Two companies under a common corporate parent want to move internally developed software — and software-repair services — from one to the other. Is that transfer subject to Tennessee sales and use tax?

Plain-English summary

A large corporate group is consolidating its technology. A common parent controls 100% of the Taxpayer (which provides back-office and IT services to the group) and of a related corporation. The group acquired a set of companies (the "Acquired Entities") that had built a lot of their own software in-house before the acquisition. To fold that technology into the group's systems, the Acquired Entities will transfer title to some of that internally developed software to the Taxpayer and will also perform software-repair and other services for the Taxpayer.

Normally, transferring software for consideration is a taxable sale in Tennessee — software (including custom software) is taxable regardless of how it's delivered. But the Department ruled that both dealings here are exempt, because the companies are affiliated:

1. Transfer of the internally developed software — exempt (§ 67-6-395(a)). Tennessee specifically exempts the "use of computer software that is developed and fabricated by an affiliated company." Because the Acquired Entities developed the software in-house and are affiliated with the Taxpayer, the Taxpayer's receipt and use of that software is exempt. The Department added an important point: the statute does not require the software to be developed after the companies became affiliated — software built before the affiliation still qualifies.

2. Software-repair and other services — exempt (§ 67-6-395(b)). Tennessee also exempts "the repair of computer software or any other services otherwise taxable that are rendered by a company for an affiliated company." So the repair and other services the Acquired Entities perform for the Taxpayer are exempt too.

What "affiliated" means. Under § 67-6-395(c), two companies are affiliated if either one directly owns or controls 100% of the other, or both are 100% owned or controlled by a common parent. Here the common parent controlled 100% of the Taxpayer (directly) and 100% of the Acquired Entities (indirectly, through a tiered ownership structure), so the test was met.

The throughline: Tennessee lets members of a 100%-commonly-controlled corporate group move internally developed software, and exchange software-repair/IT services, without sales or use tax — and the software exemption reaches software that predates the affiliation.

What this means for you

Corporate groups consolidating software and IT across subsidiaries

If your group is integrating systems after an acquisition or reorganization, transfers of in-house-developed software between 100%-commonly-controlled members can be exempt under § 67-6-395(a), and software-repair and other otherwise-taxable services one member performs for another are exempt under § 67-6-395(b). This is a meaningful planning point: the same software moving between unrelated companies would generally be taxable.

The 100% common-control test is strict

The exemption hinges on 100% ownership or control — either one company owns/controls all of the other, or a common parent owns/controls all of both (§ 67-6-395(c)). Indirect control through a tiered structure counts. But anything short of 100% (a joint venture, a partially owned affiliate, a minority stake) won't qualify. Map the ownership chain before relying on the exemption.

Software developed before the affiliation still counts

The Department confirmed § 67-6-395(a) does not require the software to be created after the companies became affiliated. Software the acquired company built years earlier, on its own, can still move into the group tax-free once the affiliation exists.

Accountants and tax professionals

The analysis: software (including custom software) is taxable on sale/license/use regardless of delivery method (§ 67-6-231(a)(1); § 67-6-102(78)(K); Creasy), but § 67-6-395(a) exempts an affiliated company's use of software developed and fabricated by an affiliate, and § 67-6-395(b) exempts software repair and other otherwise-taxable services rendered for an affiliate. Affiliation is defined by 100% direct or common-parent ownership/control (§ 67-6-395(c), (c)(2)), satisfied here through a tiered structure. Note the Department's reading that (a) carries no timing requirement as to when the software was developed relative to the affiliation.

Common questions

Q: We're moving software between two subsidiaries of the same parent. Is that taxable in Tennessee?
A: If the parent owns or controls 100% of both subsidiaries (or one owns 100% of the other), the transfer of internally developed software is exempt under § 67-6-395(a), and software-repair/other services between them are exempt under § 67-6-395(b).

Q: Does the software have to be developed after the companies became affiliated?
A: No. The Department ruled that § 67-6-395(a) has no such timing requirement — software the affiliate developed before the affiliation still qualifies.

Q: What about IT or repair services one affiliate performs for another?
A: Those are exempt too. Section 67-6-395(b) exempts the repair of computer software and any other otherwise-taxable services rendered by a company for an affiliated company.

Q: What counts as "affiliated"?
A: Under § 67-6-395(c), one company directly owns or controls 100% of the other, or both are 100% owned or controlled by a common parent. Indirect control through a tiered structure counts; less than 100% does not.

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling is binding on 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.):

• § 67-6-395(a) (exempts the use of computer software developed and fabricated by an affiliated company)
• § 67-6-395(b) (exempts the repair of computer software and any other otherwise-taxable services rendered by a company for an affiliated company)
• § 67-6-395(c), § 67-6-395(c)(2) ("affiliated" — one company directly owns/controls 100% of the other, or both are 100% owned/controlled by a common parent)
• § 67-6-231(a)(1) (retail sale, lease, licensing, or use of computer software taxable regardless of delivery method)
• § 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(78)(A), (C), (K) ("sale" — incl. furnishing enumerated services and the transfer/loading of computer software); § 67-6-102(76) ("retail sale")

Case law:

• Creasy Sys. Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986) (fabrication or customized modification/enhancement of software = taxable sale of computer software)

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/17-02.pdf

Original ruling text

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.

The application of the Tennessee sales and use tax to the transfer of computer software and the
provision of computer software repair and other services to an affiliated company.

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.

[PARENT COMPANY] (the “Parent Company”) is the parent company of the entities in its affiliated
group, which includes [REDACTED—CORPORATION] and [TAXPAYER] (the “Taxpayer”). [REDACTED].
[REDACTED—CORPORATION] is a [REDACTED—SERVICE PROVIDER]. The Taxpayer provides back

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office and information technology services to [REDACTED—CORPORATION] and other [REDACTED]
companies in the affiliated group.
An affiliate of the Parent Company acquired [ACQUIRED ENTITY], [REDACTED] has [REDACTED] 100%
controlled subsidiaries in its affiliated structure (the “Acquired Entities”). The Acquired Entities
developed a significant amount of information technology systems and software (the “Internally
Developed Software”) prior to the acquisition, which requires extensive integration, development,
software modifications, and alignment with the Parent Company’s information technology systems
used in its affiliated group through coordinated efforts with the Taxpayer’s technology and software
support group. To facilitate this effort, the Acquired Entities will transfer title to certain of their
Internally Developed Software to the Taxpayer as well as render software repair and other services
to the Taxpayer.
The Parent Company directly controls 100% of the Taxpayer and [REDACTED—CORPORATION]. The
Acquired Entities are under [REDACTED—CORPORATION] in a tiered corporate ownership structure,
in which [REDACTED—CORPORATION] has 100% control of the Acquired Entities.

1. Is the transfer of title to the Internally Developed Software from the Acquired Entities to the
   Taxpayer subject to the Tennessee sales and use tax?
   Ruling: The transfer of title to the Internally Developed Software from the Acquired Entities to
   the Taxpayer is exempt from the Tennessee sales and use tax under TENN. CODE ANN. § 67-6395(a) (Supp. 2016).
2. Is the provision of software repair and other services by the Acquired Entities to the Taxpayer
   subject to the Tennessee sales and use tax?
   Ruling: The Acquired Entities’ provision of software repair and other services to the Taxpayer is
   exempt from the Tennessee sales and use tax under TENN. CODE ANN. § 67-6-395(b).

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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”
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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. 2016) 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. § 671

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)).
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TENN. CODE ANN. § 67-6-102(76) (Supp. 2016).

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6-102(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
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purchaser.”
In addition to the transfer of tangible personal property, the term “sale” also includes “the furnishing
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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
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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
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task.” Computer software is “delivered electronically” if delivered “by means other than tangible
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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
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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,
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transferring, or loading of computer software onto a computer.
TENN. CODE ANN. § 67-6-395(a) exempts from the Tennessee sales and use tax an entity’s use of
computer software internally developed by an affiliate. It provides that “[t]here is exempt from the
tax imposed by this chapter the use of computer software that is developed and fabricated by an
affiliated company, regardless of whether such software is accessed and used as described in § 67-63

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),
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TENN. CODE ANN. § 67-6-102(78)(C).

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TENN. CODE ANN. § 67-6-231(a)(1) (Supp. 2016). 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).
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TENN. CODE ANN. § 67-6-102(18).

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TENN. CODE ANN. § 67-6-102(24).

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

9

TENN. CODE ANN. § 67-6-102(78)(K).

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231(a)(2) or delivered by other means.” Additionally, § 67-6-395(b) provides that “the repair of
computer software or any other services otherwise taxable that are rendered by a company for an
affiliated company” are exempt from the Tennessee sales and use tax.
Companies are affiliated for purposes of TENN. CODE ANN. § 67-6-395 if either company directly owns
or controls 100% of the ownership interest in the other company or both companies are 100%
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owned or controlled by a common parent. Here, the Taxpayer and the Acquired Entities are
affiliated companies for purposes of TENN. CODE ANN. § 67-6-395, as the Parent Company is a
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common parent that controls 100% of both the Taxpayer and the Acquired Entities.
Because the Taxpayer and the Acquired Entities are affiliated companies for purposes of TENN. CODE
ANN. § 67-6-395, the Acquired Entities’ transfer of title to the Internally Developed Software and
provision of software repair and other services to the Taxpayer are exempt from the Tennessee
sales and use tax. Although the Acquired Entities created the Internally Developed Software prior to
becoming affiliated with the Taxpayer, TENN. CODE ANN. § 67-6-395(a) does not require that computer
software used by an affiliated company be developed or fabricated only after the companies
become affiliated. The provision of computer software repair and other services is explicitly exempt
from the Tennessee sales and use tax when performed by an affiliated company pursuant to TENN.
CODE ANN. § 67-6-395(b).

Gary Williams
Assistant General Counsel

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APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

March 26, 2017

TENN. CODE ANN. § 67-6-395(c).

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See TENN. CODE ANN. § 67-6-395(c)(2).The Parent Company directly controls 100% of the ownership interest of the Taxpayer
and indirectly controls 100% of the ownership interest of the Acquired Entities through its tiered ownership structure.

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