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Tennessee Could Tax Online Access to Video Games, Cloud Computing Services


 Downloading this game could soon be a taxable service in Tennessee.

Update, 5.21.2015: The Revenue Modernization Act received the governor's signature on May 20.

If Governor Bill Haslam (R) of Tennessee signs the Revenue Modernization Act (RMA) as expected, certain cloud computing services will be subject to Tennessee sales tax. If enacted as written, it would impact both Tennessee and out-of-state businesses.

RMA (HB 644SB 603) would add the following subdivision to Tennessee Code Annotated, Section 67-6-102, which provides definitions of charges subject to sales and use tax:

Video game digital product means the right to access and use computer software that facilitates human interaction with a user interface to generate visual feedback for amusement purposes, when possession of the computer software is maintained by the seller or a third party, regardless of whether the charge for the service is on a per use, per user, per license, subscription, or some other basis.”

It also adds a subdivision to the Tennessee Code Annotated, Section 67-6-231(a), which subjects to sales and use tax the "retail sale, lease, licensing or use of computer software in this state ... regardless of whether the software is delivered electronically, delivered by use of tangible storage media, loaded or programmed into a computer, created on the premises of the consumer or otherwise provided....." The new subdivision reads as follows:

“For purposes of subdivision (a)(1), use of computer software includes the right to access and use software that remains in the possession of the dealer who provides the software or in the possession of a third party on behalf of such dealer. If the customer accesses the software from a location in this state as indicated by the residential street address or the primary business address of the customer, such access shall be deemed equivalent to the sale or licensing of the software and electronic delivery of the software for use in this state. 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 allocate to this state a percentage of the sales price or purchase price that equals the percentage of users in this state.” [Emphasis mine]

However, it stipulates that “[n]othing 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.”

Tax Analysts points out that future litigation is almost certain should the measure become law, due to the fact that “a number of its most prominent provisions conflict with Tennessee law or are so ambiguous that they are open to interpretation and debate by the Department of Revenue’s auditors and taxpayers alike.”

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photo credit: worldofwarcraft-0003 via photopin (license)


Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.