In Letter Ruling 17-01, the Tennessee Department of Revenue (the “Department”) ruled on the taxability of software-related transaction fees. This ruling illustrates that not all transaction-based fees are taxed the same for sales and use tax purposes. Taxability of the fee depends on what the fee is for. Fees charged for the license of software are taxable; fees charged for non-taxable services are not taxable.
The Taxpayer (a Tennessee company) licenses voice-recognition software (“Software”) from an unrelated software provider (the “Provider”). The Provider charges the Taxpayer a fee based on the number of reports the Taxpayer generates from using the Software. The Taxpayer downloads the Software onto its servers located in Tennessee.
The Taxpayer provides transcription and storage services to its clients. A client downloads the text to speech engine (a component of the Software) onto the client’s workstation. Then the client will use the text to speech engine for dictation which creates a voice recording. The Taxpayer transcribes the dictation from the voice recording and creates a written report of the transcription. The report is then sent electronically to the client’s report storage system. The Taxpayer charges its clients a fee for each transcribed report. The Taxpayer does not contract with clients to download the text to speech engine.
Here is a summary of the questions asked, and the Department’s answers:
- Is the fee that the Taxpayer charges to its clients subject to sales tax?
Answer: No, because the Taxpayer’s services (i.e. transaction and storage services) are not specifically listed as taxable services in the Retailers’ Sales Tax Act (the “Act”). Unless the Act specifically lists a service as taxable, it is not taxable.
- Is the fee the Taxpayer pays to the Provider subject to sales and use tax?
Answer: Yes, because this is a fee that the Taxpayer is paying the Provider for a license to use the Provider’s software. The sale, lease, license, or transfer of software is subject to Tennessee sales and use tax. T.C.A. §67-6-231(a)(1).
- If the fee the Taxpayer pays to the Provider is subject to sales and use tax, can the Taxpayer exempt the fee paid as a sale for resale?
Answer: No, because the Taxpayer is not reselling the Software to its clients. The Taxpayer is licensing the Software from the Provider for the Taxpayer’s use in providing services to its clients. A service provider that purchases computer software to be used in furnishing a service is the end user of the software, and is therefore subject to the Tennessee sales and use tax on such software purchases. T.C.A. §67-6-102(75)(B)(i).
Source: Tennessee Department of Revenue