Subscription charges made for cloud-based employee scheduling services were subject to Tennessee sales and use tax. Tennessee taxes the use of computer software, even when customers do not possess the software and access it remotely. The Department of Revenue ruled that customers who buy subscriptions pay mainly for the use of the software, not for services provided by the taxpayer.
Use of Cloud-Based Software
In the instant case, the taxpayer sells subscriptions to software, accessible in the cloud, that helps customers with employee scheduling. Customers subscribe to the software so that their employees can view and change their work schedules. Before customers subscribe to the software, the taxpayer inputs their scheduling data. In addition, during the subscription period, customers often ask the taxpayer to update their data. Thus, the taxpayer also provides services with the subscription.
Taxable Use of Software
Not only is the use of computer software subject to tax, Tennessee taxes its use even if it remains in the possession of the dealer or a third party. Here, the taxpayer retains the scheduling software, and users in Tennessee access it remotely.
The transaction is taxable because the true object of the subscription purchase is the software, not services provided by the taxpayer. While the taxpayer provides services to customers by updating data, the software interface is a necessary component of the cloud product. Without the software, the taxpayer’s services would be of no value to subscribers.
Letter Ruling No. 17-15, Tennessee Department of Revenue, November 9, 2017, ¶401-707
Read about how Illinois views taxing cloud services.