By Evan Hamme and Madison Barnett

The Tennessee Department of Revenue determined that computer-related services provided on an hourly basis by an IT staffing agency are subject to sales tax in certain instances. Under Tennessee law, the sale of computer software is subject to sales tax, including when the software is created on a customer’s premises. The Department evaluated the job functions of six types of IT personnel provided by the taxpayer to businesses to determine whether each type would be taxable if provided on a stand-alone basis. Of the six job functions, programmers and database administrators were determined to involve software programming and thus always be subject to sales tax. The taxpayer’s other four IT-personnel – including business analysts, systems designers, quality assurance personnel, and project managers – were determined to generally not provide services that are taxable on a stand-alone basis. Applying Tennessee’s “true object” test, however, the Department concluded that when taxable services are provided on the same project as non-taxable services, the charges for all of the taxpayer’s personnel who worked on that project are subject to Tennessee sales tax. In the Department’s view, when programmers and database administrators work on the same project with other IT-personnel, the totality of the circumstances suggests that the true object of the transaction is the sale or creation of computer software. The Department also noted that to prove that certain receipts are for nontaxable services rather than taxable software sales, the taxpayer must keep detailed records, including: (1) records that identify the projects on which each type of IT-personnel worked; (2) records showing the hours each staffer worked and the job functions performed on each project; and (3) contracts that generally specify the job and project descriptions, and job classifications, for the employees provided. Tenn. Ltr. Rul. No. 14-11 (Oct. 30, 2014; released Dec. 8, 2014).