SALT Report 2280 – The Tennessee Department of Revenue issued a ruling regarding the application of sales and use tax to online advertising and database services. The Taxpayer in this case is an out of state company who provides a wide range of advertising services over the Internet.
The Taxpayer requested a ruling regarding whether its website banner advertisements, advertisement of inventory on its websites, photography and set-up service charges, and access to online database applications and related application service provider services are subject to Tennessee sales and use tax.
The Taxpayer owns several websites and sells banner advertising space to both end users and resellers of banner advertising. The Department determined that the sale of online banner advertising does not involve the sale of tangible personal property or computer software and are therefore, not taxable. Additionally, advertising services are not among the services subject to tax under the Retailers’ Sales Tax Act.
Advertising of Seller’s Inventory
The Taxpayer provides a database of items available for purchase or lease from third party sellers or their agents. Potential customers can access the Taxpayer’s website at no charge and search the database for items based on a specific set of criteria. The Taxpayer charges the sellers and lessors a subscription fee for this service.
The Department ruled that receipts derived from the sellers and lessors for advertising their property on the database are not subject to the Tennessee sales and use tax because the Taxpayer’s service does not involve the sale of tangible personal property, computer software, final artwork, or advertising materials. Additionally, simply providing an online database is not a service subject to tax under the Retailers’ Sales Tax Act.
Access to Online Database Applications
The Taxpayer charges third party businesses a fee to access its database and related services. For example, the Taxpayer’s customers access the online database application via the Internet, and incorporate the Taxpayer’s searchable database application into their own personal website to populate the database with their Inventory.
The Department determined that because the Taxpayer does not make sales of tangible personal property or computer software and does not provide a taxable service in conjunction with access to its online database, no part of the transaction includes the sale of a taxable good or service. Accordingly, these services are not subject to the sales and use tax.
Separately Stated Service Charges
Photography Fee – The Taxpayer charges a photography fee when a customer requests that a photograph of the Inventory item be included in the advertisement. Although the photography fee includes the furnishing of a photograph, which constitutes final artwork and is generally taxable, the Taxpayer’s sales of the photographs take place outside of Tennessee. Therefore, the sale is not subject to sales and use tax. If this service occurs in Tennessee it would be taxable.
Set-Up Fee – The Taxpayer charges a “set-up” fee which gives the seller or lessor the right to enter information about an Inventory item into the Taxpayer’s database. The Department determined that the set-up fee does not involve the sale of tangible personal property, computer software, or final artwork in digital form and is not subject to tax.
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