A company invested heavily in software it built to deliver its own services and created new jobs. Does that investment make it a 'computer services' business eligible for Tennessee's franchise and excise job tax credit?

Plain-English summary

Tennessee gives a franchise & excise (F&E) job tax credit — $4,500 for each qualified job created during the investment period (up to $5,000 if the taxpayer also qualifies for an additional annual credit) — but only to a "qualified business enterprise." To claim it under § 67-4-2109(b)(1), a taxpayer must (1) be a qualified business enterprise, (2) file a business plan with the Department, and within 12 months (3) make the required capital investment, and (4) create at least 25 qualified jobs.

The taxpayer is a national services company that delivers much of its services through internally developed software. It invested heavily in that software and created new jobs, and it claimed the job tax credit on the theory that its software investment created or expanded "computer services" — one of the listed qualifying activities. The Department said no: the taxpayer is not a qualified business enterprise, so it doesn't get the credit.

Here's why:

A "qualified business enterprise" must invest in a specific list of activities. Section 67-4-2109(a)(5) defines it as a business whose required capital investment creates or expands manufacturing, warehousing & distribution, processing tangible personal property, research and development, computer services, call centers, headquarters facilities, back office operations, convention/trade-show facilities, or tourism-related businesses. The taxpayer pointed to "computer services."

"Computer services" is undefined — and read narrowly. The term isn't defined for the job tax credit, so the Department used its common meaning (Beare Co.; Tenn. Farmers Assurance). Crucially, Tennessee construes statutes granting credits, exemptions, and deductions strictly against the taxpayer — "every presumption is against exemption, and any well-founded doubt defeats a claimed" credit (Hutton v. Johnson; Sears, Roebuck; AFG Industries).

Using software to run your business isn't "providing computer services." The taxpayer invested in software to better provide its own core services — not to create or expand computer services as such. The Department noted the taxpayer isn't unique in using software to deliver its services; other companies in the same business do too. So simply using — or even building — software to provide a service does not equate to creating or expanding "computer services," even when the company designs its own software instead of buying it. A contrary rule would let almost any business that invests in software claim the credit and would cause the qualified-business-enterprise categories to overlap. Because the taxpayer wasn't a qualified business enterprise, it was not entitled to the job tax credit.

The throughline: the "computer services" category targets businesses whose enterprise is providing computer services — not every company that invests in software to run its own operations. Build-your-own software to deliver your services doesn't convert you into a computer-services enterprise, and credits are read strictly against the taxpayer.

What this means for you

Companies eyeing the Tennessee F&E job tax credit

Before counting on the job tax credit, confirm you're a qualified business enterprise — i.e., that your capital investment creates or expands one of the specific listed activities (manufacturing, warehousing/distribution, processing TPP, R&D, computer services, call centers, headquarters, back office, convention/trade-show, or tourism). It's not enough to invest a lot and add jobs; the investment has to be in a qualifying category, and you must also file a business plan and create at least 25 qualified jobs within the window.

"Computer services" means the business is computer services

Investing in software — even substantial, internally developed software — to deliver your own services does not make you a "computer services" enterprise. The category is aimed at businesses whose enterprise is providing computer services (to others), not at the countless companies that use technology to run their operations. Designing your own software rather than buying it doesn't change that.

Tennessee reads credits strictly against the taxpayer

Tennessee courts and the Department construe credits, exemptions, and deductions narrowly, and any well-founded doubt defeats the claim. If your eligibility for a credit isn't clearly established by the statute, expect the Department to deny it. Document precisely how your investment fits a listed category rather than relying on a broad reading.

Accountants and tax professionals

The analysis: the job tax credit (§ 67-4-2109(b)(1)(A)) requires "qualified business enterprise" status (§ 67-4-2109(a)(5)) plus a business plan, the required capital investment, and ≥25 qualified jobs. "Computer services" is undefined, so common usage governs (Beare Co.; Tenn. Farmers Assurance), and credits are strictly construed against the taxpayer (Hutton; Sears, Roebuck; AFG Industries; SunTrust Bank; Value Motor; Lee Med. v. Beecher). Investment in software used to provide the taxpayer's own (non-computer-services) lines of business is not investment in creating/expanding computer services under (a)(5) — a broader reading would let any software-investing business qualify and would collapse the distinct (a)(5) categories. Result: no qualified business enterprise, no credit.

Common questions

Q: We built our own software and added jobs. Can we claim the job tax credit as a "computer services" business?
A: No. Investing in software to deliver your own services isn't creating or expanding "computer services." That category is for businesses whose enterprise is providing computer services, not for companies that use software to run their operations.

Q: What does it take to be a "qualified business enterprise"?
A: Your required capital investment must create or expand one of the listed activities (manufacturing, warehousing/distribution, processing TPP, R&D, computer services, call centers, headquarters, back office, convention/trade-show, or tourism), and you must file a business plan, make the investment, and create at least 25 qualified jobs within 12 months.

Q: Does it matter that we designed our own software instead of buying it?
A: No. The Department was explicit that designing your own software doesn't turn using software into "computer services." Either way, using software to provide your services isn't a qualifying activity.

Q: Why was the credit read so narrowly?
A: Tennessee construes credits, exemptions, and deductions strictly against the taxpayer, and any well-founded doubt defeats the claim. A broad reading would let nearly any software-using business qualify.

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.):

• § 67-4-2109(b)(1)(A) (job tax credit of $4,500 per qualified job created during the investment period); § 67-4-2109(b)(1) (eligibility: qualified business enterprise + business plan + required capital investment + at least 25 qualified jobs within 12 months); § 67-4-2109(b)(2)(B), (b)(3)(A) ($5,000 enhanced credit)
• § 67-4-2109(a)(5), (a)(5)(A) ("qualified business enterprise" — investment creating/expanding manufacturing, warehousing & distribution, processing TPP, R&D, computer services, call centers, headquarters facilities, back office operations, convention/trade-show facilities, or tourism-related businesses)
• § 67-6-224(b) (definition of "headquarters facilities," cross-referenced in the qualified-business-enterprise list)
• § 67-4-2007(a) (6.5% excise tax); § 67-4-2105(a), § 67-4-2106(a) (franchise tax $0.25 per $100 of net worth); § 67-4-2004(38) (persons subject to F&E)

Case law (statutory construction; credits strictly against the taxpayer):

• Beare Co. v. Tenn. Dep't of Revenue, 858 S.W.2d 906 (Tenn. 1993); Tenn. Farmers Assurance Co. v. Chumley, 197 S.W.3d 767 (Tenn. Ct. App. 2006) (common usage of undefined terms)
• Sears, Roebuck & Co. v. Roberts, 2016 WL 2866141 (Tenn. Ct. App. 2016); AFG Industries, Inc. v. Cardwell, 835 S.W.2d 583 (Tenn. 1992); Hutton v. Johnson, 956 S.W.2d 484 (Tenn. 1997) (every presumption against exemption; well-founded doubt defeats the claim)
• SunTrust Bank, Nashville, 46 S.W.3d 224; Value Motor Co. v. Farr, 2008 WL 238423 (Tenn. Ct. App. 2008) (credits must "positively appear"; "fair purview"); Lee Med., Inc. v. Beecher, 312 S.W.3d 515 (Tenn. 2010)

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/fae/17-16fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 17-16
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 franchise and excise tax job tax credit provisions under TENN. CODE
ANN. § 67-4-2109(b) (Supp. 2016).
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

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(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 national [REDACTED] company that offers a broad-based [REDACTED –SERVICE DESCRIPTION] and other [SERVICES]. The Taxpayer provides much of its
services through internally developed software (the “Software”), summarized below.
[REDACTED]
Between [REDACTED - DATES], the Taxpayer made a capital investment of over [REDACTED AMOUNT] in the Software. The Taxpayer also created [REDACTED] new jobs from [REDACTED DATES].
RULING
For Tennessee franchise and excise tax purposes, is the Taxpayer a qualified business enterprise
eligible for the job tax credit provided in TENN. CODE ANN. § 67-4-2109(b)(1)(A) through its investment
in the Software?
Ruling: No, the Taxpayer does not qualify for the job tax credit because it is not a qualified
business enterprise as defined in TENN. CODE ANN. § 67-4-2109(a)(5).
ANALYSIS
Tennessee imposes an excise tax at the rate of 6.5% on the net earnings of all persons doing
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business within Tennessee. Tennessee also imposes a franchise tax at the rate of $0.25 per $100, or
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major fraction thereof, on the net worth of a person doing business in Tennessee. Persons subject
to Tennessee franchise and excise taxes include, but are not limited to, corporations such as the
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Taxpayer.
Tennessee allows credits against a taxpayer’s franchise and/or excise tax liability in certain
circumstances. TENN. CODE ANN. § 67-4-2109(b)(1)(A) provides that if certain statutory criteria are met,
a taxpayer may take a job tax credit against its Tennessee franchise and excise tax liability. The
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credit is in the amount of $4,500 for each qualified job created during the investment period. To
qualify for the job tax credit under TENN. CODE ANN. § 67-4-2109(b)(1) a taxpayer must: (1) be a
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TENN. CODE ANN. § 67-4-2007(a) (Supp. 2016).

2

TENN. CODE ANN. §§ 67-4-2105((a) (Supp. 2016), -2106(a) (2013).

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TENN. CODE ANN. § 67-4-2004(38) (Supp. 2016).

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TENN. CODE ANN. § 67-4-2109(b)(1)(A) (Supp. 2016). TENN. CODE ANN. § 67-4-2109(b)(3)(A) further provides that the $4,500 credit
allowed under TENN. CODE ANN. § 67-4-2109(b)(1) will be increased to $5,000 per job if the taxpayer qualifies for the additional
annual credit allowed in TENN. CODE ANN. § 67-4-2109(b)(2)(B).

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qualified business enterprise; (2) file a business plan with the Department of Revenue; and, within
twelve months of the effective date of the business plan: (3) make the required capital investment;
and (4) create at least twenty-five qualified jobs.
The first requirement is that the Taxpayer be a qualified business enterprise. A qualified business
enterprise includes an enterprise
in which the business has made the required capital investment necessary to permit
the creation or expansion of manufacturing, warehousing and distribution,
processing tangible personal property, research and development, computer
services, call centers, headquarters facilities, as defined in § 67-6-224(b), back office
operations, convention or trade show facilities, or tourism-related businesses,
including, but not limited to, restaurants, lodging establishments, or other tourismrelated attractions. 5
The Taxpayer here states that it has made a capital investment of over [REDACTED – AMOUNT] in
the Software. The Taxpayer states it qualifies as a qualified business enterprise because their capital
investments lead to the creation or expansion of “computer services.”
The term “computer services” is not defined for purposes of franchise and excise taxes or the job tax
credit. The Tennessee Supreme Court has stated that when a statute does not define a term, it is
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proper to look to common usage to determine the term's meaning. Additionally, Tennessee courts
construe statutes granting exemptions, credits, or deductions strictly against the taxpayer, and any
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well-founded doubt defeats a claimed credit. Tennessee courts also consider the general purpose
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of the statutory framework, finding that no subject of taxation will be excluded if it comes within
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the “fair purview” of the taxing statutes. “The courts' goal is to construe a statute in a way that
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avoids conflict and facilitates the harmonious operation of the law.”
Here, the Taxpayer has invested in the creation or expansion of the Software. By investing in and
using the Software, it provides its core lines of business— [REDACTED – DESCRIPTION OF SERVICES].
Thus, the Taxpayer has not invested in the creation or expansion of computer services, but instead
invested in technology to better provide its services. The Taxpayer is not unique in using computer

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TENN. CODE ANN. § 67-4-2109(a)(5).
See, e.g., Beare Co. v. Tenn. Dep’t of Revenue, 858 S.W.2d 906, 908 (Tenn. 1993); see also Tenn. Farmers Assurance Co. v. Chumley, 197
S.W.3d 767, 782-83 (Tenn. Ct. App. 2006).

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7

Sears, Roebuck & Co. v. Roberts, 2016 WL 2866141, at *4 (Tenn. Ct. App., May 11, 2016) (citing AFG Indus., Inc. v. Cardwell, 835
S.W.2d 583 (Tenn. 1992)); Hutton v. Johnson, 956 S.W.2d 484, 488 (Tenn. 1997) (“Every presumption is against exemption, and
any well founded doubt defeats a claimed exemption.”).

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Hutton, 956 S.W.2d at 488 (“A court should construe the statute's language in the context of the entire statute and in light of
the statute's general purpose.”).

9

SunTrust Bank, Nashville, 46 S.W.3d at 224; see also Value Motor Co., Inc. v. Farr, No. M2006-02024-COA-R3-CV, 2008 WL
238423, at *3 (Tenn. Ct. App., Jan. 28, 2008) (“[T]ax credits must “positively appear” in the statutes themselves, and no subject
of taxation will be excluded if it comes within the “fair purview” of the statutes.”).

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Sears, Roebuck & Co., 2016 WL 2866141, at *6 (citing Lee Med., Inc. v. Beecher, 312 S.W.3d 515, 527 (Tenn. 2010)).

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software to provide [REDACTED – DESCRIPTION OF SERVICES]. Other companies providing the same
or similar services likely also use software to provide their services. Simply using software to provide
a service does not equate to creating or expanding “computer services” under TENN. CODE ANN. § 674-2109(a)(5), even if the Taxpayer designed its own software versus purchasing software from a
separate vendor. Reaching an opposite conclusion would effectively allow any business that uses
(and makes the required investment in) computer software to be eligible to claim the job tax credit
and would result in the overlap of categories of qualified business enterprise as set forth in TENN.
CODE ANN. § 67-4-2109(a)(5)(A).
Accordingly, the Taxpayer is not a qualified business enterprise and is not entitled to the job tax
credit.

Brent C. Mayo
Assistant General Counsel

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

10/30/17

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