The Tennessee Chancery Court for the Twentieth Judicial District held that software licenses are intangible property and thus the gross receipts from their sale are not subject to tax under Tennessee’s Business Tax Act.

The taxpayer is a software company engaged in the business of selling and licensing software used for various corporate and back office tasks.

The Department issued tax assessments for years 2014 through 2018, contending that the taxpayer owed business tax on the gross receipts from software licensing—which the Department classified as a service subject to the business tax. Conversely, the taxpayer argued that its sales were not sales of services, but instead sales of intangible property and thus not taxable under the Business Tax Act.

The court agreed with the taxpayer, relying on the holding in Commerce Union Bank v. Tidwell, where the Tennessee Supreme Court held that the sale of computer software is the sale of intangible property. After the Commerce Union decision, the state legislature amended the state sales tax statute such that the sale of software would be treated as the sale of tangible property and thus subject to sales tax. Nonetheless—as the court noted—the legislature chose not to make similar changes to the Business Tax Act.

Applying strict statutory interpretation, the court held that the Commerce Union decision was still binding with regard to the Business Tax Act, classifying software as intangible property under that taxing regime. The court therefore held that sales of software licenses did not meet the definition of “services” under the Act because they involved the sale of intangible property. As a result, gross receipts from such sales are not subject to tax under the Business Tax Act. 

SAP America Inc. v. Gerregano, No. 20-1249-II, Davidson Cty. Ch. Ct. (Aug. 9, 2023).