Tennessee Enacts Legislation Taxing Remotely Accessed Software

Tennessee’s Revenue Modernization Act (“RMA”, H.B. 644), as signed by Governor Haslam on May 20, 2015, includes a provision which imposes sales and use tax on remotely accessed software effective July 1, 2015.  Use of remotely accessed software fits into the broad category of “software as a service” (“SaaS”), as do many other services.

It is important to note that typically, the provision of remotely accessed software is supported by either a software licensing agreement or a service agreement.  The RMA arguably codifies the Department’s past policy practice of imposing sales and use tax on SaaS used in Tennessee, when supported by a software license agreement.  The RMA, however, also contains a provision noting that, “Nothing in this subdivision (a)(2) shall be construed to impose a tax on any services that are not subject to tax under this chapter, such as information services, payment processing services, internet access, or the mere storage of digital products, digital codes, or computer software.”

It will be interesting to see how the Department utilizes this legislation when addressing SaaS models on a prospective basis.  In the past, the type of agreement executed (i.e., software license agreement  vs. service agreement) was the differentiating factor in the Department’s taxability determination.  However, the imposition language, coupled with the provision limiting the base expansion, creates an area of grey that could be subject to interpretation or that could put taxpayers who have traditionally been providing exempt services at risk.

In addition, under the RMA, “if the sales price or purchase price of the software relates to users located both in this state and outside this state, the dealer or customer may apportion a percentage of the sales price or purchase price that equals the percentage of users in Tennessee.” The Department’s recently issued Notice 15-14 (June 2015), provides that the purchase price for remotely accessed software will be subject to apportionment based on the percentage of users in Tennessee in the case of multistate users. However, the Department did not address whether a similar apportionment provision would apply to the purchase of software that is delivered to a customer (not merely accessed), despite the fact that remotely accessed software “shall be deemed equivalent to the sale or licensing of the software and electronic delivery of the software for use in this state.”  Whether an administrative oversight or intentional, there does not appear to be any rational basis for such disparate treatment.

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