A qualified data center processes customers' data using its own and third-party software, and also charges affiliated companies for remote access to that software. Are its data-processing service charges — and its software-access charges to affiliates — subject to Tennessee sales tax?

Plain-English summary

A qualified data center (a status Tennessee defines by statute, § 67-6-102(73)) asked the Department two questions about sales and use tax: are its data-processing service charges taxable, and are the charges it makes to affiliated companies for remote access to software taxable? The Department said no to both — and the second answer turns on two special rules Tennessee added in 2015 for data centers and corporate affiliates.

1. Data-center service charges — not taxable. The data center processes, stores, networks, manages, and distributes data for its customers, using a mix of software it builds itself and software it buys from third parties. Customers don't pick the software, get no rights to it, and sign no license. The Department held these are nontaxable information and data processing services. Crucially, the fact that the center uses software to do the work doesn't make the charge taxable: Tennessee's 2015 law that taxes remotely accessed software (§ 67-6-231(a)(2)) expressly does not turn otherwise-nontaxable services into taxable ones, and it names "information or data processing services" as a service that stays nontaxable. The customer isn't buying access to software — the software is just the center's tool — so the true object is the nontaxable service.

2. Software-access charges to affiliates — not taxable, on two separate grounds. Normally, if you buy software and then charge an affiliate for remote access to it within Tennessee, that charge is taxable. But two 2015 provisions change the result here:

• Third-party software → the data center is the consumer, not a reseller. Section 67-6-231(a)(2) says software a qualified data center buys for access and use by an affiliated company (as defined in § 67-6-395(c)) is "deemed to be used and consumed by the qualified data center and not resold to the affiliate." So the center is treated as the end user, and no taxable sale happens when an affiliate accesses that software — no matter how the access is paid for. An affiliate's later charge to another affiliate for the same access is likewise untaxed.

• Internally developed software → the affiliated-company exemption. Section 67-6-395(a) exempts the use of computer software that is developed and fabricated by an affiliated company, whether it's accessed remotely or delivered some other way. So when the center charges affiliates to remotely access software it built in house, that use is exempt — and again, the affiliate-to-affiliate re-charge is exempt too.

The throughline: a qualified data center that runs services on software is the user of that software (it isn't selling software to anyone), and Tennessee's 2015 changes go further by treating intra-affiliate software access at a data center as non-taxable — either because the center is deemed the consumer (third-party software) or because affiliate-built software is outright exempt (internally developed software).

What this means for you

Data centers and data-processing / IT-services businesses

If your charge is for a data-processing or information service and your customers are buying the output, not access to your software, the charge is generally not taxable in Tennessee — even though you run the service on licensed and home-grown software. The 2015 remote-software law didn't change that; it specifically preserves "information or data processing services" as nontaxable.

Qualified data centers serving corporate affiliates

Tennessee gives qualified data centers a specific break: software you buy for an affiliated company's access is treated as consumed by you (not resold), so charging the affiliate for access isn't a taxable sale, and neither is a downstream charge from one affiliate to another. This is narrower than it sounds — it depends on qualified-data-center status (§ 67-6-102(73)) and the affiliate meeting the § 67-6-395(c) definition.

Corporate groups sharing internally developed software

The use of software developed by an affiliated company is exempt in Tennessee, regardless of how it's delivered (remote access or otherwise) (§ 67-6-395(a)). If your group builds software in house and shares it among commonly controlled affiliates, those intercompany charges can be exempt (see also Tennessee LR 17-02 on the same affiliated-company exemption).

Accountants and tax professionals

Two layers: (1) the true-object / enumerated-services rule keeps data-processing services nontaxable, and § 67-6-231(a)(2) confirms remote-software taxation doesn't reach nontaxable services; (2) two 2015 enactments — the qualified-data-center "deemed used and consumed, not resold" rule (§ 67-6-231(a)(2); 2015 Tenn. Pub. Acts Ch. 514, § 22) for third-party software, and the affiliated-company exemption (§ 67-6-395(a); 2015 Tenn. Pub. Acts Ch. 514, § 25) for internally developed software — remove tax on intra-affiliate software access at the data center. Companion: LR 17-02 (affiliated-company exemption, § 67-6-395); data-processing cluster LR 18-09, LR 16-02.

Common questions

Q: Is a data center's data-processing service taxable in Tennessee?
A: Generally no. Information and data processing services aren't enumerated as taxable, and using software to perform them doesn't make them taxable — the 2015 remote-software law expressly leaves such services nontaxable.

Q: I charge an affiliate for access to software I bought from a vendor. Is that taxable?
A: Usually yes — but not for a qualified data center. If you're a qualified data center buying third-party software for an affiliated company's access, you're deemed to use and consume it (not resell it), so the affiliate's access isn't a taxable sale.

Q: What about software my company developed in house and shares with affiliates?
A: The use of software developed and fabricated by an affiliated company is exempt in Tennessee (§ 67-6-395(a)), whether accessed remotely or delivered another way.

Q: Does the affiliate-to-affiliate re-charge get taxed?
A: No. In this ruling, a later charge from one affiliate to another for the same software access was also nontaxable, under both the third-party-software and internally-developed-software rules.

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 — and these breaks depend on qualifying as a data center and as affiliated companies. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-102(73) (definition of "qualified data center")
• § 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; does not make nontaxable services taxable; qualified data center deemed to use and consume — not resell — software bought for an affiliate's access) — 2015 Tenn. Pub. Acts Ch. 514, § 22 (eff. July 1, 2015)
• § 67-6-395(a) (exemption for use of software developed and fabricated by an affiliated company) — 2015 Tenn. Pub. Acts Ch. 514, § 25 (eff. July 1, 2015); § 67-6-395(c) (definition of "affiliated company")
• § 67-6-205 (sales tax applies only to specifically enumerated services)
• § 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")

Case law:

• Creasy Sys. Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986) (fabrication/customization 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)

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/16-04.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 16-04
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
The 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 a qualified data center as defined in TENN. CODE ANN. § 67-6-102(73)
(Supp. 2015) headquartered in [REDACTED] and provides [REDACTED] services to [REDACTED–
CUSTOMERS] across the United States. [REDACTED].

1

Services Provided at the Data Center
The Taxpayer uses the technology infrastructure at its data center to process, store, network,
manage and distribute data for its customers. The Taxpayer’s customers access the data center
network through a variety of means, including electronically, to send and receive data from the
Taxpayer.
The Taxpayer collects the data received from its customers and uses both software that it internally
develops (the “Internally-Developed Software”) and software that it purchases from third parties (the
“Third-Party Software”) to format the data into the requested output. The Taxpayer’s customers do
not choose which software programs the Taxpayer uses in providing its services, have no rights to
the software programs used, and do not enter into any licensing or subscription agreement with the
Taxpayer for use or access to the software.
The Taxpayer provides services specific to five separate functions in the [REDACTED] services
business: [REDACTED].
The [REDACTED] function incudes [REDACTED]. The Taxpayer processes [REDACTED] information to
facilitate [REDACTED].
The [REDACTED] function includes [REDACTED]. The Taxpayer processes [REDACTED] to facilitate
[REDACTED].
The [REDACTED] function includes processing data necessary to [REDACTED] information. The
Taxpayer processes [REDACTED] information, which is used to [REDACTED]. The data is aggregated
and analyzed by [REDACTED].
The [REDACTED] function includes the processes necessary to facilitate [REDACTED]. The Taxpayer
processes and stores [REDACTED] information to facilitate [REDACTED].
The [REDACTED] function includes processes necessary to [REDACTED]. The Taxpayer processes and
stores [REDACTED] data to meet the [REDACTED] needs of its customers.
The Taxpayer also provides services related to a number of miscellaneous functions that include,
but are not limited to [REDACTED]. The Taxpayer charges its customers a fee related to each of
these functions and services.
Affiliate Accessed Software
Separate and apart from the above, the Taxpayer charges affiliated companies as defined in TENN.
CODE ANN. § 67-6-395(c) (Supp. 2015) for their remote access to both Third-Party Software and
Internally-Developed Software. In some cases, when an affiliated company purchases such access to
software from the Taxpayer, it subsequently charges another affiliate of the Taxpayer for access to
that software.

2

RULINGS

1. Are the Taxpayer’s charges for the services that it provides at its data center subject to the
   Tennessee sales and use tax?
   Ruling: No. The Taxpayer’s charges for the services that it provides at its data center are not
   subject to the Tennessee sales and use tax because the Taxpayer is providing non-taxable
   information and data processing services.
2. Are the Taxpayer’s charges to its affiliates for remote access and use of Third-Party Software and
   Internally-Developed Software and those affiliates’ subsequent charges to other affiliates of the
   Taxpayer for remote access and use of the same software subject to the Tennessee sales and
   use tax?
   Ruling: No. The Taxpayer’s charges to its affiliates for remote access and use of Third-Party
   Software and Internally-Developed Software are not subject to the Tennessee sales and use tax.
   Moreover, those affiliates’ charges to other affiliates of the Taxpayer for remote access and use
   of the same software are also not subject to the Tennessee sales and use tax.
   ANALYSIS
   1.

PROVISION OF SERVICES AT THE DATA CENTER

A.

BACKGROUND
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
designed and developed by the author or other creator to the specifications of a specific
3
purchaser.”

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).

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

3

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
(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

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).

4

access shall be deemed equivalent to the sale of licensing of the software and
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
10
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
11
Act. Notably, the application of the sales tax to retail sales of services in Tennessee remains
unaffected by the enactment of 2015 Tenn. Pub. Acts Ch. 514, § 22. The sales tax remains applicable
12
only to those services specifically enumerated in the Retailers’ Sales Tax Act. As reassurance of this
fact, the 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,
13
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
14
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

10

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).

11

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).
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; 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

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

14

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/1410.pdf.

5

15

16

17

18

19

object or a “crucial,” “essential,” “necessary,” “consequential,” or “integral” element of the
20
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
21
sales tax.
B.

APPLICATION TO THE TAXPAYER

The Taxpayer’s charges for the services provided by its data center are not subject to the Tennessee
sales and use tax.
No sale, transfer, or electronic delivery of tangible personal property or computer software occurs in
Tennessee when the Taxpayer charges its customers for the services provided by its data center.
Although the Taxpayer utilizes Third-Party Software and Internally-Developed Software to perform
the services at its data center, the Taxpayer does not transfer title, possession, or control of the
software programs at any time, nor do its customers electronically download the software
programs.
Moreover, the Taxpayer is not furnishing taxable services or things in Tennessee. As previously
stated, only specifically enumerated services and things, such as the use of computer software, are
subject to the Tennessee sales and use tax.
With respect to the taxable use 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 from
a location in this state. In this instance, it is the Taxpayer that uses computer software to perform
services through its data center. The electronic transfer of and access to the customer information
to the data center is merely incidental to the Taxpayer’s provision of its services.
15

See, e.g., Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 624 (Tenn. 1987) (holding that a transaction involving the sale of nontaxable 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).
16

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).
17

See supra note 16.

18

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”).
19

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

20

See generally Ltr. Rul. No. 14-10, supra note 15.

21

See generally id.

6

TENN. CODE ANN. § 67-6-231(a)(2) clarifies that the application of the sales and use tax to remotelyaccessed software does not make otherwise nontaxable services subject to tax. One such service
that TENN. CODE ANN. § 67-6-231(a)(2) specifically identifies as nontaxable is “information or data
processing services.” The services identified above that the data center performs qualify as
information or data processing services. The fact that the Taxpayer uses computer software to
perform the information or data processing services is irrelevant. Thus, the software programs that
the Taxpayer uses in the provision of services are not subject to tax as remotely accessed software.
Accordingly, the Taxpayer’s services performed by its data center are not subject to the Tennessee
sales and use tax.
2.

USE OF REMOTELY ACCESSED SOFTWARE BY AN AFFILIATED ENTITY

A.

THIRD-PARTY SOFTWARE

Generally, if an entity purchases software from a third party and charges an affiliate for remote
access and use of that software within Tennessee, such charges are subject to the Tennessee sales
22
and use tax. However, the new subdivision (2) of TENN. CODE ANN. § 67-6-231(a) added by 2015
Tenn. Pub. Acts Ch. 514, § 22 (effective July 1, 2015) sets forth an exception with respect to a
qualified data center. TENN. CODE ANN. § 67-6-231(a)(2) provides that “software purchased by a
qualified data center for access and use by an affiliated company, as defined by § 67-6-395(c), shall
be deemed to be used and consumed by the qualified data center and not resold to the affiliate
23
company.”
Thus, effective for all billing periods beginning on or after July 1, 2015, when the Taxpayer, a
qualified data center as defined in TENN. CODE ANN § 67-6-102(73), purchases Third-Party Software for
remote access and use by entities that qualify as its affiliates under TENN. CODE ANN. § 67-6-395(c), it
is deemed the end user and consumer of that software. It follows that no taxable sale occurs when
an affiliate of the Taxpayer remotely accesses and uses that software regardless of the manner of
payment for such access.
Accordingly, the Taxpayer’s charge to an affiliated company for remote access to Third-Party
Software and that affiliate’s subsequent charge to another affiliate of the Taxpayer for remote
access to such software are not subject to the Tennessee sales and use tax.
B.

INTERNALLY-DEVELOPED SOFTWARE

2015 Tenn. Pub. Acts Ch. 514, § 25 (effective July 1, 2015) exempts from the Tennessee sales and use
tax an entity’s use of software internally developed by an affiliate through its amendment of TENN.
CODE ANN. § 67-6-395(a). TENN. CODE ANN. § 67-6-395(a) (Supp. 2015) provides that “[t]here is exempt
from the tax imposed by this chapter the use of computer software that is developed and fabricated

22

See TENN. CODE ANN. § 67-6-231(a)(2).

23

TENN. CODE ANN. § 67-6-231(a)(2).

7

by an affiliated company, regardless of whether such software is accessed and used as described in
§ 67-6-231(a)(2) or delivered by other means.”
Thus, for all billing periods beginning on or after July 1, 2015, when the Taxpayer charges its affiliates
as defined in TENN. CODE ANN. § 67-6-395(c) for remote access and use of Internally-Developed
Software that it hosts on its servers, such use is exempt from the Tennessee sales and use tax. It
follows that when that affiliate subsequently charges another affiliate of the Taxpayer for remote
access and use of such software, such use is also exempt from the Tennessee sales and use tax.

Gary Williams
Assistant General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

June 8, 2016

8