Yesterday, the Tennessee Department of Revenue issued Letter Ruling #13-21. In the Letter Ruling, the Department considered the taxability of three distinct transactions.
The first two scenarios involve demonstrations of software. The Ruling concludes that when a taxpayer creates a “virtual lab” for testing and demonstration purposes, whereby it loads full-version software or a trial version of that software (for which it has a license) either on it OR its customer’s hardware, any charge relating to the same is not subject to Tennessee sales and use tax. The key factor in both of these instances was that there was no actual transfer of any license to use the software, and that a transfer of the same would be necessary to create a taxable sale. Moreover, the Ruling provides that creating a “virtual lab” under either of these scenarios would not fall within any definition of a taxable service.
This Ruling is most notable, perhaps, for its conclusion involving a third scenario—the sale of digital back up services. Here, the taxpayer backs up the customer’s data to the taxpayer’s servers—and, as the Ruling notes—it does so by creating a copy (digital) that it will provide to the customer upon request.
Tennessee has not been a state to shy away from the consideration of the taxability of electronic and cloud-based services (e.g., electronic data backup, which might be characterized as “cloud computing”). In a series of prior guidance, the Department has maintained a consistent position that access to data or software or charge for storage or retrieval of the same is not taxable:
- Fee for access to software = not taxable.
- Charge for data storage and retrieval = not taxable.
- Fee for access to software housed outside of Tennessee = not taxable.
The reasons? No transfer of title, control or possession of the software, which is required under Tennessee’s sales tax laws. Letter Ruling #13-21 re-affirms this conclusion, providing that data backup does not involve the transfer or possession of title and that data backup is not a taxable service. Thus, taxpayers questioning the taxability of their cloud-based products or software services to Tennessee customers have yet another source for guidance: the key, it seems, is a transfer title or possession of TPP. Without this, and barring the provision of an enumerated, taxable service, the outlook for cloud taxability questions remains clear.