Tennessee Provides Sales and Use Tax Guidance on Internet Database Services

Tennessee issued a private letter ruling concluding that the taxpayer’s web-based database access service was not taxable as either a telecommunications services or remote access software, and that certain add-on services were not taxable as they were incidental to the main service.

By Betsy Tuck, SALT Manager

As the service economy becomes more and more digitally driven, businesses and states continue to struggle to properly characterize transactions involving software and services in order to then determine taxability.

On July 26, 2019, the Tennessee Department of Revenue (“DOR”) issued Letter Ruling #19-04 regarding sales and use tax guidance on database services and internet-based information systems.

The taxpayer in question requested guidance on the sales and use taxability of the following services or offerings:

• Web-based Information Database Service – Customers pay a monthly fee for access to the database via taxpayer’s web-based portal.
• Auto-Notification Email Service – Customers can set up automatic emails to be notified of new database listings that meet pre-set parameters.
• License to access data in database – Customer receive a license to download and use the data for specifically-approved purposes.
• Fee to maintain accuracy of data – Customers are charged for manipulating the data.
• [Redacted] System – Annual access fee for system and includes item of tangible personal property

With regard to the Web-based Information Database Service, the DOR looked at whether this service might be construed as a taxable telecommunication service or as taxable remote access computer software.

The ruling notes that telecommunications 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” but that it excludes “data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by electronic transmission to a purchaser, where such purchaser’s primary purpose for the underlying transaction is the processed data or information.”[1]  Based on this definition, the ruling concludes that the taxpayer’s service is not taxable telecommunication services since the primary purpose of the transaction is the information.

The DOR then analyzed whether the service could be taxable as remotely accessed software, explaining that the statute clarifies that the application of sales and use tax to remotely access software does not make otherwise nontaxable services subject to tax.[2]  Although the DOR treated taxpayer’s web-based portal as computer software, it concluded that the customer’s use of the portal is “incidental to the true object of the . . . information database service.”  In other words, customers aren’t paying for the web-based portal, they are paying for the information, and the portal is just the tool to access the information.  Therefore, the DOR ruled that the Web-based Information Database Service was not taxable.

With regard to items (2)-(4), the DOR examined each add-on service and determined that since these services are purchased primarily for and in connection with the information database service, these services are also not subject to Tennessee sales and use tax.

Finally, the DOR determined the sale of the [Redacted] System is subject to Tennessee sale tax. The sales price for the system included annual access fee and charges for the sale of tangible personal property. For Tennessee sales tax purposes, “Sales Price”  means the total amount of consideration, with any deduction for charges by the seller for services necessary to complete the sale.[3] Since the taxpayer’s charge for the access fee are necessary to complete the sale, the entire charge for the System (inclusive of both the access fee and tangible property) is subject to sales and use tax.

Not only are state sales tax rules regarding the taxability of software and services not uniform, but states may take different positions on whether a particular offering is treated as software or as a specific service. Aprio’s SALT team has experience analyzing these issues and can help with your sales and use taxability decisions to ensure that you remain in compliance with your sales and use tax obligations and do not incur unexpected tax exposure and penalties.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Betsy Tuck, SALT manager, at betsy.tuck@aprio.com or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the September 2019 SALT Newsletter.

[1] Tenn. Code Ann. § 67-6-102(90).

[2] Tenn. Code Ann. § 67-6-231.

[3] Tenn. Code Ann. § 67-6-102(79)

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.