By Liz Cha and Todd Lard

The Tennessee Department of Revenue issued a letter ruling finding that a taxpayer’s annual subscription charge for its cloud-based employee scheduling services is subject to Tennessee sales and use tax. 

In Tennessee, the use of computer software is subject to tax, even if it remains in the possession of the dealer or a third party. If a transaction involves taxable and non-taxable components, the entire transaction is subject to sales tax if the true object of the transaction is a crucial, essential, necessary, consequential or integral element of the transaction.

The taxpayer provides software and services that allows its customers to manage employee schedules remotely over the Internet through personal computers and handheld devices on a website or application. The taxpayer retains the scheduling software, and users in Tennessee access it remotely.

The Department determined that the true object of the transaction is the remotely accessed software, not the non-taxable services provided by the taxpayer, because without the software, the taxpayer’s services would be of no value to the subscribers. Thus, the cloud-based employee scheduling services are subject to Tennessee sales tax. Tenn. Dept. of Rev., Letter Ruling No. 17-15 (10/11/17).