Cloud Computing in Tennessee Ruled Exempt
- Oct 8, 2013 | Gail Cole
The taxation of cloud computing services is relatively unchartered territory. Cloud computing transactions have been called “the new ‘wild west’ sales tax frontier,” and that seems fitting. It took time for the law to effectively reach the wild west, and it will take time for lawmakers to pass laws on new technologies. The process has begun: Idaho exempts software as a service; Vermont taxes cloud computing; Massachusetts can’t decide. The Bay State imposed a tax on computer software and services this summer and repealed it less than 2 months later.
Tennessee Department of Revenue has published a number of letter rulings regarding the issue. Most recently is Letter Ruling # 13-12, on the application of the Tennessee Retailers’ Sales Tax Act to various cloud computing services.
Letter rulings are binding only upon the Department of Revenue and apply to the individual taxpayer being addressed, not all taxpayers. That said, letter rulings are a useful sounding board and are helpful in determining how a state regards issues.
The Taxpayer discussed in Letter Ruling #13-12 “offers information technology infrastructure services to customers via the Internet … [that] allow customers to access applications and platforms, server bandwidth, and storage capacity without significant information technology capital investment.” The Taxpayer is not headquartered in Tennessee, nor does it have offices or data centers in Tennessee.
The 11+page letter ruling is an interesting read. It references the Tennessee Retailers’ Sales Tax Act, telecommunications, and virtual computing service software. It discusses remote storage services and fees. In the end, the ruling boils down to three questions, answered:
- Is the Taxpayer’s [REMOTE STORAGE SERVICE] subject to the Tennessee sales and use tax?
- Is the Taxpayer’s [VIRTUAL COMPUTING SERVICE] subject to the Tennessee sales and use tax?
- Is the Taxpayer’s [FEE] subject to the Tennessee sales and use tax?
The department answered all questions with a “No.” Since the Taxpayer’s data centers are located out of state, there is no sale or use of tangible personal property in Tennessee. Furthermore, “the sale or use of intangible intellectual property generally is not subject to Tennessee sales and use tax unless stored on a tangible storage media” in the state. In this case, customers can’t download software for their own use—they can only use it “in conjunction with [THE VIRTUAL SERVICE]….” Additional details are in the ruling itself.
Other letters issued by the Tennessee Department of Revenue have served up similar rulings. The American Institute of CPAs in June wrote a summary of cloud computing rulings. As the title of the article suggests, the CPAs found the taxation of the cloud to be a hazy subject. Still, they note that the Tennessee Department of Revenue repeatedly found various computing services to be not subject to sales tax.
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