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Tennessee’s Situsing of Accessed Software Runs Afoul

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Inexplicably, Tennessee has come up with two different methods of sourcing prewritten computer software based solely upon whether the software is delivered to the purchaser or merely accessed by the purchaser. In Tennessee, “tangible personal property” is defined to include prewritten computer software. Tenn. Code Ann. § 67-6-102(91)(A). The sale of prewritten computer software is subject to sales and use tax regardless of whether the software is delivered electronically through tangible storage media, or by some other means. Tenn. Code Ann. 67-6-231(a)(1). Software delivered to a purchaser (rather than accessed) is sourced to the location where the software is installed.

Effective July 1, 2015, taxable “use” of “prewritten computer software” in the State includes remotely accessed software. Tenn. Code Ann. § 67-6-231(a)(2). However, instead of adopting a consistent sourcing regime for all purchases of “prewritten computer software”, Tennessee has decided to source remotely accessed software based on user location, while continuing to situs software that is delivered to purchasers based on where the software is installed.

Thus, although Tennessee law treats the sale of prewritten computer software as tangible personal property regardless of whether it is delivered or remotely accessed, Tennessee has created a policy which imposes a disparate situsing regime based on the whether there is delivery to the purchaser or merely access; creating a distinct disadvantage for similarly situated taxpayers. For example, Tennessee customers who purchase remotely accessed software are allowed to apportion the price based on a percentage of Tennessee users, effectively reducing their tax burden on such purchase. However, Tennessee customers who purchase electronically delivered software must pay tax on the full sales price of the software if installed in Tennessee, without the benefit of a reduced tax base. Ultimately, Tennessee customers may be inclined to seek the use of non-Tennessee data centers to host purchases of electronically delivered software, thereby avoiding Tennessee sales tax altogether, even though the electronically delivered software is accessed by users within Tennessee.

Given that the location of the software of remotely accessed software is often unknown to a purchaser and can be in multiple locations, it is understandable that Tennessee has elected to situs remotely accessed software based on the user location. However, Tennessee’s decision to impose two different sourcing methodologies for the purchase of the same item – “prewritten computer software” - based on whether the software is delivered to the purchaser or merely accessed by the taxpayer not only makes taxpayer compliance more difficult, but also may have unintended economic consequences.

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Carolynn is the founder and Managing Member of Industry Sales Tax Solutions, LLC (“ISTS”), which offers a subscription database containing the sales and use taxability of software related transactions, digital content and cloud services; she is also the Managing Member of Kranz & Associates, PLLC, a boutique law firm specializing in state and local tax consulting. See Carolynn's AUTHOR page in order to send a message and/or consultation request.

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