Are an online vendor-referral website's charges -- for sales-lead referrals, used-product advertising space, phone-call tracking reports, and hosted vendor websites -- subject to Tennessee sales and use tax?

Plain-English summary

The Taxpayer runs an Internet vendor-referral website. Shoppers browse vendors, read details, and either submit a purchase request through the site or call the vendor directly. The site and supporting technology sit on out-of-state servers owned by a third party. The Taxpayer charges vendors for four things and asked whether each is taxable. The Department said none of the four is subject to Tennessee sales and use tax.

1–3. New-product referrals, used-product advertising, and tracking services. These are all services, and Tennessee taxes only the services its statute specifically lists. The most likely candidate — telecommunications service (§ 67-6-205(c)(3)) — doesn't apply, because the statute's definition (§ 67-6-102(93)(A)) excludes data processing/information services and advertising (§ 67-6-102(93)(B)(i), (iv)):

• Referrals: the Taxpayer gathers customer contact info and transmits it to the matched vendor. Even though that uses the Internet, the Department applied the "true object" test from Equifax Check Services v. Johnson — when a telecommunications service is merely the incidental means of delivering another service that's the real object of the deal, it can't be taxed as a telecom service. The true object is the referral.
• Tracking services: the Taxpayer displays a phone number and gives the vendor a report of call data (date, time, duration, caller name and number). The actual phone service is provided by a third party, not the Taxpayer; the vendor's real purpose is the data, so this is excluded data-processing/information services under § 67-6-102(93)(B)(i).
• Used-product advertising: advertising is expressly excluded from telecommunication services under § 67-6-102(93)(B)(iv).

None of the three fits any other enumerated taxable service, so all are non-taxable.

4. Vendor websites. A website counts as computer software (a set of coded instructions), and the sale of software is normally taxable. But there's no sale here: the vendor websites stay on third-party servers at all times, are never transferred to or installed on the vendor's computer, and the vendor can't even manipulate the content. With no transfer of title, possession, or control (§ 67-6-102(52), (81)(A)), there's no taxable sale of tangible personal property — and the website-hosting service isn't an enumerated taxable service. So the monthly website fee isn't taxable.

5. Refunds. Because the Taxpayer had been collecting and remitting sales tax on these (non-taxable) charges, the Department explained how to get it back under § 67-1-1802: the Taxpayer must first refund or credit the tax to its customers (the vendors), file the claim within three years of December 31 of the year the tax was paid, and — if the claim is denied (or deemed denied after six months) — file suit in chancery court within one year. The Department recommended attaching a copy of this ruling to the refund claim. (It also noted the flip side: any telecommunications the Taxpayer buys to provide its non-taxable services are themselves taxable on purchase.)

What this means for you

Lead-generation, referral, advertising, and web-hosting businesses

If your product is really information, a referral, or advertising — and any telecom or Internet plumbing is just how you deliver it — Tennessee's telecom exclusions (data processing/information services and advertising) generally keep you out of sales tax. And a hosted website or app that the customer only accesses remotely wasn't a taxable software sale under this 2011 analysis, because nothing is transferred to the customer. Two cautions: (a) if you've been collecting tax you didn't owe, you generally must refund your customers first before the state will refund you, and the clock (three years to claim, one year to sue) is unforgiving; and (b) Tennessee began taxing remotely accessed software in 2015, so test any "hosted software isn't taxable" conclusion against current law.

Accountants and tax professionals

The workhorses here are the telecommunications-service exclusions (§ 67-6-102(93)(B)(i) data processing/information services and (iv) advertising) plus the Equifax true-object doctrine for separating incidental telecom from the taxable/non-taxable real transaction — the same framework later applied in rulings like RR 12-25. The website-as-software-but-no-transfer holding turns on the transfer-of-control test (§ 67-6-102(52)). For refunds, § 67-1-1802 imposes a customer-refund-first rule and strict limitations periods.

Common questions

Q: Did the company owe sales tax on referral or lead-generation fees?
A: No. Referrals are a non-taxable information service; any telecommunications used is merely the incidental means of delivering the referral (the Equifax true-object test).

Q: Was the fee to host a vendor's website taxable?
A: No. A website is computer software, but it stayed on third-party servers and was never transferred to the vendor, so there was no taxable sale — and website hosting isn't an enumerated taxable service.

Q: The company already collected sales tax on these charges — can it get it back?
A: Yes, under § 67-1-1802, but it must first refund or credit the tax to its vendor-customers, file within three years, and sue within one year if the claim is denied.

Q: Can another business rely on this revenue ruling?
A: No. Tennessee revenue rulings are advisory only and are not binding on the Department, even as to the requester. This summary is informational only, not legal or tax advice.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-205(c)(3) (telecommunication services taxable); § 67-6-102(93)(A) (definition); § 67-6-102(93)(B)(i) (data processing/information services excluded); § 67-6-102(93)(B)(iv) (advertising excluded)
• § 67-6-202(a) (sales tax on retail sales of TPP, including computer software); § 67-6-231 (software taxable regardless of delivery method)
• § 67-6-102(20) (definition of "computer software"); § 67-6-102(71) (definition of "prewritten computer software")
• § 67-6-102(81)(A), (D) (definition of "sale"); § 67-6-102(52) (definition of "lease or rental"); § 67-6-102(92)(A) (definition of "tangible personal property"); § 67-6-102(79) (definition of "retail sale")
• § 67-1-1802 (sales tax refund procedure: refund customers first; three-year claim window; six-month deemed denial; one-year deadline to sue)
• § 67-6-101 et seq. (Retailers' Sales Tax Act)

Case law:

• Equifax Check Services, Inc. v. Johnson, No. M1999-00782-COA-R3-CV, 2000 WL 827963 (Tenn. Ct. App. June 27, 2000) (telecom used only to deliver the true object of the transaction isn't taxable as a telecommunications service)
• Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994) (only enumerated services are taxable)

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/11-22.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 11-22
WARNING
Revenue rulings are not binding on the Department. This presentation of the ruling in a
redacted form is information only. Rulings are made in response to particular facts
presented and are not intended necessarily as statements of Departmental policy.

SUBJECT
The application of the Tennessee sales and use tax to an online customer tracking and referral
business.
SCOPE
Revenue Rulings are statements regarding the substantive application of law and statements of
procedure that affect the rights and duties of taxpayers and other members of the public. Revenue
Rulings are advisory in nature and are not binding on the Department.
FACTS
The Taxpayer operates an Internet website where customers can choose a vendor and access
detailed information about the vendor. The information is located directly on the Taxpayer’s
website or is accessed by clicking on a link located on the Taxpayer’s website that directs the
customer to the vendor’s website. Additionally, customers can submit purchase requests to the
vendor through the Taxpayer’s Internet site via email. Alternatively, the customer may
telephone the vendor directly by using a telephone number posted on the website. The Taxpayer
receives compensation for providing vendors’ websites, for tracking customers, and for referring
customers to vendors.
The Taxpayer charges a monthly fee for providing a vendor with a vendor-specific website
established and maintained on behalf of the Taxpayer by a third party; the Taxpayer refers to this
service as a “web hosting and maintenance” service. Title to and possession of the website never
passes to the vendor and no software is ever installed on the vendor’s computer. The vendor can
only gain access to the website remotely via the Internet and cannot manipulate the content of the
website.
The Taxpayer also charges a fee for each time a vendor receives a sales lead as a result of a
customer visiting the Taxpayer’s website, which is referred to by the Taxpayer as a “new product
referral.” If a customer visiting the Taxpayer’s main website locates a vendor in which the
customer is interested, the customer may request to be contacted by the vendor. The customer
submits this request to the Taxpayer on the Taxpayer’s main website. The Taxpayer then uses
the customer’s phone number or zip code to match the customer with the vendor’s business

location that is nearest the customer. The Taxpayer then sends the customer’s information to that
vendor, who in turns contacts the customer.
Additionally, the Taxpayer charges a monthly fee that allows vendors to advertise their
inventories of previously used products on the Taxpayer’s main website.
Finally, the Taxpayer also charges vendors a monthly fee for “tracking services.” These services
include providing and displaying a telephone number on the Taxpayer’s main website or on the
vendor-specific website that allows customers to contact the vendor directly about new products.
For an additional charge, the vendor may also display the telephone number in advertisements,
not located on the Taxpayer’s main website or on the vendor-specific website, that are purchased
by the vendor from third parties. The tracking services also include providing the vendor with a
report containing information collected from the telephone calls made to the telephone number
such as the date, time, call duration, caller name, and caller telephone number. The Taxpayer
contracts with an out-of-state third party to maintain and monitor the telephone number.
The Taxpayer’s website and the technology supporting these four revenue sources reside on
computers located outside the state of Tennessee. These computers are not owned by the
Taxpayer, but rather they are owned by the third party that contracts with the Taxpayer to
maintain the websites.
Currently, the Taxpayer collects Tennessee sales tax and files sales tax returns in Tennessee for
sales that result from the operation of its website.
QUESTIONS
1.

Are the charges for new product referrals subject to the Tennessee sales and use tax?

2.

Is the monthly fee for vendors to advertise their pre-owned product inventories on the
Taxpayer’s website subject to the Tennessee sales and use tax?

3.

Is the monthly fee for displaying a phone number and tracking customers through
information obtained from phone calls made to the phone number subject to the
Tennessee sales and use tax?

4.

Is the monthly fee for providing vendors with a website subject to the Tennessee sales
and use tax?
RULINGS

1.

No. The charges for new product referrals are not subject to the Tennessee sales and use
tax.

2.

No. The monthly fee for vendors to advertise their pre-owned product inventories on
Taxpayer’s website is not subject to the Tennessee sales and use tax.

3.

No. The monthly fee for displaying a phone number and tracking customers through
information obtained from phone calls made to the phone number is not subject to the
Tennessee sales and use tax.
2

4.

No. The monthly fee for providing vendors with a website is not subject to the
Tennessee sales and use tax.
ANALYSIS

1-3.

New product referrals, used product advertising, and tracking services

The charges and fees for new product referrals, space on the Taxpayer’s website to advertise
used products, and tracking services are not subject to the Tennessee sales and use tax.
Under the Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et seq., retail sales of tangible
personal property and specifically enumerated services in Tennessee are subject to sales and use
tax. TENN. CODE ANN. § 67-6-102(79) (Supp. 2010) defines a “retail sale” as a “sale, lease, or
rental for any purpose other than for resale, sublease, or subrent.” The term “sale” includes “the
furnishing of any of the things or services taxable” under the Tennessee sales and use tax laws.
TENN. CODE ANN. § 67-6-102(81)(D).
The fees charged by the Taxpayer for new product referrals, used product advertising, and
tracking services are all related to services, rather than the sale of tangible personal property.
The Retailers’ Sales Tax Act imposes the sales tax on certain services. The sales tax does not
apply to all services; rather, it only applies to retail sales of those services specifically
enumerated by the statute. Ryder Truck Rental, Inc. v. Huddleston, No. 91-3382-III, 1994 WL
420911 (Tenn. Ct. App. Aug. 12, 1994).1 In particular, TENN. CODE ANN. § 67-6-205(c)(3)
(Supp. 2010) imposes the sales tax on retail sales of the service of “furnishing, for a
consideration, of intrastate, interstate or international telecommunication services.”2
“Telecommunications service” is defined 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. § 67-6-102(93)(A). However, the definition of “telecommunication
service” specifically excludes data processing and information services, advertising, and Internet
access services. TENN. CODE ANN. § 67-6-102(93)(B)(i),(iv),(vi).
The Taxpayer’s referral, tracking, and advertising services are not subject to the Tennessee sales
and use tax as telecommunication services. The Taxpayer’s referral services include providing a
vendor with contact information for customers who have expressed interest in that vendor’s
products. The customer provides this information to the Taxpayer via the Taxpayer’s website.
The Taxpayer’s use of the Internet and its website to gather customer information and transmit it
to a vendor could arguably be classified as the use of telecommunications services. However,

1

Note that even if a service is not specifically enumerated by the statute, the service may be subject to the sales tax
where charges for the service are included in the sales price of a taxable good or service. Specifically, TENN. CODE
ANN. § 67-6-102(82)(A) provides that the sales price of a good or service equals the “total amount of consideration .
. . for which personal property or services are sold.” Thus, when the sale of a non-enumerated service is part of the
sale of a taxable good or service, the charges for the non-enumerated service are included in the sales price of the
taxable good or service and as such are subject to taxation.
2

The new product referrals, used product advertising, and tracking services do not come within the scope of any
other service enumerated under TENN. CODE ANN. § 67-6-205(c) or elsewhere in the Retailers’ Sales Tax Act.

3

the Tennessee Court of Appeals has held that when a telecommunications service is merely used
to deliver another service that is the true object of the transaction, the service cannot be subjected
to the sales and use tax as a telecommunications service. Equifax Check Servs., Inc. v. Johnson,
No. M1999-00782-COA-R3-CV, 2000 WL 827963 (Tenn. Ct. App. June 27, 2000).
Here, telecommunications services are only an incidental means of providing the Taxpayer’s
referral service, which is the true object of the transaction. The Taxpayer’s tracking services
include the furnishing of a toll free telephone number and the collection of data from calls made
to that number. While the calls made to a vendor by way of the telephone number are clearly
telecommunication services, the actual telephone service is provided by a third party and not by
the Taxpayer. Importantly, the purpose of the Taxpayer’s services is to generate data from the
calls made to the telephone number, such as date, time, and duration of call, and transmitting this
data to the vendor. Because a vendor’s primary purpose in obtaining these services is to acquire
the data from the telephone calls, the Taxpayer’s tracking services are excluded from the
definition of telecommunication services under TENN. CODE ANN. § 67-6-102(93)(B)(i) as data
processing and information services.
Additionally, the Taxpayer also charges a fee for vendors to advertise their pre-owned products.
Advertising is also specifically excluded from the definition of “telecommunication services”
pursuant to TENN. CODE ANN. § 67-6-102(93)(B)(iv).
Accordingly, the Taxpayer’s referral, tracking, and advertising services do not come within the
definition of “telecommunication services” and are not subject to the Tennessee sales and use tax
as such.3 Moreover, the Taxpayer’s services do not come within the scope of any other
enumerated service under the Retailers’ Sales Tax Act. Therefore, the fees charged for product
referrals, tracking services, and web site advertisements are not subject to the Tennessee sales
and use tax.
4.

Vendor websites

The monthly fee for providing a vendor with a website is not subject to the Tennessee sales and
use tax.
The retail sale4 of tangible personal property, including computer software, is subject to the
Tennessee sales and use tax. TENN. CODE ANN. § 67-6-202(a) (Supp. 2010). “Tangible personal
property” is defined as “personal property that can be seen, weighed, measured, felt, or touched,
or that is in any other manner perceptible to the senses” and expressly includes prewritten
computer software. TENN. CODE ANN. § 67-6-102(92)(A). The sale of all computer software is
subject to the Tennessee sales tax under TENN. CODE ANN. § 67-6-231 (Supp. 2010). TENN.
CODE ANN. § 67-6-102(71) defines “prewritten computer software” as “computer software . . .
3

Note that any telecommunications services that the Taxpayer purchases in order to provide its nontaxable service
are subject to the sales and use tax upon purchase.
4

TENN. CODE ANN. § 67-6-102(81)(A) defines the term “sale” in pertinent part as “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.” (Emphasis added.) A “lease or rental” occurs when
there is a “transfer of possession or control” of tangible personal property for a fixed or indeterminate term for a
consideration. TENN. CODE ANN. § 67-6-102(52).

4

that is not designed and developed by the author or other creator to the specifications of a
specific purchaser.” “Computer software” is “a set of coded instructions designed to cause a
computer or automatic data processing equipment to perform a task.” TENN. CODE ANN. § 67-6102(20). Under these definitions, a website is properly characterized as computer software, and
the transfer of a website for a consideration therefore constitutes a taxable sale of tangible
personal property.
In the Taxpayer’s case, the fee a vendor pays for the provision of a vendor website does not
represent a sale of tangible personal property, including prewritten computer software, or of
custom computer software, because the Taxpayer does not transfer title, possession, or control of
the website to the vendor at any time. Significantly, the vendor websites remain on third party
servers on behalf of the Taxpayer at all times; the websites are never transferred to, or installed
on, the vendors’ computers. In fact, vendors do not download or otherwise install software of
any type on their own computers; rather, access to and use of the websites take place entirely
over the Internet. Additionally, the vendors are unable to connect to the third party servers and
have no way to manipulate the content of the vendor websites. Because title and possession of
the software are never transferred to the vendor, there is no taxable sale of tangible personal
property.
Furthermore, the fee charged for the provision of a vendor website is a fee for services rather
than for the transfer of tangible personal property. However, such services are not included
among any of the enumerated taxable services under the Retailers’ Sales Tax Act.5 Therefore,
the monthly fee for providing a vendor with a website is not subject to the Tennessee sales and
use tax.
5.

Procedure for claiming refunds of Tennessee sales tax paid

The Taxpayer may request a refund for sales taxes previously collected and remitted to the
Tennessee Department of Revenue on its charges for new product referrals, advertising space,
tracking services, and vendor websites. The Taxpayer must follow the procedure for claiming
refunds set forth under TENN. CODE ANN. § 67-1-1802 (Supp. 2010).
With respect to a refund of sales taxes paid, TENN. CODE ANN. § 67-1-1802(a)(1) requires that
the Taxpayer first refund or credit the sales tax to its customers (in this case, the vendors). TENN.
CODE ANN. § 67-1-1802(a)(1) also requires that the Taxpayer submit its claim for refund within
three years from December 31 of the year in which the tax payment was made. The claim must
set forth each ground upon which a refund is claimed, the amount of such refund, the tax period,
the tax type, and any other information reasonably sufficient to apprise the Commissioner of
Revenue of the general basis for the refund claim.6 It is recommended that the Taxpayer include
a copy of this letter ruling with any claims for refund of sales taxes paid with respect to the new
product referrals, advertising space, tracking services, and vendor websites.
5

As discussed above, the sales tax does not apply to all services; rather, it only applies to retail sales of those
services specifically enumerated by the statute. Ryder Truck Rental, Inc. v. Huddleston, No. 91-3382-III, 1994 WL
420911 (Tenn. Ct. App. Aug. 12, 1994).
6

A Tennessee sales and use tax refund claim form is available on the Department’s website at
http://state.tn.us/revenue/forms/sales/f1403301.pdf.

5

If a claim is not determined within the six-month period following receipt of the claim by the
Commissioner, the claim shall be deemed denied for the purpose of filing suit in chancery court.
TENN. CODE ANN. § 67-1-1802(b)(2). The Taxpayer must file suit on a denied refund claim in
the appropriate Tennessee chancery court within one year from the date that the refund claim
was filed with the Department. TENN. CODE ANN. § 67-1-1802(b)(1).

Elizabeth Henderson
Tax Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

6/10/11

6