Article
Court decision could impact your business tax obligations in Tennessee
Jan. 22, 2024 · Authored by Adam Cline
A recent court decision in SAP America, Inc. v. Commissioner of Revenue, State of Tennessee, involves a dispute over whether a taxpayer is subject to Tennessee’s Business Tax Act.
The court ruled selling and licensing of software isn’t taxable under Tennessee’s Business Tax Act, and the impacts of this decision are extensive. Businesses in the software industry should review their sales and licensing models, as well as any related services they provide, to assess potential impacts on their tax obligations in Tennessee.
Business tax act
The Business Tax Act imposes a tax on businesses that make sales of either tangible personal property or services in Tennessee. It doesn’t apply to businesses that sell intangible personal property.
The taxpayer in the SAP America case was a company that licenses enterprise software and provides optional online training, cloud consulting, and cloud hosting services. The question the court needed to answer was whether the licensing of software constituted the sale of tangible or intangible property. This distinction would determine whether the taxpayer’s business is subject to Tennessee’s Business Tax Act.
The court concluded that software is intangible property that is not subject to taxation under the Business Tax Act. The court explained its goal was to carry out legislative intent without broadening or restricting the statute beyond its intended scope. Using this guiding principle, the court determined that if the Tennessee legislature wanted to subject the sale of intangible property — specifically the licensing of software — to the Business Tax Act, it would have.
The court started its analysis at the Commercial Union Bank v. Tidwell case. In that case, the issue was whether the sale of computer software was subject to Tennessee sales tax. The Tennessee Supreme Court specifically held that in the context of Tennessee’s sales tax, the sale of computer software was the sale of intangible personal property.
The SAP America court explained that the Tennessee legislature amended the sales tax statute to treat computer software as a sale of tangible personal property after the ruling in Commercial Union.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.