Tennessee: Taxing Cloud Collaboration Services
- Oct 14, 2014 | Gail Cole
Cloud collaboration services include voice, video and messaging services. Audio conferencing and web conferencing are cloud collaboration services, as is the presence application that determines when colleagues are available and open to instant messaging. Cloud collaboration services may also include mobility services.
A Tennessee business recently requested a letter ruling from the Tennessee Department of Revenue in order to determine whether or not its cloud collaboration services are subject to Tennessee sales tax. Like all letter rulings, the response applies only to the individual taxpayer being addressed in the ruling, and to the particular facts and circumstances described. Letter rulings may be rendered obsolete in the event the law changes. That said, they can be telling.
The Taxpayer in question “provides comprehensive and integrated technology solutions to business, government, education and healthcare customers through hardware, software and value-added services.” It also provides “cloud-based applications and related services to supplement and support a customer’s telecommunication equipment…. The Cloud Collaboration Service… eliminates the need for a customer to maintain software and hardware necessary to process and route calls.”
The Taxpayer uses servers located in an unnamed state to provide its Cloud Collaboration Service. Employees in that state maintain the hardware and software and remotely monitor performance, make updates, and troubleshoot. Customers must provide their own telephone, Internet and network connections. “The Taxpayer does not provide telephone, Internet or network access.”
The Taxpayer charges customers a monthly user fee that is based on the number of users of the Cloud Collaboration Service. That fee covers charges for:
- Virtual server instances
- Required storage
- Rack space
- Power and cooling
- Monitoring and management
- Most move-adds
- Major version upgrades
Any charges accrued for maintenance and management of customer-owned software applications are separately stated on monthly invoices.
The Tennessee Department of Revenue has determined that the Taxpayer’s sale of Cloud Collaboration Service is subject to Tennessee sales and use tax “as the sale of intrastate telecommunications and ancillary services.” Sales to Tennessee customers should be sourced to the Tennessee address where “the customer primarily uses the service….”
The Taxpayer’s purchases of hardware and software do not qualify for resale, as the Taxpayer is “considered the user and consumer of the hardware and software that it purchases in providing its service.”
Read all the details in Tennessee Revenue Ruling 14-05.
States are struggling to keep sales tax laws in step with changing technology. Last year, another Tennessee DOR letter ruling determined that sales tax did not apply to a taxpayer's remote storage or virtual computing services.
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