A company sells an annual subscription to its cloud-based employee-scheduling platform, which customers access remotely. Is that subscription subject to Tennessee sales and use tax?

Plain-English summary

The taxpayer (a company with Tennessee nexus) sells a cloud-based employee-scheduling product. Customers pay an annual subscription to access the scheduling "Interface" — a software program the company develops, hosts, and owns, and that customers reach remotely over the internet from PCs and handheld devices. The company doesn't sell or license the Interface; it charges for access. Employees use it to view schedules, request shift swaps, and request time off; the customer's admins use it to approve/deny requests, run reports, and make temporary changes. The company's own personnel set up each customer's scheduling rules (and typically add new users), and the ruling notes that virtually no customer can "plug and play" without that setup help.

The question: is the annual subscription subject to Tennessee sales and use tax? The Department said yes — because the true object of the transaction is remotely accessed software.

Here's the reasoning:

Remotely accessed software is taxable. Since the 2015 software law, Tennessee taxes the sale, license, or use of computer software regardless of how it's accessed — including software that "remains in the possession of the dealer" and is accessed remotely (§ 67-6-231(a), (a)(2)). The Interface is computer software, and the customers access it from locations in Tennessee, so it falls squarely within that rule.

The true object is using the software — not buying a service. The Department applied the true-object test. The subscribers interact directly with the Interface (viewing schedules, requesting swaps and time off; admins approving requests and running reports), and the Interface is "a necessary component, without which the [company's] services would be of no value." So the software is not merely incidental — it is what the customer is buying. The fact that the company's personnel input the initial rules doesn't change the analysis; the ongoing thing the customer pays for is access to and use of the scheduling software.

This is the flip side of a nontaxable data service. Compare LR 18-09 (data analytics), where the Department reached the opposite result: there, the true object was a nontaxable data-analytics service, and the customer-facing software (tracking code, dashboard) was just a tool to deliver it. The deciding question is always the same: is the customer buying the use of the software itself, or buying an output/service that software merely helps produce? Here, the customer operates the scheduling platform to do its own scheduling — so the software is the true object, and the subscription is taxable.

The throughline: a subscription to a cloud/SaaS platform the customer logs into and operates is a taxable use of remotely accessed software in Tennessee — and bundled setup or onboarding help by the vendor doesn't convert it into a nontaxable service.

What this means for you

SaaS and cloud-software subscription providers

If your customers pay to log into and use your hosted software — scheduling, project management, CRM, any operational tool — that subscription is generally a taxable use of remotely accessed software in Tennessee, even though the software never leaves your servers. Plan to collect Tennessee sales tax on subscriptions used by customers at Tennessee business addresses, and don't assume "it's a cloud service" makes it nontaxable.

Onboarding, setup, and configuration help usually won't change the result

Bundling setup services (configuring rules, loading data, adding users) with a software subscription doesn't turn the whole thing into a nontaxable service when the true object is the software. The Department reached its conclusion here even though it found that virtually no customer could use the platform without the vendor's setup help. If you want services to be treated separately, the analysis depends on the true object — and where the customer is fundamentally buying use of the software, the charge is taxable.

Know which side of the LR 18-09 / LR 17-15 line you're on

• Customer operates the software to do its own work (this ruling) → taxable remotely accessed software.
• Customer buys a finished output/service and the software is just the delivery tool (LR 18-09 data analytics) → nontaxable (if the service isn't enumerated).

Map your offering honestly against that line; the label ("service," "subscription," "SaaS") doesn't control.

Accountants and tax professionals

The analysis: the Interface is computer software accessed remotely from Tennessee, so § 67-6-231(a), (a)(2) (2015 Tenn. Pub. Acts Ch. 514, § 22) applies. Under the true-object test (Thomas Nelson; AT&T; Rivergate Toyota; Ltr. Rul. 14-10), the software is a necessary, non-incidental component and is the object of the purchase, so the subscription is taxable — vendor-provided rule setup notwithstanding. Contrast LR 18-09 (data analytics) and the data-processing carve-out in § 67-6-231(a)(2). Services remain taxable only if enumerated (§ 67-6-205; Covington Pike Toyota; Ryder Truck Rental).

Common questions

Q: My customers subscribe to access my cloud software. Is that taxable in Tennessee?
A: Generally yes. Tennessee taxes the use of remotely accessed software, so a subscription that lets a customer log into and operate your hosted software is taxable when accessed from Tennessee.

Q: We also set up and configure the software for each customer. Does that make it a nontaxable service?
A: Not if the true object is still the software. The Department found the subscription taxable even though the vendor's personnel did the initial setup and customers couldn't easily "plug and play" without it.

Q: How is this different from a nontaxable data or analytics service?
A: In a nontaxable service (like LR 18-09), the customer buys a finished output and the software is just the tool that delivers it. Here, the customer operates the software itself to do its scheduling, so the software is the true object — and that's taxable.

Q: Does it matter that the software stays on the vendor's servers (cloud)?
A: No. Since 2015, Tennessee taxes remotely accessed software the same as software delivered on media or downloaded — the method of access doesn't change the result.

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.):

• § 67-6-231(a) (retail sale, license, or use of computer software taxable regardless of access method); § 67-6-231(a)(1); § 67-6-231(a)(2) (access and use of remotely hosted software is equivalent to a sale/licensing for use in the state — 2015 Tenn. Pub. Acts Ch. 514, § 22, eff. July 1, 2015)
• § 67-6-205 (sales tax applies only to services specifically enumerated in the Retailers' Sales Tax Act)
• § 67-6-102(76) ("retail sale"); § 67-6-102(78)(A), (C), (K) ("sale" — incl. furnishing enumerated services and the transfer/loading of computer software)
• § 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 or customized modification 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 (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)

Related Tennessee rulings: Ltr. Rul. 18-09 (data analytics — true object was a nontaxable service); Ltr. Rul. 19-04 (subscription database services); Ltr. Rul. 20-04 (live vs. self-paced online courses).

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/17-15.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 17-15
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 cloud-based [EMPLOYEE] scheduling services.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon the
Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation or
modification shall be effective retroactively unless the following conditions are met, in which case
the revocation shall be prospective only:
(A)

The taxpayer must not have misstated or omitted material facts involved in the
transaction;

(B)

Facts that develop later must not be materially different from the facts upon
which the ruling was based;

(C)

The applicable law must not have been changed or amended;

(D)

The ruling must have been issued originally with respect to a prospective or
proposed transaction; and

(E)

The taxpayer directly involved must have acted in good faith in relying upon the
ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.

1

FACTS
[TAXPAYER] is a [REDACTED] company with nexus in Tennessee. Taxpayer [REDACTED] provides
cloud-based [EMPLOYEE] scheduling services ("Services"). Generally, Taxpayer's Services [REDACTED]
manage [EMPLOYEE] schedules.
Taxpayer invoices its customers for an annual subscription ("Subscription") to Taxpayer's Services
and access to the scheduling interface (the “Interface”).
The Interface consists of a shell software program developed by Taxpayer, hosted by Taxpayer, and
accessed by Taxpayer's customers via personal computers and handheld devices on a website or
application remotely over the internet. Taxpayer does not license or sell the Interface to the
customer; rather, Taxpayer retains full ownership of the Interface and charges customers for access
to the Interface.
The [USERS] access the Interface to view their work schedules. Users can also request to switch
shifts with other Users. Users can also request a day off, vacation, or other absences that otherwise
go against their preset rules.
The customer’s office administrative staff [ADMINS] use the Interface to review the rules initially
input by Taxpayer's personnel, run certain reports, and to approve or deny schedule requests
submitted by Users. Admins can also make temporary changes to account for sick-leave or other
unplanned short-term absences.
However, whenever new Users join the [COMPANY] and need to be added to the Interface, the
Admins do not typically add these Users to the Interface. Rather, the Admins contact Taxpayer's
personnel to input the rules for the new Users. Taxpayer's management estimates that there are
virtually no customers that can "plug and play" into the Interface without further services from
Taxpayer's personnel.
RULING
Are Taxpayer’s annual Subscription charges subject to Tennessee sales and use tax?
Ruling: Yes, the Taxpayer’s annual Subscription is subject to Tennessee sales and use tax under
TENN. CODE ANN. § 67-6-231(a) because the true object of the transaction is remotely accessed
software.
ANALYSIS
1

Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and
specifically enumerated services are subject to the sales and use tax, unless an exemption applies.

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 & Supp. 2016)).

2

“Retail sale” is defined as “any sale, lease, or rental for any purpose other than for resale, sublease,
2
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 “property that can be seen, weighed, measured, felt, or touched, or that
3
is in any other manner perceptible to the senses.” Tangible personal property also includes
“prewritten computer software,” which is defined in TENN. CODE ANN. § 67-6-102(68) in pertinent part
as “computer software, including prewritten upgrades, that is not designed and developed by the
4
author or other creator to the specifications of a specific purchaser.”
In addition to the transfer of tangible personal property, the term “sale” also includes “the furnishing
5
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 into a computer, created on the premises of the consumer or
6
otherwise provided.
“Computer software” is “a set of coded instructions designed to cause a computer . . . to perform a
7
task.” Computer software is “delivered electronically” if delivered “by means other than tangible
8
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
9
software.

2

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

3

TENN. CODE ANN. § 67-6-102(89)(A).

4
TENN. CODE ANN. § 67-6-102(68) further 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.” Id.
5

TENN. CODE ANN. § 67-6-102(78)(C).

6

TENN. CODE ANN. § 67-6-231(a) (2013). 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).
7

TENN. CODE ANN. § 67-6-102(18).

8

TENN. CODE ANN. § 67-6-102(24).

9

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

3

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,
10
transferring, or loading of computer software onto a computer.
In response to advances in technology that allow the remote access and use of software over the
Internet, the Tennessee General Assembly adopted into law 2015 Tenn. Pub. Acts Ch. 514, § 22. This
new law effectively treats all uses of computer software in this state equally, regardless of how a
person accesses the software. 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
electronic delivery of the software for use in the state.

11

As a result, effective for all billing periods beginning on or after July 1, 2015, the access and use of
computer software in this state, which has generally been subject to tax since 1977,
subject to sales and use tax regardless of a customer’s chosen method of use.

12

remains

The sales and use tax also applies to retail sales of services specifically enumerated in the Retailers’
13
Sales Tax 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
14
applicable 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

10

TENN. CODE ANN. § 67-6-102(78)(K).

11

2015 Tenn. Pub. Acts Ch. 514, § 22 (codified at TENN. CODE ANN. § 67-6-231(a)(2) (Supp. 2016)).

12

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).

13

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).
14

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).

4

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,
and distributing digital products.

15

Therefore, while the new TENN. CODE ANN. § 67-6-231(a)(2) modernizes taxation on the use 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
items is subject to sales tax, the entire sales price is subject to the sales tax as a bundled
16
transaction. Finally, when a transaction involves taxable and nontaxable components and the
17
18
19
20
21
transaction’s true object or a “crucial,” “essential,” “necessary,” “consequential,” or “integral”
22
element of the 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
23
not be subject to sales tax.

15

2015 Tenn. Pub. Acts Ch. 514, § 22 (codified at TENN. CODE ANN. § 67-6-231(a)(2) (Supp. 2016)).

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/1410.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 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).
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

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

23

See generally id.

5

The Taxpayer’s annual Subscription is subject to Tennessee sales and use tax under TENN. CODE ANN.
§ 67-6-231(a) because the true object of the transaction is remotely accessed software.
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 Interface, which is computer
software, is accessed remotely by the Taxpayer’s customers from locations within Tennessee.
Although the Taxpayer’s personnel input the initial set of rules, once this task is completed, the
Users access the Interface and interact with the Interface by requesting days off for vacation and
other absences that otherwise go against the users preset rules, as well as requesting shift swaps.
The Admins interact by temporarily changing a User’s rules, approving or denying shift swaps,
requests for time off, and run various reports.
Further, although the Admins do not typically update and change the rules and add new Users, they
do so on occasion. The true object of purchasing the Subscription is not the Taxpayer’s services, but
instead, remotely accessing and using the Taxpayer’s software. The Interface is not merely incidental
to the Taxpayer’s Services; it is a necessary component, without which the Taxpayer’s services would
be of no value to the Subscribers.
Accordingly, the Taxpayer’s Subscription to access the Interface is subject to Tennessee sales and
use tax.

Brent C. Mayo
Assistant General Counsel

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

10/11/17

6