Tennessee – Taxability of Remote Storage and Virtual Computing Services

SALT Report 3076 – The Tennessee Department of Revenue issued a letter ruing regarding a Taxpayer’s charges for remote storage and virtual computing services. These services allow the Taxpayer’s customers to access certain computer applications and platforms, server bandwidth, and offers data storage capabilities.

The remote storage service allows customers to use a Web-based interface to store, retrieve, and maintain content, data, applications, and software on the Taxpayer’s servers. Using this service the customer can store and retrieve large amounts of data at any time and from any location via the Internet.

For use of this service, customers are charged both a base fee, determined by the amount of gigabytes used in a month, as well as an incidental usage fee that is based on their activity. The Taxpayer also provides a software development kit and a management console that helps customers upload and manage their stored data, free of charge.

The virtual computing service provides customers with access to computing resources that allow them to perform a variety of activities, such as running applications, monitoring computers and computer usage, and hosting web domains.  In order to use the virtual computing service, the customer must create a virtual server to run the applications and services.  The virtual server allows the customer to create memory configurations, CPU, and storage capabilities that are specific to their operating system.

For this service, the customer is charged both a base fee, determined by the amount of computing power used in a given month, as well as an incidental usage fee based on their activity while using the service. The Taxpayer also provides its customers with operating system software, application tools, and data for their convenience and builds these costs into its monthly charge.

In its response, the Department stated that, neither service provided by the Taxpayer is subject to sales and use tax for the following reasons:

  • Neither transaction involves the sale, transfer, or electronic delivery of tangible personal property or computer software.
  • Neither service constitutes a taxable service under Tennessee sales and use tax laws.  This is because the services fall within the category of data processing and information services, which are specifically excluded from taxable telecommunications services.
  • The Taxpayer does not make taxable sales of goods or services in conjunction with the sale of its service, therefore the services cannot be characterized as bundled sales of nontaxable services sold with taxable goods or services, and
  • Because the customer accesses the software from a server that is located outside Tennessee, no use of tangible personal property occurs in the State.

For Further Information

Tennessee Department of Revenue – Letter Ruling #13-12