75)(A)), while a service provider that consumes software is the end user (§ 67-6-102(75)(B)(i)); (3) only enumerated services are taxed (§ 67-6-205), so the bundled portal drops out under the true-object test (Thomas Nelson; AT&T; Rivergate Toyota; Ltr. Rul. 14-10); and (4) multistate allocation by in-state user percentage, implemented through a Direct Pay Permit or a Streamlined certificate (see Sales & Use Tax Notices 15-14 and 15-24).

Common questions

Q: Is remotely accessed software (SaaS) taxable in Tennessee?
A: Generally yes. Since the 2015 law, the access and use of software hosted by the vendor is taxed when the customer accesses it from Tennessee — regardless of whether anything is downloaded.

Q: I rebrand and resell a vendor's platform. Do I pay tax when I buy it?
A: No, if you buy it solely to resell access and don't use it to provide your own service. Give the vendor a resale certificate, buy it tax-free, and collect tax from your customers on the access you sell.

Q: I give customers a free login portal as part of my service. Is that taxable?
A: Usually not. If the portal is incidental to your nontaxable service and isn't sold separately, the true object is the service and the access isn't separately taxed. If the software is what customers are really buying, it's taxable.

Q: My employees use the same software in several states. Do I pay Tennessee tax on all of it?
A: No — only on the Tennessee portion. Present the seller a Remotely Accessed Software Direct Pay Permit (and self-remit) or a fully completed Streamlined certificate of exemption, and allocate by the percentage of your users located in Tennessee.

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 facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-231(a)(1) (sale, license, or use of computer software taxable regardless of delivery method); § 67-6-231(a)(2) (remotely accessed software taxed where the customer accesses it; dealer carve-out for software bought only to resell access; multistate allocation by in-state user percentage) — 2015 Tenn. Pub. Acts Ch. 514, § 22 (eff. July 1, 2015)
• § 67-6-102(76) ("retail sale"); § 67-6-102(78)(A), (C), (K) ("sale")
• § 67-6-102(68) ("prewritten computer software"); § 67-6-102(18) ("computer software"); § 67-6-102(24) ("delivered electronically"); § 67-6-102(89)(A) ("tangible personal property")
• § 67-6-102(75)(A) ("resale"); § 67-6-102(75)(B)(i) (a service provider that buys software to furnish its service is the end user/consumer)
• § 67-6-205 (sales tax applies only to specifically enumerated services); § 67-6-205(c)(3) (telecommunication services enumerated)
• § 67-6-102(90)(A) ("telecommunications service"); § 67-6-102(90)(B)(i) (data processing and information services excluded)
• § 67-6-502 (dealer collection of the sales tax)

Case law:

• Creasy Sys. Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986) (custom modification/enhancement of software = taxable sale of software)
• Univ. Computing Co. v. Olsen, 677 S.W.2d 445 (Tenn. 1984); Commerce Union Bank v. Tidwell, 538 S.W.2d 405, 408 (Tenn. 1976) (software treated as tangible personal property after the 1977 amendment)
• True object / enumerated services: Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987); AT&T Corp. v. Johnson, 2002 WL 31247083 (Tenn. Ct. App. 2002); Rivergate Toyota, Inc. v. Huddleston, 1998 WL 83720 (Tenn. Ct. App. 1998); Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132 (Tenn. 1992); Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994); Tenn. Dep't of Revenue Ltr. Rul. 14-10 (Oct. 14, 2014)

Department guidance:

• Tennessee Sales and Use Tax Notice #15-14 and Notice #15-24 (remotely accessed software; multistate user allocation)

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/16-01.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 16-01
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and circumstances
presented, and is an interpretation of the law at a specific point in time. The law may have
changed since this ruling was issued, possibly rendering it obsolete. The presentation of this
ruling in a redacted form is provided solely for informational purposes, and is not intended as
a statement of Departmental policy. Taxpayers should consult with a tax professional before
relying on any aspect of this ruling.
SUBJECT
Application of the Tennessee sales and use tax to remotely accessed software.
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”) is an [REDACTED – SERVICE] provider headquartered in [CITY],
Tennessee. The Taxpayer’s [REDACTED – PRODUCTS] include [REDACTED]. The Taxpayer directly
owns and controls one hundred percent of [REDACTED] operating subsidiaries that provide
[REDACTED – PRODUCTS] (the “Affiliates”).

Website Access
As part of its [REDACTED – PRODUCTS] offerings, the Taxpayer provides Web-based access to
[CUSTOMERS] (a “User” or the “Users”) to access information on the [REDACTED – PRODUCTS]. The
Taxpayer provides Users with a non-exclusive, non-transferable, limited right to access and use the
Website. Through a username and password, a User may access the content on the Website to
obtain information on its [REDACTED – PRODUCTS]. A [CUSTOMER] may review information such as
[REDACTED] or make [REDACTED] changes (e.g., [REDACTED]). A [CUSTOMER] generally evaluates
[REDACTED] information or pulls reports of data maintained and owned by the Taxpayer. The
Taxpayer does not charge Users for access to the Website or for the ability to obtain information
from the Website. Access to the Website is part of the overall [REDACTED] contract entered into
between the parties and is never sold separately from the sale of [REDACTED] services.

The System
The Taxpayer provides its customers with the option to subscribe to a web-based [REDACTED –
PRODUCT] technology solution (the “System”) that allows a [CUSTOMER] to manage its own
[INFORMATION]. The Taxpayer’s customers access the System through a hosted extranet site with a
username and password. The customer itself uses the System for the purpose of managing and
administering [REDACTED – INFORMATION]. The Taxpayer does not use the System to provide
[REDACTED – SERVICES], and the Taxpayer’s only role after implementation of the System is
technical support.
The Taxpayer licenses the System from a third party ([THIRD PARTY]) that hosts the System on its
own computer servers. The [THIRD PARTY] grants the Taxpayer a non-exclusive, non-transferable
license for its own use and for use by the Taxpayer’s customers. The Taxpayer then modifies the
software to identify it as being provided by the Taxpayer itself, rather than the [THIRD PARTY] (i.e.,
the System includes the Taxpayer’s own name, logo, and trademarks). The Taxpayer, itself, does not
use the System [REDACTED].
The price the Taxpayer charges a customer is based on [REDACTED]. The Taxpayer separately
itemizes its charges for the System from its [REDACTED – SERVICES].

Taxpayer’s Remote Access of Various Software Applications
In order to provide its [REDACTED – SERVICES], the Taxpayer purchases and uses software
applications that its employees access remotely over the Internet from locations both inside and
outside of Tennessee.
RULINGS
1.

Is the Taxpayer’s provision of customer access to its Website subject to the Tennessee sales
and use tax?

Ruling: No. The Taxpayer offers access to the Website in order to provide [REDACTED –
SERVICES].
2.

May the Taxpayer purchase the System from the [THIRD PARTY] exempt from the Tennessee
sales tax if it provides the [THIRD PARTY] with a properly completed resale certificate?
Ruling: Yes. The Taxpayer licenses the System from the [THIRD PARTY] for resale to its own
customers.

3.

Are the Taxpayer’s charges to its customers for access to the System subject to the
Tennessee sales and use tax?
Ruling: Yes. The customers’ access to the System is subject to the Tennessee sales and use
tax as remotely accessed software.

4.

Is the Taxpayer required to remit Tennessee sales tax on its purchases of remotely accessed
software used by persons located inside and outside of Tennessee?
Ruling: The Taxpayer may present the seller with a Remotely Accessed Software Direct Pay
Permit at the time of purchase and remit sales tax directly to the Department on the portion
of the sales price that corresponds to the percentage of its users located inside Tennessee.
Alternatively, the Taxpayer may present the seller with a fully completed Streamlined
certificate of exemption at the time of purchase to exclude the portion of the sales price that
corresponds to its percentage of users located outside Tennessee, and pay sales tax based
on its percentage of users located inside of Tennessee.
ANALYSIS
LEGAL BACKGROUND

1. Taxation of Software
   1

Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and
specifically enumerated services is subject to the sales tax, unless an exemption applies. “Retail sale”
2
is defined as “any sale, lease, or rental for any purpose other than for resale, sublease, or subrent.”
TENN. CODE ANN. § 67-6-102(78)(A) (Supp. 2015) defines “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.” Tangible
personal property includes “prewritten computer software,” which is defined in TENN. CODE ANN. § 676-102(68) in pertinent part as “computer software, including prewritten upgrades, that is not

1

Tennessee Retailers’ Sales Tax Act, ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts Ch. 22, 22-54 (codified as amended at
TENN. CODE ANN. §§ 67-6-101 to -907 (2013)).
2

TENN. CODE ANN. § 67-6-102(76) (Supp. 2015).

designed and developed by the author or other creator to the specifications of a specific
3
purchaser.”
In addition to the transfer of tangible personal property, the term “sale” also includes “the furnishing
4
of any of the things or services” taxable under the Retailers’ Sales Tax Act. One of the “things”
specifically taxable is:
[t]he retail sale, lease, licensing or use of computer software in this state, including
prewritten and custom computer software . . . regardless of whether the software is
delivered electronically, delivered by use of tangible storage media, loaded or programmed
5
into a computer, created on the premises of the consumer or otherwise provided.
“Computer software” is “a set of coded instructions designed to cause a computer . . . to perform a
6
task.” Computer software is “delivered electronically” if delivered “by means other than tangible
7
storage media.” 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
8
software.
Additionally, the term “sale” specifically includes the transfer of computer software, including the
creation of computer software on the premises of the consumer and any programming,
9
transferring, or loading of computer software onto a computer.
In response to advances in technology that allow persons to remotely access and use software over
the Internet, the Tennessee General Assembly adopted into law 2015 Tenn. Pub. Acts Ch. 514, § 22
3

Tangible personal property” includes “property that can be seen, weighed, measured, felt, or touched, or that
is in any other manner perceptible to the senses.” TENN. CODE ANN. § 67-6-102(89)(A).

With regard to prewritten computer software, TENN. CODE ANN. § 67-6-102(68) provides that “‘[p]rewritten
computer software’ or a prewritten portion of the computer software that is modified or enhanced to any
degree, where the modification or enhancement is designed and developed to the specifications of a specific
purchaser, remains prewritten computer software.” Note, however, that “where there is a reasonable,
separately stated charge or an invoice or other statement of the price given to the purchaser for the
modification or enhancement, the modification or enhancement shall not constitute prewritten computer
software.” TENN. CODE ANN. § 67-6-102(68),
4

TENN. CODE ANN. § 67-6-102(78)(C).

5

TENN. CODE ANN. § 67-6-231(a)(1) (Supp. 2015). The term “sale” specifically includes the transfer of computer
software, including the creation of computer software on the premises of the consumer and any programming,
transferring, or loading of computer software onto a computer. TENN. CODE ANN. § 67-6-102(78)(K).
6

TENN. CODE ANN. § 67-6-102(18).

7

TENN. CODE ANN. § 67-6-102(24).

8

See Creasy Sys. Consultants, Inc. v. Olsen, 716 S.W.2d 35, 36 (Tenn. 1986).

9

TENN. CODE ANN. § 67-6-102(78)(K).

(effective July 1, 2015). This new law effectively treats all purchases of computer software in this
state equally, regardless of how the software is provided to and used by a purchaser in this state. It
amends TENN. CODE ANN. § 67-6-231(a) to include a new subdivision (2), which states in pertinent part
that
[f]or purposes of subdivision (a)(1), “use of computer software” includes the access
and use of software that remains in the possession of the dealer who provides the
software or in the possession of a third party on behalf of such dealer. If the
customer accesses the software from a location in this state as indicated by the
residential street address or the primary business address of the customer, such
access shall be deemed equivalent to the sale of licensing of the software and
10
electronic delivery of the software for use in the state.
As a result, effective for all billing periods beginning on or after July 1, 2015, the access and use of
11
computer software in this state, which has generally been subject to tax since 1977, remains
subject to sales and use tax regardless of a customer’s chosen method of use.
The sales tax also applies to retail sales of services specifically enumerated in the Retailers’ Sales Tax
12
Act. The furnishing of “intrastate, interstate or international telecommunication services” is one
13
such specifically enumerated service. “Telecommunications service” is defined by TENN. CODE ANN.
§ 67-6-102(90)(A) 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. § 67-6102(90)(B)(i) excludes from the definition of “telecommunications service,” however, “[d]ata
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.”
Notably, the application of the sales tax to retail sales of services in Tennessee remains unaffected
by the enactment of 2015 Tenn. Pub. Ch. 514, § 22. The sales tax remains applicable only to those
14
services specifically enumerated in the Retailers’ Sales Tax Act. As reassurance of this fact, the
10

2015 Tenn. Pub. Acts Ch. 514, § 22 (codified at TENN. CODE ANN. § 67-6-231(a)(2) (Supp. 2015)).

11

The General Assembly amended the definition of “tangible personal property” in 1977 to specifically include
computer software in response to the Tennessee Supreme Court’s holding to the contrary in Commerce Union
Bank, 538 S.W.2d at 408. 1977 Tenn. Pub. Acts Ch. 42 (defining “tangible personal property” to include computer
software); see also Univ. Computing Co. v. Olsen, 677 S.W.2d 445, 447 (Tenn. 1984) (detailing the General
Assembly’s actions taken to subject computer software to sales and use tax).

12

The Retailers’ Sales Tax Act imposes the sales tax only on services specifically enumerated in the Act. See, e.g.,
TENN. CODE ANN. § 67-6-205 (2013); Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992); Ryder
Truck Rental, Inc. v. Huddleston, No. 91-3382-III, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug. 12, 1994) (sales tax
does not apply to all services; rather, it only applies to retail sales of services specifically enumerated by the
statute).
13

14

TENN. CODE ANN. § 67-6-205(c)(3) (2013).

The Retailers’ Sales Tax Act imposes the sales tax only on services specifically enumerated in the Act. See, e.g.,
TENN. CODE ANN. § 67-6-205; Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992); Ryder Truck

General Assembly included language in Section 22 stating that nothing in the new subdivision (a)(2)
of TENN. CODE ANN. § 67-6-231
shall be construed to impose a tax on any services that are not currently subject to
tax under this chapter, such as, but not limited to, information or data processing
services, including the capability of the customer to analyze such information or data
provided by the dealer; payment or transaction processing services; payroll
processing services; billing and collection services; Internet access; the storage of
data, digital codes, or computer software; or the service of converting, managing,
15
and distributing digital products.
Therefore, while the new TENN. CODE ANN. § 67-6-231(a)(2) modernizes taxation of computer software
in this state, it has no effect on the taxation of services.
Additionally, whenever two or more items are sold for a single sales price and at least one of the
16
items is subject to sales tax, the entire sales price is subject to sales tax as a bundled transaction.
Finally, when a transaction involves taxable and nontaxable components and the transaction’s true
17
18
19
20
21
object or a “crucial,” “essential,” “necessary,” “consequential,” or “integral” element of the
Rental, Inc. v. Huddleston, No. 91-3382-III, 1994 WL 420911, at *3 (Tenn. Ct. App. Aug. 12, 1994) (sales tax does
not apply to all services; rather, it only applies to retail sales of services specifically enumerated by the statute).
15

2015 Tenn. Pub. Acts Ch. 514, § 22 (codified at TENN. CODE ANN. § 67-6-231(a)(2) (Supp. 2015)).

16

See generally Tenn. Dept. of Rev. Ltr. Rul. 14-10 (Oct. 14, 2014) [hereinafter “Ltr. Rul. 14-10”] (discussing
Tennessee
law
regarding
bundling
and
the
“true
object”
test),
available
at
http://www.tennessee.gov/assets/entities/revenue/attachments/14-10.pdf.
17

See, e.g., Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 624 (Tenn. 1987) (holding that a transaction involving
the sale of non-taxable intangible advertising concepts was nevertheless subject to sales tax on the entire
amount of the transaction because advertising models, which were tangible personal property, were an
“essential,” “crucial,” and “necessary” element of the transaction).

18

Id.; see also AT&T Corp. v. Johnson, No. M2000-01407-COA-R3-CV, 2002 WL 31247083, at *8 (Tenn. Ct. App. Oct.
8, 2002) (holding that a transaction involving the sale of engineering services along with separately itemized
tangible telecommunications systems was subject to sales tax on the entire amount of the contract because
“equipment, engineering, and installation combine in this instance to produce BellSouth's desired result: a
functioning item of tangible personal property assembled on the customer's premises,” and further describing
the engineering services as “‘essential’” and “‘integral’” to the sale of tangible personal property).

19

See supra note 18.

20

See Rivergate Toyota, Inc. v. Huddleston, No. 01A01-9602-CH-00053, 1998 WL 83720, at *4 (Tenn. Ct. App. Feb.
27, 1998) (holding that a transaction involving the commission and distribution of advertising brochures was
subject to sales tax on the “‘entire cost of the transaction’” because, although the transaction involved a number
of services, the brochures themselves “were not inconsequential elements of the transaction but, in fact, were
the sole purpose of the contract”).
21

See AT&T Corp. v. Johnson, 2002 WL 31247083, at *8.

22

transaction is subject tax, the entire transaction is subject to sales tax. Only if the true object of the
transaction is not independently subject to sales tax and the items that would be subject to sales tax
are “merely incidental” to the true object of the transaction will the transaction not be subject to
23
sales tax.

2. Payment of Tax
   If a person purchases remote access to software for use wholly within Tennessee, applicable sales
   24
   tax on the transaction generally must be collected by the seller. However, if the seller does not
   collect the tax, the purchaser must remit tax directly to the Department.
   Alternatively, a person might purchase remote access to software for use across several states in a
   single transaction. To ensure the purchaser pays Tennessee sales and use tax only on the portion of
   the sales price reflecting its access and use of software in Tennessee, TENN. CODE ANN. § 67-6231(a)(2), provides that
   [i]f the sale price or purchase price of the software relates to users located both in
   this state and outside this state as indicated by a residential street or business
   address, the dealer or customer may allocate to this state a percentage of the sales
   price or purchase price that equals the percentage of users in this state.
   To make this allocation, a purchaser of remotely accessed software must determine the number of
   persons accessing and using the remotely accessed software in this state and divide that number by
   the total number of persons represented in the transaction that are accessing and using the
   software everywhere. A purchaser should determine the location of each user, insofar as possible,
   by the user’s primary residential street or business address at the time of sale. If the location of
   users is difficult to determine, a purchaser should use a reasonable and consistent method of
   allocation that accurately reflects the percentage of users in Tennessee based on its books and
   records at the time of sale. A purchaser must include any person for whom it has purchased access
   and use of the software in the calculation, regardless of any person’s level of access or extent of use.
   If the purchaser pays for access to software that will be used by individuals who are located in this
   state, and other individuals who are located outside this state (for example, the purchaser’s
   employees), then the purchaser may allocate the sales price subject to Tennessee tax based on the
   percentage of its users located in Tennessee. The purchaser must maintain adequate records
   supporting the allocation percentage applied to any particular transaction. If a purchase is ongoing
   or recurring in nature, the purchaser must take reasonable steps to update its allocation percentage
   upon a material change in its user ratio.

22

See generally Ltr. Rul. No. 14-10, supra note 16.

TENN. CODE ANN. § 67-6-502 (2013). A dealer will not be required to collect tax on a sale of remotely accessed
software where it is not readily apparent to the dealer that the customer is using the software in Tennessee.
Due to the nature of remotely accessed software, the dealer may not be aware that the software is used in
Tennessee.
24

A purchaser may present to a seller a Remotely Accessed Software Direct Pay Permit and remit sales
tax to the Department on the portion of the sales price that corresponds to the percentage of its
users located in Tennessee at the time of sale. A seller is not obligated to collect and remit the
applicable sales tax when a purchaser presents a Remotely Accessed Software Direct Pay Permit or
when the seller is not on notice that the customer will be using the software in Tennessee. When a
25
customer presents the seller with a fully completed Streamlined certificate of exemption, a seller
must collect and remit sales tax only on the portion of the sales price that corresponds to the
26
percentage of the customer’s users located in Tennessee.
APPLICATION

1.

Website Access

The Taxpayer’s provision of customer access to its Website is not subject to Tennessee sales and use
tax.
As part of its [REDACTED – PRODUCTS] offerings, the Taxpayer provides Users with access to its
Website at no separate charge. The Taxpayer’s Website is a set of coded instructions that enables a
User to perform a task and, thus, constitutes computer software for Tennessee sales and use tax
purposes.
With respect to the taxable use of computer software in this state that remains in possession of the
dealer, TENN. CODE ANN. § 67-6-231(a)(2) requires the access and use of the computer software by a
customer within this state. The Website is accessed by the Taxpayer’s customers from locations
within Tennessee.
However, the true value of the right to access the Website is the ability for the Users to view
information relating to their own [REDACTED – INFORMATION]. Furthermore, any manipulation of
[REDACTED – INFORMATION], such as {REDACTED], which requires use of the Website, is merely
incidental to the Taxpayer’s provision of [REDACTED – SERVICES]. Therefore, the true object of
granting access to the Website is the provision of [REDACTED – SERVICES]. To this end, the Taxpayer
is the user of the Website in the provision of its [REDACTED – SERVICES].
Accordingly, the access of the Website is not subject to the Tennessee sales and use tax.

The Streamlined certificate must include the customer’s Tennessee sales and use tax registration number. In
addition, on Line 5, “Reason for Exemption,” the customer should circle “Other” with an explanation such as,
“remote access software used by employees located in multiple states” and specify the percentage of users
located outside of Tennessee.
25

26

For
additional
information,
see
Sales
and
Use
Tax
Notice

15-14,

available
at
http://tn.gov/assets/entities/revenue/attachments/sales15-14.pdf, and Sales and Use Tax Notice # 15-24,
available at http://tn.gov/assets/entities/revenue/attachments/sales15-24.pdf.

2.

The Taxpayer’s License of the System

The Taxpayer may license the System from the [THIRD PARTY] exempt from the Tennessee sales and
use tax as a sale for resale if it presents the [THIRD PARTY] with a properly completed resale
certificate.
With respect to the taxable use in this state of computer software that remains in possession of the
dealer, TENN. CODE ANN. § 67-6-231(a)(2) requires the access and use of the computer software by a
customer within this state. The [THIRD PARTY’S] software is a set of coded instructions that enables
a computer to perform a task and, thus, constitutes computer software for Tennessee sales and use
tax purposes. The [THIRD PARTY’S] software is housed on its own server, but the Taxpayer is granted
a license to use, rebrand, and sublicense the software.
The license of the System generally would be subject to the Tennessee sales and use tax as remotely
accessed software because the Taxpayer accesses and uses the software housed at the [THIRD
PARTY’S] servers. However, TENN. CODE ANN. § 67-6-231(a)(2) provides that “[a]ny dealer that
purchases computer software only for the purpose of reselling access and use of such software . . .
shall be entitled to purchase such software exempt from” the Tennessee sales and use tax. The term
“resale” means “a subsequent, bona fide sale of the property, services, or taxable item by the
27
purchaser.” A service provider that purchases computer software to be used in the furnishing of
28
such service is the end user of the software.
Here, the Taxpayer does not use the System to facilitate the provision of [REDACTED – PRODUCTS].
Instead, the Taxpayer purchases the System solely for the purpose of offering the System to its
customers in a separate transaction. Therefore, the sale to the Taxpayer’s clients constitutes a bona
fide resale, and the Taxpayer may purchase the license of the System exempt from the Tennessee
sales and use tax if it presents to the [THIRD PARTY] a properly completed resale certificate.
3.

Charges for Customer Access to the System

The Taxpayer’s charges to its customers for access to the System are subject to Tennessee sales and
use tax.
With respect to the taxable use of computer software in this state that remains in possession of the
dealer or a third party on behalf of such dealer, TENN. CODE ANN. § 67-6-231(a)(2) requires the access
and use of the computer software by a customer from within this State. Here, the System is housed
on the [THIRD PARTY’S] servers and accessed remotely by the Taxpayer’s customers from locations
within Tennessee. Accordingly, the Taxpayer’s provision of access to the System to its customers is
subject to Tennessee sales and use tax.

4. Payment of Tax
   In order to provide its [REDACTED – SERVICES], the Taxpayer purchases and uses software, including
   software that it accesses remotely via the Internet from locations in Tennessee. The seller of such
   27

TENN. CODE ANN. § 67-6-102(75)(A).

28

See TENN. CODE ANN. § 67-6-102(75)(B)(i).

software used by the Taxpayer in Tennessee must generally collect tax from the Taxpayer on the
retail sales price of such software. However, if it is not readily apparent to the seller that the
Taxpayer is accessing and using the software in Tennessee, or if the Taxpayer provides to the seller
a Remotely Accessed Software Direct Pay Permit, the seller is not obligated to collect tax. The
Taxpayer must, however, remit tax to the Department on the portion of the sales price allocated to
its Tennessee users. Alternatively, if the Taxpayer presents the seller with a fully completed
Streamlined certificate of exemption, the Taxpayer must pay, and the seller must collect, tax based
on the Taxpayer’s percentage of users located inside of Tennessee.
The Taxpayer must allocate the sales price based on the number of users located in Tennessee
divided by the total number of users represented in the transaction. The Taxpayer must determine
the location of its users by looking to the residential street address or business address of each
user. The Taxpayer should use its best efforts to determine the number and location of users at the
time of sale based on the information available to it at the time. If a material change in this number
occurs during a purchase of a recurring nature, the Taxpayer must take reasonable steps to adjust
the allocation percentage accordingly.

Grant Marshall
Assistant General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

January 26, 2016