Tax Insight

Tennessee Court of Appeals finds software licenses exempt from business tax; cloud-based hosting and services taxable

Insight
5 minute read
June 16, 2026

What happened?

The Tennessee Court of Appeals on May 13, 2026 held that receipts from computer software licenses are exempt from Tennessee business tax as sales of intangible personal property. The court found that cloud hosting and related cloud-based services are taxable when electronically delivered to Tennessee locations.

SAP America, Inc. v. David Gerregano, Commissioner of Revenue, State of Tennessee, No. M2024-01399-COA-R3-CV, Tenn. Ct. App. (5/13/26)

Why is it relevant?

For out-of-state service providers, the decision emphasizes that Tennessee business tax exposure is dependent on the customer’s delivery or access location rather than the provider’s performance location. Electronic access by Tennessee users establishes in-state delivery, making customer, billing, “ship-to,” and service-location data important support for sourcing positions. It also highlights that prewritten computer software is considered intangible personal property for purposes of the business tax, despite being defined as tangible personal property under the sales and use tax statutes.

Actions to consider

Companies selling software, SaaS, or cloud-based services, as well as other companies filing business tax, franchise and excise tax, or sales and use tax returns, may want to consider the following:

Review Tennessee business tax positions for software, SaaS, cloud hosting, cloud-based services, and sales of other items that might be classified as sales of intangible property or leases of property.
Revisit contract terms, product mapping, and invoicing practices.
Prepare for potential vendor pricing, invoicing, or tax collection changes.
Assess whether procurement, accounts payable, or other in-house data is “clear and cogent” evidence reflecting where services are received or accessed.
Assess whether refunds may be available to the extent tax was remitted historically on the sale or license of software.
Consider potential implications of the court declining to apply sales and use tax legislative action to business tax (i.e., business tax inaction as proof of legislative intent).
Consider potential implications of the court looking to the common meaning of undefined terms (e.g., “delivered”) versus looking to other bodies of Tennessee law or other federal or state law.
Consider potential implications of the court declining, due to an absence of specific statutory language, to reference the SIC Index as dispositive of whether a gross receipt is generated from a sale of tangible property, intangible property, or services.