The taxability of cloud computing for state sales and use tax purposes has evolved over the years with the advancement of technology. As more businesses automate their products and services, the nature of which have become ever more complex and sophisticated in recent years, the sales and use tax implications have likewise become more intricate and involved.

Tennessee SaaS

As one of the 46 jurisdictions that impose sales and use taxes, Tennessee is a prime example.  Pursuant to the Tennessee Revenue Modernization Act of 2015 (which took effect July 1, 2015), Tennessee expanded its stance on the taxation of cloud computing. Tennessee now imposes sales and use tax on amounts charged to a purchaser to remotely access and use software that remains in the seller’s possession (a/k/a Software-as-a-Service or “SaaS”), if the purchaser accesses the software within Tennessee. Specifically, the tax applies to any access and use of software from a location in Tennessee, regardless of whether the software is delivered electronically, delivered by use of tangible storage media, loaded, or programmed into a computer, created on the premises of the consumer, or otherwise provided. Additionally, the tax applies whether the charge for the software is on a per use, per user, per license, subscription or other basis. A customer’s access to software from a location indicated by a residential street address or primary business address in Tennessee, is equivalent to the sale or licensing of the software and electronic delivery of the software for use in Tennessee.

Classification of offerings

It is incredibly important to make a clear distinction among the types of services and products a company provides.  For instance, a particular offering may be classified as SaaS in one state but considered to be data processing in another. Therefore, it is critical to determine the type of product, service, etc., being sold and the taxability of the transaction.

Each state typically defines or provides examples of SaaS, data processing, telecommunication services, and information services to assist a taxpayer in making correct decisions regarding sales tax.  For example, taking a customer’s uploaded data; systematically comparing that information to a database; and providing the customer with any matches between the uploaded data and the database is likely to be deemed nontaxable data processing services in Tennessee.[1]  And electronically transmitting routing of voice, data, audit, video or any other information or signals to a point, or between points are would generally be taxable telecommunications services in the state.[2]

The Tennessee Department of Revenue has published several letter and revenue rulings identifying distinctions between types of technology services and highlighting potential differentiating characteristics between and among those offerings.  In these rulings, the state often employs the “true object” test to assist in determining the taxability of a certain transaction.

[1] Tennessee Letter Ruling 22-08 (October 12, 2022)

[2] Tenn. Code Ann. § 67-6-102(98)(A)

The True Object Test

The true object test is a subjective analysis that seeks to look through a transaction to determine the intent of the underlying of the purchaser. For example, in Tennessee Letter Ruling 22-08, the taxpayer provided its Tennessee customers access to a proprietary database. To use the service, customers had to gain access through the taxpayer’s online portal, which did not provide functionality outside of uploading information and viewing results. The taxpayer did not provide its customers with software code to facilitate the transfer of data. Further, the taxpayer generally charged a one-time on-boarding fee and a monthly fee based on volume of data.

The Department ruled that the taxpayer’s services were not taxable remotely accessed software (SaaS) but rather were nontaxable information or data processing services.  The use of the online portal was found to be merely incidental to the provision of non-taxable services.  The ruling states in part:

Under the true object test that is used to determine the taxability of a product that involves taxable and non-taxable items, when the non-taxable component is the true object, and the taxable components are merely incidental, the transaction is not subject to sales and use tax. Therefore, the incidental use of the online portal or the API to access the […] services does not subject the Taxpayer’s offerings to the Tennessee sales and use tax.

This ruling, like many others posted on the Department’s website, arguably provides a degree of clarification to some affected entities yet may cause other potential taxpayers to have more questions regarding the correct tax treatment of the services and products they sell.


As technology advances, state taxing authorities are continually updating their statutes, regulations, administrative guidance, etc., to refine and clarify their approach to the imposition of sales tax on cloud-based software services. Concurrently, and perhaps in response to these changes, it appears that more taxpayers are requesting letter rulings and similar guidance from these taxing authorities to receive more direction and guidance for their specific set facts and circumstances.

Content provided by LBMC tax professionals, Leigh Ann Vernich and Austin Prevost. Let us know if the LBMC State and Local Tax Practice can assist your company in determining its sales and use tax obligations.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.