Guidance for Tennessee Tax on Remotely Accessed Software

Tennessee passed the Revenue Modernization Act (“RMA”) this year to update the Tennessee Tax Code with regards to advances in technology that allow businesses to remotely access their software.[1] Certain provisions in the RMA become effective as of July 1, 2015. One such provision is the imposition of sales tax on remotely accessed software.

Pursuant to the RMA, the access and use of software that 1) remains in possession of the seller and 2) is remotely accessed by a business for use in Tennessee is subject to Tennessee sales and use tax.[2] Specifically, the RMA provides that if a customer accesses the software from a location in Tennessee as indicated by the primary business address of the customer, such access is deemed to be equivalent to the sale or licensing of the software and, therefore, taxable.[3]  Further, if the sales price or purchase price of the software relates to users located both within and outside of the state of Tennessee, the dealer or customers may allocate a portion of the sale or license price that will be subject to Tennessee sales tax based on the percentage of users in the state.[4]

Recent Administrative Guidance

The Tennessee Department of Revenue (“the Department”) recently issued Notice No. 15-14 (“the Notice”).[5] In the Notice, the Department specifies that sellers of remotely accessed software to Tennessee customers must collect the 7 percent state sales tax plus any applicable local tax for billing periods that begin on or after July 1, 2015.[6]  

When Vendors Don’t Charge Tax

If the seller does not collect the tax, purchasers in Tennessee who remotely access and use software must report and pay use tax directly to the Department.[7]

Users in Multiple States

When a purchaser pays for access to software that will be used by individuals in Tennessee and other individuals outside the state, then the price paid by the purchaser may be allocated based on the percentage of users in Tennessee to determine the amount subject to Tennessee tax.[8]  In order for the purchase price to be allocated, the seller must obtain a completed Streamline certificate (available at the Department’s website)[9] from a Tennessee customer.[10]  The seller then must collect Tennessee tax from the customer based on the portion of the purchase price that corresponds to the percentage of Tennessee users.[11]

Nontaxable Transactions

The Notice specifies that certain transactions are not taxable, including software purchased for resale, remote access of software for the purpose of fabricating other software, and certain services such as: data processing; payment or transaction processing; payroll processing; billing and collection; internet access; storage of data, digital codes or computer software; and converting, managing and distributing digital products.[12]  These services are not taxable even if the purchaser uses remote access to utilize or receive the service.[13]

Recommendation

Taxpayers that remotely access software in Tennessee should understand the multi-state usage rules and Tennessee’s allocation rules.  The allocation computation needs to be done at the time of purchase and supplied to the vendor.  Further, vendors that provide computer related services should ensure that those services are not misconstrued as the provision to customers of access to software.

For more information, contact your DHG tax advisor or any of the following:

Jack Small, Director  | jack.small@dhg.com | 404.681.8215

Tommy Varnell, Senior Manager | tommy.varnell@dhg.com | 404.575.8859




[1] T.C.A. § 67-6-231(a)(2) (2015).

[2] Tennessee Important Notice No. 15-14, 06/01/2015.

[3] T.C.A. § 67-6-231(a)(2) (2015).

[4] Note, the statute expressly does not apply to services such as information services, internet access or the mere storage of digital products, digital codes, or computer software. Id.

[5] Tennessee Important Notice No. 15-14, 06/01/2015.

[6] The tax applies to any access or use of software from a location in Tennessee whether the charge is based on a per use, per user, per license, subscription or any other basis. Id.

[7] Id.

[8] Id.

[10] The Streamline certificate must include the customer’s Tennessee sales and use tax registration number, specify the reason for the exemption “other” on line 5 of the certificate (remote access of software used by employees located in multiple state) and specify the percentage of users in Tennessee. Tennessee Important Notice No. 15-14, 06/01/2015.

[11] Id.

[12] T.C.A. § 67-6-231(a)(2) (2015).

[13] See id.