The Tennessee Department of Revenue has issued a letter ruling (Letter Ruling 21-10) explaining the tax treatment of services provided along with the sale of remotely accessed software. Remotely accessed software has been subject to tax in Tennessee since July 1, 2015. Although services are not generally subject to tax in Tennessee, when a service is a crucial element of an otherwise taxable sale, the entire sale is subject to tax. The services may be subject to tax even if specified as a separate element in the sale contract and invoiced separately from the sale of other taxable items.
The taxpayer requesting the letter ruling charged an implementation fee related to the sale of remotely accessed software. The implementation fee was a mandatory fee that covered integrating, configuring, and mapping the software to the purchaser’s existing systems. Without the implementation the software would not operate correctly. Therefore, the implementation fee was subject to tax.
The implementation fee also included training services. The training services weren’t required as part of the purchase of the software. The software would have worked without the training and the purchaser would have been able to use the software without the training. By themselves, training services aren’t subject to tax in Tennessee. However, these charges were nevertheless subject to tax because they were not separately stated from the charges for the rest of the taxable implementation services. The sales tax applied to the exempt training services because they weren’t separately stated from the taxable implementation fees.
The software also included proprietary content and information. Access to this information was charged separately from the charge for the software and the implementation fee. Information services are not taxable services in Tennessee. However, this proprietary content is not accessible without first purchasing the software. It is also an essential element of the software, and the purchase of the software would be nonsensical without access to the proprietary content. Since the proprietary content is essential and integral to the operation of the software, charges for this content are not optional and are also subject to tax.
This letter ruling is a reminder that sellers must be aware of each specific element of the products and services they provide and how they relate to the overall sale. Sellers must also be aware of how each product and service is presented in their contracts, marketing materials, and invoices. An otherwise exempt service that is sold with a taxable item for one price typically becomes subject to sales tax, but even separate statement of products and services is no guarantee that the taxing authorities won’t view that service as taxable.
By Nic Schatte