By Leigh Ann Vernich and Jay Hancock
SAP v. Gerregano highlights refund opportunities for software companies while reaffirming tax exposure for hosting and cloud-based services.
Executive Summary
On May 13, 2026, the Tennessee Court of Appeals issued a significant state and local tax decision addressing the application of Tennessee Business Tax (gross receipts tax) to software licenses, SaaS revenue, cloud hosting, and remotely delivered technology services. The Court ruled that software license revenue is not subject to Tennessee Business Tax, while cloud hosting and certain cloud-based services delivered to Tennessee customers are taxable. For any company that has been remitting Business Tax on software license revenue, the decision may create a refund opportunity.
Key Takeaways for Software and SaaS Companies
- Software licenses are not subject to Tennessee Business Tax. Software is neither tangible personal property nor services, both of which are taxable. It is intangible personal property regardless of the delivery method and not subject to tax. On-premise installations and SaaS access are treated the same, and neither is subject to the Business Tax.
- Prior payments on license revenue may be recoverable. If your company has been paying Business Tax on software license revenue, a refund claim is worth examining. The refund statute runs three years from December 31 of the year in which the return was filed, so returns filed anytime during CY2023 or later are currently open.
- Hosting and service revenue is taxable. Cloud hosting and remotely delivered support, training, and consulting fees are taxable when Tennessee customers receive those services in-state. Companies that bundle software licenses with hosting or services cannot treat all revenue as nontaxable. Each category needs to be analyzed and reported on its own.
Background on Tennessee Business Tax and the SAP Case
The Tennessee Business Tax is a gross receipts tax imposed on sellers of tangible personal property (TPP) and certain services delivered to Tennessee customers. In recent years, tax has become increasingly important for software companies, SaaS providers, and cloud-based technology businesses operating across state lines.
The tax has been in place since 1971. While initially a locally-imposed tax administered at the county level, the scope and reach of the tax has been legislatively expanded over recent years such that it now applies to all sellers of TPP and most service providers (some services are exempt) selling to Tennessee customers. Despite its broad application, many software companies, SaaS providers, and newer technology businesses operating in Tennessee remain unfamiliar with the Business Tax and how it applies to cloud-based revenue streams and remotely delivered services.
In the SAP case, the Tennessee Department of Revenue assessed roughly $728,000 in Business Tax (including interest and penalties) against SAP America, Inc., a large enterprise software company, covering tax years 2014-18. SAP challenged the assessment in court, which led to the Court of Appeals review of the trial court’s determinations. The dispute required the Court to assess the taxability of three distinct categories of revenue:
- Software Licenses — Sales of computer software licenses (both downloaded and accessed remotely over the internet)
- Cloud Hosting — Fees charged for customers to run their licensed software on SAP’s own servers and hardware infrastructure
- Cloud-Based Services — Optional support, training, configuration, and consulting services delivered remotely
Tennessee Court Analyzes Three Categories of Technology Revenue
As the Court affirmed, the tax applies only to the sale/lease of TPP and services, but not to sales/leases of intangible personal property. Thus, the classification of each revenue stream determines its taxability.
1. Software Licenses and SaaS Access Were Held Not Taxable
The Court affirmed that SAP’s software license revenue is not subject to Tennessee Business Tax, regardless of whether the customer installs the software on its own machines or accesses it remotely over the internet (“Software as a Service” or “SaaS”). The Court applied a 1976 Tennessee Supreme Court opinion addressing the taxability of computer software for sales tax purposes and held that computer software is intangible personal property and not taxable. The Court noted that a software license conveys the right to use intellectual content; it does not transfer a physical object. Because the Business Tax applies to TPP and services but not intangibles, revenue from the sale/lease of software is not taxable regardless of the delivery method via a physical disc, as a download, through a cloud-based application, etc. The means by which the software gets to the customer does not change what the customer is actually buying.
2. Cloud Hosting Revenue Was Held Taxable
Cloud Hosting is the arrangement by which SAP’s customers pay to run their licensed software on SAP’s servers rather than acquiring and maintaining their own data center hardware. SAP contended the arrangement was functionally a lease of its equipment, and that the receipts were not subject to tax because the hardware was never physically delivered to Tennessee.
The Court rejected that framing, observing that a true lease requires the vendor to transfer possession and control of the property to the customer. SAP never did that – it kept full operational control of its infrastructure throughout. As such, SAP was delivering a service rather than leasing equipment, Cloud Hosting revenue was held to be taxable. The Court further found that the services were “delivered” to Tennessee within the meaning of the statute because SAP’s customers accessed them electronically from Tennessee locations, thus bringing the revenue within the state’s taxing reach.
3. Cloud-Based Support and Consulting Services Remain Taxable
SAP largely conceded that its support, training, configuration, and consulting offerings are “services” within the meaning of the Act. However, it asserted that because no SAP employee traveled to Tennessee to perform those services, the services were not delivered in TN and thus not subject to tax.
The Court dismissed that argument, noting that the Tennessee legislature amended the applicable statute in 2016 to apply to services “delivered to a location in this state.” SAP’s own invoices identified Tennessee business addresses as the “ship-to” locations, and the Court recognized those addresses as the best available evidence of where the services were “delivered.” SAP produced no evidence that those customers were actually accessing the services from somewhere outside of Tennessee.
The ruling also serves as a reminder that some software and technology companies may have Tennessee Business Tax exposure for cloud hosting, support, training, or consulting revenue that has not historically been reported. In some situations, Tennessee voluntary disclosure agreement (VDA) programs may help businesses limit historical lookback periods and reduce penalty exposure.
The Core Principle: What This Means for Your Business
Software licenses and SaaS access are sales of intangible property and fall outside Tennessee’s Business Tax. That can change once a software company begins providing services around the software itself. Hosting, infrastructure access, support, training, and configuration all carry tax exposure if Tennessee customers receive or use them in-state. Parsing where the line falls between selling software and delivering a service requires an examination of the facts.
Why the Tennessee SaaS Tax Analysis Is So Fact-Dependent
This Tennessee SaaS tax case shows how heavily Business Tax classifications depend on the specific facts of each software or cloud-services transaction. Courts and tax authorities typically look past labels and marketing descriptions to examine what is actually being provided and where the customer receives it. Several factors can move a transaction from one category to another:
- What does the customer actually receive? A right to use intellectual content is intangible property; the ability to use a vendor’s physical or technological infrastructure is a service. The substance of what is being conveyed controls.
- Who controls the underlying assets? When the vendor retains full management and control of its servers and hardware, as SAP did here, the arrangement tends to look more like a service agreement and less like an equipment lease.
- Where does delivery occur? A Tennessee customer accessing services electronically from a Tennessee address can trigger the “delivery in Tennessee” element even if the vendor has no physical footprint in the state.
- What records does the vendor keep? Courts rely on the best evidence available, including the vendor’s own invoice addresses, to establish where services are received. Vendors without precise customer location data carry that risk.
This documentation issue can become especially important during Tennessee Department of Revenue audits, where businesses may need to substantiate how software, SaaS, hosting, and service revenue should be classified for Business Tax purposes. Companies with incomplete billing descriptions or bundled revenue streams may face additional audit scrutiny.
The facts here were not especially complicated, yet they produced a divided result: software licenses were not taxable, yet cloud hosting and cloud-based services were. Companies that bundle software with hosting or support should not treat all of that revenue as a single category – doing so may put the entire transaction at risk of taxation.
Possible Tennessee Supreme Court Review
The Court of Appeals’ opinion may not be the final say. Either party may petition the Tennessee Supreme Court for review. That review is discretionary; the Supreme Court can decline without explanation, in which case the Court of Appeals’ decision would stand as the final word. Businesses and tax practitioners should watch for a petition and, if one is filed, track whether the Supreme Court accepts it. For now, the Court of Appeals ruling governs.
Action Item: Has Your Company Paid Business Tax on Software Licenses?
If your company has paid Tennessee Business Tax on software license revenue, whether for installed software or SaaS access, you may have overpaid. Tennessee law permits refund claims for taxes improperly assessed or remitted, but filing deadlines apply. LBMC’s State and Local Tax practitioners can assist with assessing your exposure, estimating the potential recovery, and guiding you through the refund claim process before the filing deadlines expire.
Tennessee Business Tax Treatment of Software, SaaS, and Cloud Services
Revenue Type | Taxable? | Reason |
Software Licenses (On-Premise & SaaS) | No — Not Taxable | Sale of intangible personal property (right to use software) does not constitute a taxable “service” under the Business Tax Act |
Cloud Hosting (IaaS/PaaS) | Yes — Taxable | Providing access to infrastructure is a service; electronically delivered to TN customers |
Cloud-Based Services (support, training, config, consulting) | Yes — Taxable | Clear services; electronically delivered to Tennessee customer locations based on invoice addresses |
What Software and SaaS Companies Should Do Next
The SAP v. Gerregano decision provides important guidance for software companies, SaaS providers, and other technology businesses evaluating Tennessee Business Tax exposure. While the Court confirmed that software license and SaaS revenue are generally not taxable, cloud hosting and remotely delivered services may still create Tennessee tax obligations.
Companies that have paid Business Tax on software license revenue may also want to evaluate potential refund opportunities before filing deadlines expire. LBMC’s State and Local Tax team can help businesses assess exposure, refund opportunities, and compliance considerations.
Jay Hancock is a Shareholder and Practice Leader of LBMC’s state and local tax practice. He can be reached at jay.hancock@lbmc.com.
Leigh Ann Vernich is a Senior Manager in LBMC’s state and local tax practice. She can be reached at leighann.vernich@lbmc.com.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. This 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.
