Tennessee Tax Department Releases Letter Rulings

The Tennessee Department of Revenue recently released several Letter Rulings analyzing various Tennessee tax issues, including the application of sales and use taxes to cloud collaboration services and software consulting services, the application of the Hall income tax to cash distributions received by an employee shareholder, and the availability of the franchise and excise tax industrial machinery credit. An analysis of these rulings and practice point comments are set forth below.

Cloud Collaboration Service Subject to Sales Tax

Ltr. Rul. 14-05 (Tenn. Dep't of Revenue Aug. 25, 2014) - Posted Oct. 6, 2014

Facts: The taxpayer is a provider of comprehensive and integrated technology solutions that involve transfers of hardware, software, and value-added services. One of those services is a "cloud collaboration service," which supplements and supports the operation of its customer's telecommunications equipment. The cloud collaboration service facilitates the processing and routing of telephone calls and augments voice, video, messaging, presence, audio/web conferencing, and mobile capabilities. The use of these cloud-based applications eliminates the need for the customers to maintain hardware and software for the internal processing and routing of calls they receive.

The customers obtain their own telephone equipment and network connections for voice and Internet access from telephone and Internet access providers. The taxpayer owns and leases or licenses the hardware and software needed to facilitate the cloud collaboration service. The hardware is maintained by the taxpayer at its locations, and the software is not downloaded by the customer. The taxpayer remotely monitors performance and provides updates and troubleshooting.

The taxpayer charges a monthly fee under a customer service contract, which includes charges for hardware, software, virtual server instances, required storage, rack space, power and cooling, monitoring and management, and upgrades. Customers may also purchase add-on services, which are charged separately. The ruling addresses whether the cloud collaboration service is subject to Tennessee sales tax and, if so, how it is sourced.

Summary of Ruling:

The taxpayer's cloud collaboration service is subject to Tennessee sales tax as the sale of intrastate telecommunications and ancillary services. Where a sale of cloud collaboration service is made to a Tennessee customer, the sale is sourced to Tennessee if the customer primarily uses the service at a street address located in Tennessee. The taxpayer's purchases, leases, and licenses of hardware and software are not sales for resale, because the taxpayer is considered the end user and consumer of the hardware and software in providing its services. Discussion: The Department...