United States

Tennessee Department of Revenue finds data center services exempt

Applies amended law to certain affiliate software transactions


The Tennessee Department of Revenue (DOR) recently released Letter Ruling #16-04, responding to a request from a qualified data center for guidance on the sales and use taxability of charges for the provision of its data center-related services and charges to affiliates for the use of certain software. The DOR concluded that both charges are exempt from the Tennessee sales and use tax.

The taxpayer is in the business of processing, storing, networking, managing and distributing data for its customers. The taxpayer collects the data received from its customers and uses both internally developed software and software purchased from third parties to format the data according to the customer’s instructions. The customers do not dictate which software programs the taxpayer uses, have no rights to the software programs used, and maintain no licensing or subscription agreements with the taxpayer for use or access to the software. The taxpayer also charges affiliated companies for remote access to both third-party software and internal software.

The DOR determined that the taxpayer’s data center services are not subject to the sales and use tax because there was no sale or transfer of software to its customers, as required under Tennessee law, for the services provided. The DOR emphasized that while it used various internal and third-party software to provide the services, there was no transfer of that software, no control was given to the customers, nor can the customers download the software used by the taxpayer. Additionally, the DOR concluded that there was not an enumerated taxable service performed. In fact, the DOR identified an applicable statutory exemption for ‘information or data processing services’ and therefore, the use of software to perform those services was irrelevant to determine taxability.

The DOR also found that the third-party software that the taxpayer charged its affiliates for use was also exempt. Under the prior law, if an entity purchased third-party software and then charged its affiliates for the use of that software, those charges would be subject to tax. The amended law, effective July 1, 2015, provides an exception where software purchased for use by an affiliate is deemed used and consumed by the data center, not a resale transaction. The amended law also provides an exemption from the sales and use tax for software internally developed by an affiliate. As long as the entities involved in the transaction qualify as affiliates, i.e., either company directly owns or controls 100 percent of the ownership interest of the other, or 100 percent of the ownership interest of both companies is controlled by a common parent, the charges will be exempt.

Tennessee data centers should review the taxability of the services provided to customers and consider the provisions of the 2015 amendments for possible exemptions.


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