Tennessee rules data services not subject to sales and use tax


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The Tennessee Department of Revenue recently issued a letter ruling in which it concluded that a taxpayer’s mobile and web data analytics services were not subject to sales and use tax.1 In the ruling, the Department determined that the true object of the services provided is the taxpayer’s nontaxable data analytics services, and not remotely accessed software that was incidental to the delivery of the services.

Background The taxpayer, a provider of mobile and web data analytics services, collects data about users of its customers’ websites or mobile applications and provides customers with reports about that use. Customer data is obtained in one of two ways: (i) the customer will install the taxpayer’s code within its website or mobile application; or (ii) the customer will send its data to the taxpayer using taxpayer-generated code. Customers have the option to decide what user interactions or metrics they wish to track. Once the raw data is collected, it is streamed to the taxpayer’s servers and made available to customers through a web-based dashboard. Customers are granted a limited, non-exclusive, non-transferrable software license to use the web-based dashboard, which can be accessed through the customer’s Internet browser or the taxpayer’s mobile application. While some are generated automatically, the customer also has the ability to create its own customized reports of user activity.

Customers may choose from two types of available plans offered by the taxpayer. User interaction plans track user interactions with a customer’s website or mobile application. The taxpayer offers three tiers of user interaction plans, which vary in price according to the amount of data provided and the ability to download the data. Additionally, the taxpayer’s user data plans collect and analyze user data, rather than user interactions. Customers may use these plans to categorize users and target emails or mobile application messages to those groups, or to send notifications to customers.

Data analytics services as ‘true object’ of transaction The taxpayer sought guidance from the Department as to the proper sales and use tax treatment of its services. Central to the Department’s analysis was whether the true object of the services was data analytics services or the remote access of computer software. Since the enactment of the Revenue Modernization Act in 2015,2 the use of computer software in Tennessee that remains in possession of the dealer is subject to tax if the access and use of the computer software is by a customer located in the state.3 However, Tennessee law provides that data analytics services are not a specifically enumerated taxable service.4 The Act also specifies that services including information and data processing services and data storage services remain nontaxable services in Tennessee.5
Tennessee follows the “true object” test in determining the sales and use tax treatment of a transaction involving both taxable and nontaxable components. In other words, if a transaction contains both taxable and nontaxable elements and the transaction’s true object is subject to sales tax, the entire transaction is subject to tax.6 In contrast, if the transaction’s true object is not independently subject to sales tax and the taxable items are “merely incidental” to the true object of the transaction, then sales tax will not apply.7

In analyzing the transaction at issue, the Department acknowledged that Tennessee customers choosing to install the taxpayer’s code within their own applications obtain access to the taxpayer’s software. However, the Department noted that the customer’s use of the software is merely incidental to the true object of the taxpayer’s services. Customers purchase the taxpayer’s plans for the purpose of using its data analytics services, and not to gain access to the taxpayer’s software. The Department reasoned that the software is merely a tool to collect raw data, and that the data is meaningless to customers without the taxpayer’s analysis. Thus the Department determined that the data analytics services constituted the true object of the transaction.

Similarly, although the Department found that the taxpayer’s web-based dashboard used to store customer data and reports constitutes computer software under Tennessee law, it determined that the dashboard is merely a tool to view the end result of the data analytics services purchased from the taxpayer. For these reasons, the Department concluded that the data analytics service is the true object of the taxpayer’s services. Acknowledging that these services were not specifically enumerated taxable services under Tennessee law, the Department ruled that such services are not subject to tax.

Commentary In 2015, Tennessee enacted the Revenue Modernization Act in part to address technological advances in the remote access and use of software over the Internet. The law was designed to treat all uses of computer software in the state equally, regardless of how the software is accessed. Since that time, the Department has released several letter rulings advising on the sales and use tax treatment of both nontaxable services and remotely accessed software under the 2015 law.8
Although binding on the Department only with respect to the taxpayer’s particular facts and circumstances, the Department’s letter ruling provides helpful guidance regarding the treatment of data analytics services involving the remote access of software in light of the Revenue Modernization Act. Moreover, the ruling provides an effective application of Tennessee’s true object test in determining the appropriate sales and use tax treatment of the taxpayer’s data collection services. Rooted in Tennessee case law, the true object test allows taxing authorities to understand what is truly being purchased: the data analytics services themselves or the software that is used as a tool to facilitate the delivery of the service. Important to the Department’s analysis was a provision in the Tennessee statute clarifying that application of sales and use tax to remotely accessed software does not make otherwise nontaxable services – including information or data processing services or data storage services – subject to tax.9

The ruling may also have potential applicability outside Tennessee. Certain states have been tempted to recast otherwise nontaxable services as taxable items of tangible personal property when the provision of remotely accessed software, although incidental to the transaction, is included. For those states following a true object test, this ruling may serve as a model analysis to properly classify transactions in which businesses provide services also involving the remote access of software.

1 Letter Ruling No. 18-09, Tennessee Department of Revenue, Dec. 14, 2018.
2 H.B. 644, Laws 2015. The Revenue Modernization Act enacted major amendments to Tennessee’s excise and franchise taxes, business tax and sales and use taxes.
3 TENN. CODE ANN. § 67-6-231(a). The statute provides that the retail sale, lease, licensing or use of computer software in Tennessee is subject to tax, regardless of whether delivered electronically, by use of tangible storage media, loaded or programmed into a computer, or otherwise. TENN. CODE ANN. § 67-6-231(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. If the customer accesses the software from a Tennessee location, the access is deemed equivalent to the sale or licensing of the software and electronic delivery of the software for use in the state. TENN. CODE ANN. § 67-6-231(a)(2).
4 See TENN. CODE ANN. § 67-6-205.
5 TENN. CODE ANN. § 67-6-231(a)(2).
6 See Letter Ruling No. 16-02, Tennessee Department of Revenue, March 8, 2016; Letter Ruling No. 16-01, Tennessee Department of Revenue, Jan. 26, 2016; Letter Ruling No. 14-10, Tennessee Department of Revenue, Oct. 14, 2014.
7 Id.
8 See, e.g., Letter Ruling No. 17-17, Tennessee Department of Revenue, Oct. 31, 2017. For a discussion of this letter ruling, see GT SALT Alert: Tennessee Addresses Sales Tax Treatment of Self-Study Online Courses, Instructor-Led Webinars.
9 TENN. CODE ANN. § 67-6-231(a)(2).

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