In a redacted ruling applying the True Object Test, the Tennessee Department of Revenue (DOR) held that the use of the taxable components was merely incidental to the overall transaction involving both taxable and non-taxable items.
The taxpayer provides information and data processing services which are not subject to Tennessee sales and use tax. Although Tennessee does tax tangible personal property, exemptions may apply including ones for specified digital products, remotely accessed software and specifically enumerated services. Such exemptions include subscriptions to information or data processing services, including the capability of the customer to analyze such information or data from the dealer which encompasses the services offered by the taxpayer.
“... sales of its [offerings] are sales of information or data processing services and are not subject to Tennessee sales and use tax. ”
INformation & data processing services
The key component of the taxpayer’s service offerings is its proprietary data set. In addition to its database, it uses a variety of automated and manual processes to “verify, augment, and enhance” that data in providing its compliance monitoring services.
As stated by the DOR in its ruling, “[b]uilding a proprietary database from various sources of information and providing customers access to that database is a type of information service.” Further, “[t]aking customers’ uploaded data, systematically comparing that data to the database, and providing the customers with any matches between the uploaded data and the database is a data processing service.”
TO TAX OR NOT TO TAX
The services provided by the taxpayer compare customers’ uploaded data to its database, provide information or data processing services and then allow customers to view the information. Such services are not subject to Tennessee sales or use tax.
The component of the taxpayer’s services transaction that is taxable is the taxpayer’s customers’ access to the services, which is through an online portal or an Application Programming Interface (API).
Because the true object of the transaction was the non-taxable services and not the taxable tangible personal property, the TN DOR aptly determined that the overall transaction was not subject to sales tax.
THE TRUE OBJECT TEST
The first step in figuring out if you can apply a true object test is to determine the sales tax classification of what you are selling in a given state - is it tangible personal property or services? Although this may seem to be a straightforward determination, state laws differ vastly, even as to what is considered “tangible personal property”.
Continuing with the analysis, if you sell services, the next step is to determine whether any tangible personal property is transferred with the service and whether the services are separately stated on the invoice.
Ultimately, the true object test is applied to determine the purchaser’s intent with the transaction - was it to acquire the tangible personal property itself, or was the property merely incidental to the rendering of a service?
CALL TO ACTION
Analyzing contracts and transactions to determine taxability, sales tax classifications, de minimis thresholds and the other elements of a true object test analysis can be a time consuming, daunting process. Libertas has the knowledge base and experience to lead you through the process.