The Tennessee Department of Revenue ruled recently that an information technology company’s platform product was subject to Tennessee sales and use tax. The platform was used to support a decision-making process.

The platform was hosted on Taxpayer or third-party servers, and users accessed the platform from their employer’s electronic software system. The platform was highly integrated into employers’ systems. After integration, a separate tab for users to click for access to the platform would appear, or certain triggers in an employer’s software system would produce a pop-up directing the user to use the platform. In some cases, the platform’s use was mandatory.

Although some user input was required, both the platform and customer’s computer systems exchanged information with each other, presumably automating the information transfer process. After the platform received the necessary information, it produced a decision tree that users would follow as additional information is entered. Ultimately, the platform suggests an outcome based on the information users provide.

The taxpayer charged customers three different fees in connection with the product: Platform Fees, Implementation Fees, and Content Fees. All three fees are part of a single contract, itemized within the same, and separately stated on invoices.

The Platform Fee was paid to license the platform’s technology and required configuration, content integration, and hosting, customer support, and connectivity maintenance. The Implementation Fee was paid for resources necessary to assure seamless implementation, employee onboarding, on-site user training, and the strategies to drive customer success.  Onboarding was necessary for the platform’s function, and generally involved configuring the platform so that information with a customer’s computer system could be exchanged. The Content Fee was charged for access to the platform’s proprietary content and was based on the amount and type of content made available to the customer. Only the Implementation Fee and Content Fee were at issue.

The Department concluded that both were taxable. The Department explained that retail sales of tangible personal property and computer software are subject to sales tax, including the “use of computer software,” which includes the access and use of computer software in Tennessee.

The Department observed that whether the Fees were taxable turned on the outcome of the “true object” test, since the transaction involved the sale of a combination of items or services.

The Department then determined that the true object of the transaction was for access to the platform. The Department did not explain its basis for concluding, and the taxpayer did not dispute, that the Platform Fees were subject to sales tax as charges for access and use of computer software. Finding the Implementation Fee and Content Fee were necessary to complete the sale or essential and integral to the sale, they too were taxable. The Department reasoned that the platform would not operate properly without onboarding (for which Implementation Fees were charged). And, because the taxpayer’s proprietary content could not be purchased without the platform, the Department had no difficulty concluding they were also taxable.  The Content Fees were charges for tools and information essential and integral to the platform’s operation.

Concluding, the Department wrote, “The sale and access to and use of the Platform (computer software) is subject to Tennessee sales and use tax. The Taxpayer’s Implementation Fees and the Content Fees are in turn subject to the Tennessee sales and use tax because the services covered by the fees are necessary to complete the sale and/or an essential and integral part of the taxable sale of the [p]latform.”

Tennessee Dep’t. of Revenue, Letter Ruling 21-10 (Oct. 21, 2021)