Is SaaS Taxable in Tennessee?
Short answer: Generally, yes. When software remains with the seller or its designee and a customer accesses it from Tennessee, the state generally taxes that remote use. Tennessee’s general state sales tax rate is **7%**, plus the applicable local rate.
What counts as remotely accessed software?
The Tennessee Department of Revenue describes remotely accessed software as software that remains in the possession of the seller, or someone acting for the seller, while the purchaser accesses it from elsewhere. Examples include online accounting, tax preparation, human resources, and word processing applications. The department’s RAS-1 guidance says access from a Tennessee location is subject to sales and use tax.
What the customer receives and where the customer uses it matter more than the server’s location. If a purchaser instead takes possession of downloaded software, the purchase is not a remotely accessed software sale merely because employees later connect to that software over a network. The delivery of that software must be analyzed separately.
Does custom software receive different treatment?
Do not assume it does. Tennessee’s general software guidance says both prewritten and custom software can be taxable when provided to a customer in Tennessee, whether by physical media, electronic download, or remote access. A product’s custom features or lack of a physical copy does not, by itself, exempt the charge.
Is every online service taxable as SaaS?
No. Tennessee distinguishes software access from several other services. Its RAS-1 guidance excludes information and data processing, payment and transaction processing, payroll processing, billing and collection, internet access, and data storage from its definition of remotely accessed software. A customer’s use of an online portal to receive one of those services does not automatically turn it into a taxable software-access sale.
For example, a customer who logs in and operates the seller’s accounting application is buying something different from a customer who pays the seller to process payroll on the customer’s behalf. The agreement, product functions, and invoice should show what is actually being sold.
What if users are in several states?
Tennessee taxes the portion of remotely accessed software used from within the state. A business with users both inside and outside Tennessee may be able to allocate the subscription price and claim the out-of-state portion under the department’s rules. RAS-4 explains when a purchaser can use a Remotely Accessed Software Direct Pay Permit or a Streamlined exemption certificate. Sellers need the appropriate completed documentation to support an allocation.
How is tax calculated?
Tennessee’s sales and use tax overview lists a 7% general state rate, with a local rate that varies by jurisdiction. The department’s RAS-3 guidance says amounts for setup or customization included in the sale of remotely accessed software can be part of its taxable sales price. Larger contracts for a single prewritten software product may require the state’s special single article calculation for local tax.
To assess a SaaS offering, confirm who possesses the software, where its users access it, what other services the agreement includes, how charges are stated, and whether a multistate allocation is properly documented.
Sources: Tennessee Department of Revenue, RAS-1, RAS-2, RAS-4, and Sales and Use Tax.