Although more states are concluding that the provision of services via a SaaS model does not constitute the retail sale of prewritten software(consider the guidance issued by Missouri, Nebraska and New Jersey in 2014), state taxing authorities are not precluded from considering whether such services are taxable under other provisions of their existing sales tax scheme. Last year, Virginia ruled that an application service provider (“ASP”) providing cloud based and hosted phone and other services that supported voice processing and routing, video processing, etc., was subject to sales and use tax as a taxable “communications service.” See “Taxing ASP’s as Telecommunications” blog.
In late 2014, the Tennessee Department of Revenue issued Letter Ruling No. 14-05 (8/25/2014), addressing whether certain “cloud collaboration services” were subject to its sales tax. The cloud collaboration services were provided to customers via a SaaS model and essentially supported the customer’s telecommunications equipment in connection with its voice, video, messaging, and audio/web conferencing capabilities. While Tennessee concluded that the SaaS model at issue did not constitute the taxable sale of prewritten computer software because the provider “does not transfer title, possession, or control of any tangible personal property or software to a customer,” it nevertheless ruled that the cloud collaboration service was subject to sales and use tax as the “sale of intrastate telecommunications and ancillary services.”
Tennessee imposes sales tax on intrastate, interstate or international “telecommunications services,” which 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,” and includes “such transmission, conveyance or routing in which computer processing applications are used to act on the form code, or protocol, without regard to whether such service is referred to as voice over Internet protocol services or is classified by the federal communications commission as enhance or value added.” Tenn. Code Ann. § 67-6-102(90)(A). In addition, the Tennessee sales tax is also imposed on “ancillary services,” which are “services that are associated with, or incidental to, the provision of telecommunication services.” Tenn. Code Ann. § 67-6-102(7). Based on the foregoing, the Department concluded that the cloud collaboration service used computer processing applications to provide customers with voice, video, presence, and mobility capabilities, and that such services were subject to sales tax as a telecommunication and ancillary service.
Although the services at issue in both Virginia and Tennessee have a more obvious and direct “communications” or “telecommunications” service component, it is troubling that states are considering these models as telecommunications services, particularly given the telecommunications situsing rules may not be easily applied to these models. This ruling further emphasizes that when it comes to SaaS it is important to look beyond cursory descriptions and labels in an agreement, and understand the true object of the transaction.
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Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:
- Illinois Finally Rules on SaaS
- Tennessee’s Situsing of Accessed Software Runs Afoul
- Chicago Taxes the Cloud
- Tennessee Enacts Legislation Taxing Remotely Accessed Software
- New York and Cloud Computing: NY Gets It Right With IaaS