By Mary Alexander and Andrew Appleby

The Tennessee Court of Appeals held a wide area network (WAN) service provided by IBM was not taxable because the true object of the service was not a “telecommunications service.” IBM’s WAN service was a technological infrastructure that enabled remote access to information by linking geographically separated computers. The users of the WAN service could retrieve information related to the customer’s business but were not able to use the WAN service to communicate with other users. The WAN service did not include any messaging capabilities (e.g., email or voice). The Commissioner of Revenue argued that the WAN service was taxable as a communications service because “IBM did not create the content that it transmitted to its customers.” Quoting Qualcomm Inc. v. Chumley, 2007 WL 2827513 (Tenn. Ct. App. Sept. 26, 2007), the court stated that a distinction based upon the creator of the content did not trump inquiry into the true object of a potentially taxable service. The true object test that the court applied was “whether communication between users of the service was the primary purpose of the service.” Because the true object of IBM’s service was to allow users to access information stored on geographically separated computers, and the service did not allow users to communicate with one another, the court determined that IBM’s WAN service was not taxable as a telecommunications service. IBM Corp. v. Farr, No. M2012-0714-COA-R3-CV (Tenn. Ct. App. Sept. 24, 2013).