(1) General Rules.
(a) Market-Based Sourcing. Sales, other than
sales of tangible personal property, are in Tennessee if and to the extent that
the taxpayer's market for the sales is in Tennessee. In general, the provisions
in this section establish uniform rules for (1) determining whether and to what
extent the market for a sale other than the sale of tangible personal property
is in Tennessee, (2) reasonably approximating the state or states of assignment
where such state or states cannot be determined, and (3) excluding the sale
where the state or states of assignment cannot be determined or reasonably
approximated.
(b) Outline of
topics. The provisions in this regulation are organized as follows.
1. General Rules.
a. Market-Based Sourcing
b. Outline of Topics
c. Definitions Market-Based
Sourcing
d. General Principles of
Application; Contemporaneous Record
e. Rules of Reasonable
Approximation
f. Exclusion of Sales
from the Sales Factor
2.
Sale, Rental, Lease or License of Real Property.
3. Rental, Lease or License of Tangible
Personal Property.
4. Sale of a
Service.
a. General Rule
b. In-Person Services
c. Services Delivered to the Customer or on
Behalf of the Customer, or Delivered Electronically Through the
Customer
d. Professional
Services
e. Broadcast
Advertising
5. License
or Lease of Intangible Property.
a. General
Rules
b. License of a Marketing
Intangible
c. License of a
Production Intangible
d. License of
a Broadcasting Intangible
e.
License of Mixed Intangible
f.
License of Intangible Property where Substance of the Transaction Resembles a
Sale of Goods or Services
g.
Examples
6. License of
Intangible Property.
a. Assignment of
Sales
b. Examples
7. Special Rules.
a. Software Transactions
b. Sales or Licenses of Digital Goods and
Services
c. Enforcement of Legal
Rights
(c)
Definitions. For the purposes of this regulation the following terms have the
following meanings.
1. "Billing address" means
the location indicated in the books and records of the taxpayer as the primary
mailing address relating to a customer's account as of the time of the
transaction as kept in good faith in the normal course of business and not for
tax avoidance purposes.
2.
"Broadcast customer" means a person, corporation, partnership, limited
liability company, or other entity, such as an advertiser or a platform
distribution company, that has a direct connection or contractual relationship
with the broadcaster under which revenue is derived by a broadcaster.
3. "Broadcaster" means a taxpayer that is a
television broadcast network, a cable program network, or a television
distribution company. The term "broadcaster" does not include a platform
distribution company.
4. "Business
customer" means a customer that is a business operating in any form, including
an individual who operates a business through the form of a sole
proprietorship. Sales to a non-profit organization, to a trust, to the U.S.
Government, to any foreign, state or local government, or to any agency or
instrumentality of such government shall be treated as sales to a business
customer and shall be assigned consistent with the rules that apply to such
sales.
5. "Commercial domicile"
means the principal place from which the trade or business of a business entity
is directed or managed.
6. "Film
programming" means one or more performances, events, or productions (or
segments of performances, events, or productions) intended to be distributed
for visual and auditory perception, including but not limited to news,
entertainment, sporting events, plays, stories, or other literary, commercial,
educational, or artistic works.
7.
"Individual customer" means any customer who is not a business
customer.
8. "Place of order,"
means the physical location from which a customer places an order for a sale
other than a sale of tangible personal property from a taxpayer, resulting in a
contract with the taxpayer.
9.
"Platform distribution company" means a cable service provider, a direct
broadcast satellite system, an Internet content distributor, or any other
distributor that directly charges viewers for access to any film
programming.
10. "State where a
contract of sale is principally managed by the customer," means the primary
location at which an employee or other representative of a customer serves as
the primary contact person for the taxpayer with respect to the implementation
and day-to-day execution of a contract entered into by the taxpayer with the
customer.
(d) General
Principles of Application; Contemporaneous Records. In order to satisfy the
requirements of this regulation, a taxpayer's assignment of sales of other than
tangible personal property must be consistent with the following principles:
1. A taxpayer's application of the rules set
forth in this regulation shall be based on objective criteria and shall
consider all sources of information reasonably available to the taxpayer at the
time of its tax filing including, without limitation, the taxpayer's books and
records kept in the normal course of business. A taxpayer's method of assigning
its sales shall be determined in good faith, applied in good faith, and applied
consistently with respect to similar transactions and year to year. A taxpayer
shall retain contemporaneous records that explain the determination and
application of its method of assigning its sales, including its underlying
assumptions, and shall provide such records to the Commissioner of Revenue upon
request.
2. The provisions of Rule
1320-06-01-.42(4)-(7) provide for various assignment rules that apply
sequentially in a hierarchy. For each sale to which a hierarchical rule
applies, a taxpayer must make a reasonable effort to apply the primary rule
applicable to the sale before seeking to apply the next rule in the hierarchy
(and must continue to do so with each succeeding rule in the hierarchy, where
applicable). For example, in some cases, the applicable rule first requires a
taxpayer to determine the state or states of assignment, and where the taxpayer
cannot do so, the rule then requires the taxpayer to reasonably approximate
such state or states. In such cases, the taxpayer must in good faith and with
reasonable effort attempt to determine the state or states of assignment (i.e.,
apply the primary rule in the hierarchy) before it may reasonably approximate
such state or states.
3. A
taxpayer's method of assigning its sales, including the use of a method of
approximation, where applicable, must reflect an attempt to obtain the most
accurate assignment of sales consistent with the regulatory standards set forth
in this regulation, rather than an attempt to lower the taxpayer's tax
liability. A method of assignment that is reasonable for one taxpayer may not
necessarily be reasonable for another taxpayer, depending upon the applicable
facts.
(e) Rules of
Reasonable Approximation.
1. In General. In
general, the provisions of Rule 1320-06-01-.42(4)-(7) establish uniform rules
for determining whether and to what extent the market for a sale other than the
sale of tangible personal property is in Tennessee. The provisions of the
regulation also set forth rules of reasonable approximation, which apply where
the state or states of assignment cannot be determined. In some instances, the
reasonable approximation must be made in accordance with specific rules of
approximation prescribed by this regulation. See, e.g., Rule
1320-06-01-.42(4)(d) (pertaining to professional services). In other cases, the
applicable rule in this regulation permits a taxpayer to reasonably approximate
the state or states of assignment, using a method that reflects an effort to
approximate the results that would be obtained under the applicable rules or
standards set forth in this regulation.
2. Approximation Based Upon Known Sales. In
any instance where, applying the applicable rules set forth in Rule
1320-06-01-.42(4) (pertaining to sales of services), a taxpayer can ascertain
the state or states of assignment of a substantial portion of its sales of
substantially similar services ("assigned sales"), but not all of such sales,
and the taxpayer reasonably believes, based on all available information, that
the geographic distribution of some or all of the remainder of such sales
generally tracks that of the assigned sales, it shall include those sales which
it believes track the geographic distribution of the assigned sales in its
sales factor in the same proportion as its assigned sales. This rule also
applies in the context of licenses and sales of intangible property where the
substance of the transaction resembles a sale of goods or services. See
1320-06-01-.42(5)(f) and (6)(a)4.
(f) Exclusion of Sales from the Sales Factor.
In any case in which a taxpayer cannot ascertain the state or states to which a
sale is to be assigned pursuant to the applicable rules set forth in this
regulation (including through the use of a method of reasonable approximation,
where relevant) using a reasonable amount of effort undertaken in good faith,
the sale shall be excluded from the numerator and the denominator of the
taxpayer's sales factor.
(2) Sale, Rental, Lease or License of Real
Property. In the case of a sale, rental, lease or license of real property, the
sale is in Tennessee if and to the extent that the property is in
Tennessee.
(3) Rental, Lease or
License of Tangible Personal Property. In the case of a rental, lease or
license of tangible personal property, the sale is in Tennessee if and to the
extent that the property is in Tennessee. If property is mobile property that
is located both within and without Tennessee during the period of the lease or
other contract, the receipts assigned to Tennessee shall be the receipts from
the contract period multiplied by the fraction used by the taxpayer for
property factor purposes (as adjusted when necessary to reflect differences
between usage during the contract period and usage during the taxable
year).
(4) Sale of a Service.
(a) General Rule. The sale of a service is in
Tennessee if and to the extent that the service is delivered at a location in
Tennessee. In general, the term "delivered" shall be construed to refer to the
location of the taxpayer's market for the service provided and is not to be
construed by reference to the location of the property or payroll of the
taxpayer as otherwise determined for corporate apportionment purposes. The
rules to determine the location of the delivery of a service in the context of
several specific types of service transactions are set forth at Rule
1320-06-01-.42(4)(b)-(e).
(b)
In-Person Services.
1. In General. Except as
otherwise provided in this subsection, in-person services are services that are
physically provided in person by the taxpayer, where the customer or the
customer's real or tangible property upon which the services are performed is
in the same location as the service provider at the time the services are
performed. This rule includes situations where the services are provided on
behalf of the taxpayer by a third-party contractor. Examples of in-person
services include, without limitation, warranty and repair services; cleaning
services; plumbing services; carpentry; construction contractor services; pest
control; landscape services; medical and dental services, including medical
testing and x-rays and mental health care and treatment; child care; hair
cutting and salon services; live entertainment and athletic performances; and
in-person training or lessons. In-person services include services within the
description above that are performed at (1) a location that is owned or
operated by the service provider or (2) a location of the customer, including
the location of the customer's real or tangible personal property. Various
professional services, including legal, accounting, financial and consulting
services, and other such services as described in Rule 1320-06-01-.42(4)(d),
although they may involve some amount of in-person contact, are not treated as
in-person services within the meaning of this section.
2. Assignment of Sales. Except as otherwise
provided in this subsection, where the service provided by the taxpayer is an
in-person service, the delivery of the service is at the location where the
service is received. Therefore, the sale is in Tennessee if and to the extent
the customer receives the in-person service in Tennessee.
(i) Rule of Determination. In assigning its
sales of in-person services, a taxpayer shall first attempt to determine the
location where a service is received, as follows:
(I) Where the service is performed with
respect to the body of an individual customer in Tennessee (e.g. hair cutting
or x-ray services) or in the physical presence of the customer in Tennessee
(e.g. live entertainment or athletic performances), the service is received in
Tennessee.
(II) Where the service
is performed with respect to the customer's real estate in Tennessee or where
the service is performed with respect to the customer's tangible personal
property at the customer's residence or in the customer's possession in
Tennessee, the service is received in Tennessee.
(III) Where the service is performed with
respect to the customer's tangible personal property and the tangible personal
property is to be shipped or delivered to the customer, whether the service is
performed in Tennessee or outside Tennessee, the service is received in
Tennessee if such property is shipped or delivered to the customer in
Tennessee.
(ii) Rule of
Reasonable Approximation. In any instance in which the state or states where a
service is actually received cannot be determined, but the taxpayer has
sufficient information regarding the place of receipt from which it can
reasonably approximate the state or states where the service is received, the
taxpayer shall reasonably approximate such state or states.
(c) Services Delivered
to the Customer or on Behalf of the Customer, or Delivered Electronically
Through the Customer.
1. In General. Where
the service provided by the taxpayer is not an in-person service within the
meaning of Rule 1320-06-01-.42(4)(b) or a professional service within the
meaning of Rule 1320-06-01-.42(4)(d) and the service is delivered to or on
behalf of the customer, or delivered electronically through the customer, the
sale is in Tennessee if and to the extent that the service is delivered in
Tennessee. For purposes of this section, a service that is delivered "to" a
customer is a service in which the customer and not a third party is the
recipient of the service. A service that is delivered "on behalf of" a customer
is one in which a customer contracts for a service but one or more third
parties, rather than the customer, is the recipient of the service, such as
fulfillment services (see Rule 1320-06-01-.42(4)(c)2(i) or the direct or
indirect delivery of advertising to the customer's intended audience (see Rule
1320-06-01-.42(4)(c)2(iii)). A service that is delivered electronically
"through" a customer is a service that is delivered electronically to a
customer for purposes of resale and subsequent electronic delivery in
substantially identical form to an end user or other third-party recipient.
Except in the instance of a service that is delivered through a customer (where
the service must be delivered electronically), a service is included within the
meaning of this section, irrespective of the method of delivery, e.g., whether
such service is delivered by a physical means or through an electronic
transmission.
2. Assignment of
Sales. The assignment of a sale to a state or states in the instance of a
service that is delivered to the customer or on behalf of the customer, or
delivered electronically through the customer, depends upon the method of
delivery of the service and the nature of the customer. Separate rules of
assignment apply to services delivered by physical means and services delivered
by electronic transmission. (For purposes of this section, a service delivered
by an electronic transmission shall not be considered a delivery by a physical
means). In any instance where, applying the rules set forth in this section,
the rule of assignment depends on whether the customer is an individual or a
business customer, and the taxpayer acting in good faith cannot reasonably
determine whether the customer is an individual or business customer, the
taxpayer shall treat the customer as a business customer.
(i) Delivery to or on Behalf of a Customer by
Physical Means, Whether to an Individual or Business Customer. Services
delivered to a customer or on behalf of a customer through a physical means
include, for example, product delivery services where property is delivered to
the customer or to a third party on behalf of the customer; the delivery of
brochures, fliers or other direct mail services; the delivery of advertising or
advertising-related services to the customer's intended audience in the form of
a physical medium; and the sale of custom software (e.g., where software is
developed for a specific customer in a case where the transaction is properly
treated as a service transaction for purposes of corporate taxation) where the
taxpayer installs the custom software at the customer's site. The rules in this
subsection apply whether the taxpayer's customer is an individual customer or a
business customer.
(I) Rule of Determination.
In assigning the sale of a service delivered to a customer or on behalf of a
customer through a physical means, a taxpayer must first attempt to determine
the state or states where such services are delivered. Where the taxpayer is
able to determine the state or states where the service is delivered, it shall
assign the sale to such state or states.
(II) Rule of Reasonable Approximation. Where
the taxpayer cannot determine the state or states where the service is actually
delivered, but has sufficient information regarding the place of delivery from
which it can reasonably approximate the state or states where the service is
delivered, it shall reasonably approximate such state or states.
(III) Examples. Assume in each of these
examples that the taxpayer that provides the service is taxable in Tennessee
and is to apportion its income pursuant to T.C.A. §67-4-2012.
Example 1: Direct Mail Corp, a corporation based outside
Tennessee, provides direct mail services to its customer, Business Corp.
Business Corp transacts with Direct Mail Corp to deliver printed fliers to a
list of customers that is provided to it by Business Corp. Some of Business
Corp's customers are in Tennessee and some of those customers are in other
states. Direct Mail Corp will use the postal service to deliver the printed
fliers to Business Corp' s customers. The sale of Direct Mail Corp's services
to Business Corp is assigned to Tennessee to the extent that the services are
delivered on behalf of Business Corp to Tennessee customers (i.e., to the
extent that the fliers are delivered on behalf of Business Corp to Business
Corp's intended audience in Tennessee).
Example 2: Ad Corp is a corporation based outside Tennessee
that provides advertising and advertising-related services in Tennessee and in
neighboring states. Ad Corp enters into a contract at a location outside
Tennessee with an individual customer who is not a Tennessee resident to design
advertisements for billboards to be displayed in Tennessee, and to design
fliers to be mailed to Tennessee residents. All of the design work is performed
outside Tennessee. The sale of the design services is in Tennessee because the
service is physically delivered on behalf of the customer to the customer's
intended audience in Tennessee.
Example 3: Same facts as Example 2, except that the contract
is with a business customer that is based outside Tennessee. The sale of the
design services is in Tennessee because the services are physically delivered
on behalf of the customer to the customer's intended audience in
Tennessee.
Example 4: Fulfillment Corp, a corporation based outside
Tennessee, provides product delivery fulfillment services in Tennessee and in
neighboring states to Sales Corp, a corporation located outside Tennessee that
sells tangible personal property through a mail order catalog and over the
Internet to customers. In some cases when a customer purchases tangible
personal property from Sales Corp to be delivered in Tennessee, Fulfillment
Corp will, pursuant to its contract with Sales Corp, deliver that property from
its fulfillment warehouse located outside Tennessee. The sale of the
fulfillment services of Fulfillment Corp to Sales Corp is assigned to Tennessee
to the extent that Fulfillment Corp's deliveries on behalf of Sales Corp are to
recipients in Tennessee.
Example 5: Software Corp, a software development corporation,
enters into a contract with a business customer, Buyer Corp, which is
physically located in Tennessee, to develop custom software to be used in Buyer
Corp's business. Software Corp develops the custom software outside Tennessee,
and then physically installs the software on Buyer Corp's computer hardware
located in Tennessee. The development and sale of the custom software is
properly characterized as a service transaction, and the sale is assigned to
Tennessee because the software is physically delivered to the customer in
Tennessee.
Example 6: Same facts as Example 5, except that Buyer Corp
has offices in Tennessee and several other states, but is commercially
domiciled outside Tennessee and orders the software from a location outside
Tennessee. The receipts from the development and sale of the custom software
service are assigned to Tennessee because the software is physically delivered
to the customer in Tennessee.
(ii) Delivery to a Customer by Electronic
Transmission. Services delivered by electronic transmission include, without
limitation, services that are transmitted through the means of wire, lines,
cable, fiber optics, electronic signals, satellite transmission, audio or radio
waves, or other similar means, whether or not the service provider owns, leases
or otherwise controls the transmission equipment. In the case of the delivery
of a service by electronic transmission to a customer, the following rules
apply.
(I) Services Delivered By Electronic
Transmission to an Individual Customer.
I.
Rule of Determination. In the case of the delivery of a service to an
individual customer by electronic transmission, the service is delivered in
Tennessee if and to the extent that the taxpayer's customer receives the
service in Tennessee. If the taxpayer can determine the state or states where
the service is received, it shall assign the sale to such state or
states.
II. Rules of Reasonable
Approximation. If the taxpayer cannot determine the state or states where the
customer actually receives the service, but has sufficient information
regarding the place of receipt from which it can reasonably approximate the
state or states where the service is received, it shall reasonably approximate
such state or states. Where a taxpayer does not have sufficient information
from which it can determine or reasonably approximate the state or states in
which the service is received, it shall reasonably approximate such state or
states using the customer's billing address.
(II) Services Delivered By Electronic
Transmission to a Business Customer.
I. Rule
of Determination. In the case of the delivery of a service to a business
customer by electronic transmission, the service is delivered in Tennessee if
and to the extent that the taxpayer's customer receives the service in
Tennessee. If the taxpayer can determine the state or states where the service
is received, it shall assign the sale to such state or states. For purposes of
this section, it is intended that the state or states where the service is
received reflect the location at which the service is directly used by the
employees or designees of the customer.
II. Rules of Reasonable Approximation. If the
taxpayer cannot determine the state or states where the customer actually
receives the service, but has sufficient information regarding the place of
receipt from which it can reasonably approximate the state or states where the
service is received, it shall reasonably approximate such state or
states.
III. Secondary Rule of
Reasonable Approximation. In the case of the delivery of a service to a
business customer by electronic transmission where a taxpayer does not have
sufficient information from which it can determine or reasonably approximate
the state or states in which the service is received, such state or states
shall be reasonably approximated as set forth in this section. In such cases,
unless the taxpayer can apply the safe harbor set forth in Rule
1320-06-01-.42(4)(c)2(ii)(II)IV, the taxpayer shall reasonably approximate the
state or states in which the service is received as follows: first, by
assigning the sale to the state where the contract of sale is principally
managed by the customer; second, if the state where the customer principally
manages the contract is not reasonably determinable, by assigning the sale to
the customer's place of order; and third, if the customer's place of order is
not reasonably determinable, by assigning the sale using the customer's billing
address; provided, however, that in any instance in which the taxpayer derives
more than 5% of its sales of services from a customer, the taxpayer is required
to identify the state in which the contract of sale is principally managed by
that customer.
IV. Safe Harbor. In
the case of the delivery of a service to a business customer by electronic
transmission a taxpayer may not be able to determine, or reasonably approximate
under Rule 1320-06-01-.42(4)(c)2(ii)(II)II, the state or states in which the
service is received. In these cases, the taxpayer may, in lieu of the rule
stated at Rule 1320-06-01-.42(4)(c)2(ii)(II)III, apply the safe harbor stated
in this section (Rule 1320-06-01-.42(4)(c)2(ii)(II)IV). Under this safe harbor,
a taxpayer may assign its sales to a particular customer based upon the
customer's billing address in any taxable year in which the taxpayer (1)
engages in substantially similar service transactions with more than 250
customers, whether business or individual, and (2) does not derive more than 5%
of its sales of services from such customer. This safe harbor applies only for
purposes of Rule 1320-06-01-.42(4)(c)2(ii)(II) to services delivered by
electronic transmission to a business customer, and not otherwise.
(III) Examples. Assume in each of
these examples that the taxpayer that provides the service is taxable in
Tennessee and is to apportion its income pursuant to T.C.A. § 67-4-2012.
Assume where relevant, unless otherwise stated, that the safe harbor set forth
at Rule 1320-06-01-.42(4)(c)2(ii)(II)IV does not apply.
Example 1: Support Corp, a corporation that is based outside
Tennessee, provides software support and diagnostic services to individual and
business customers that have previously purchased certain software from
third-party vendors. These individual and business customers are located in
Tennessee and other states. Support Corp supplies its services on a
case-by-case basis when directly contacted by its customer. Support Corp
generally provides these services through the Internet but sometimes provides
these services by phone. In all cases, Support Corp verifies the customer's
account information before providing any service. Using the information that
Support Corp verifies before performing a service, Support Corp can determine
where its services are received, and therefore must assign its sales to these
locations. The sales made to Support Corp's individual and business customers
are in Tennessee to the extent that Support Corp's services are received in
Tennessee. See Rule 1320-06-01-.42(4)(c)2(ii)(I) and (II).
Example 2: Online Corp, a corporation based outside
Tennessee, provides web-based services through the means of the Internet to
individual customers who are residents of Tennessee and other states. These
customers access Online Corp's web services primarily in their states of
residence, and sometimes, while traveling, in other states. For a substantial
portion of its sales, Online Corp either can determine the state or states
where such services are received, or, where it cannot determine such state or
states, it has sufficient information regarding the place of receipt to
reasonably approximate such state or states. However, Online Corp cannot
determine or reasonably approximate the state or states of receipt for all of
such sales. Assuming that Online Corp reasonably believes, based on all
available information, that the geographic distribution of the sales for which
it cannot determine or reasonably approximate the location of the receipt of
its services generally tracks those for which it does have this information,
Online Corp must assign to Tennessee the sales for which it does not know the
customers' location in the same proportion as those sales for which it has this
information. See Rule 1320-06-01-.42(1)(e)2.
Example 3: Same facts as in Example 2, except that Online
Corp reasonably believes that the geographic distribution of the sales for
which it cannot determine or reasonably approximate the location of the receipt
of its web-based services do not generally track the sales for which it does
have this information. Online Corp must assign the sales of its services for
which it lacks information as provided to its individual customers using the
customers' billing addresses. See Rule 1320-06-01-.42(4)(c)2(ii)(I)II.
Example 4: Net Corp, a corporation based outside Tennessee,
provides web-based services to a business customer, Business Corp, a company
with offices in Tennessee and two neighboring states. Particular employees of
Business Corp access the services from computers in each Business Corp office.
Assume that Net Corp determines that Business Corp employees in Tennessee were
responsible for 75% of Business Corp's use of Net Corp's services, and Business
Corp employees in other states were responsible for 25% of Business Corp's use
of Net Corp's services. In such case, 75% of the sale is received in Tennessee,
and therefore 75% of the sale is in Tennessee. See Rule
1320-06-01-.42(4)(c)2(ii)(II). Assume alternatively that Net Corp lacks
sufficient information regarding the location or locations where Business
Corp's employees used the services to determine or reasonably approximate such
location or locations. Under these circumstances, if Net Corp derives 5% or
less of its sales from Business Corp, Net Corp must assign the sale under Rule
1320-06-01-.42(4)(c)2(ii)(II)III to the state where Business Corp principally
managed the contract, or if that state is not reasonably determinable, to the
state where Business Corp placed the order for the services, or if that state
is not reasonably determinable, to the state of Business Corp's billing
address. If Net Corp derives more than 5% of its sales of services from
Business Corp, Net Corp is required to identify the state in which its contract
of sale is principally managed by Business Corp and must assign the receipts to
that state.
Example 5: Net Corp, a corporation based outside Tennessee,
provides web-based services through the means of the Internet to more than 250
individual and business customers in Tennessee and in other states. Assume that
for each customer Net Corp cannot determine the state or states where its web
services are actually received, and lacks sufficient information regarding the
place of receipt to reasonably approximate such state or states. Also assume
that Net Corp does not derive more than 5% of its sales of services from any
single customer. Net Corp may apply the safe harbor stated in Rule
1320-06-01-.42(4)(c)2(ii)(II)IV and may assign its sales using each customer's
billing address.
(iii) Services Delivered Electronically
Through or on Behalf of an Individual or Business Customer. A service delivered
electronically "on behalf of" the customer is one in which a customer contracts
for a service to be delivered electronically but one or more third parties,
rather than the customer, is the recipient of the service, such as the direct
or indirect delivery of advertising on behalf of a customer to the customer's
intended audience. A service delivered electronically "through" a customer to
third-party recipients is a service that is delivered electronically to a
customer for purposes of resale and subsequent electronic delivery in
substantially identical form to end users or other third-party recipients.
(I) Rule of Determination. In the case of the
delivery of a service by electronic transmission, where the service is
delivered electronically to end users or other third-party recipients through
or on behalf of the customer, the service is delivered in Tennessee if and to
the extent that the end users or other third-party recipients are in Tennessee.
For example, in the case of the direct or indirect delivery of advertising on
behalf of a customer to the customer's intended audience by electronic means,
the service is delivered in Tennessee to the extent that the audience for such
advertising is in Tennessee. In the case of the delivery of a service to a
customer that acts as an intermediary in reselling the service in substantially
identical form to third-party recipients, the service is delivered in Tennessee
to the extent that the end users or other third-party recipients receive such
services in Tennessee. The rules in this subsection apply whether the
taxpayer's customer is an individual customer or a business customer and
whether the end users or other third-party recipients to which the services are
delivered through or on behalf of the customer are individuals or
businesses.
(II) Rule of Reasonable
Approximation. If the taxpayer cannot determine the state or states where the
services are actually delivered to the end users or other third-party
recipients either through or on behalf of the customer, but has sufficient
information regarding the place of delivery from which it can reasonably
approximate the state or states where the services are delivered, it shall
reasonably approximate such state or states.
(III) Select Secondary Rules of Reasonable
Approximation.
I. Where a taxpayer's service
is the direct or indirect electronic delivery of advertising on behalf of its
customer to the customer's intended audience, if the taxpayer lacks sufficient
information regarding the location of the audience from which it can determine
or reasonably approximate such location, the taxpayer shall reasonably
approximate the audience in a state for such advertising using the following
secondary rules of reasonable approximation. Where a taxpayer is delivering
advertising directly or indirectly to a known list of subscribers, the taxpayer
shall reasonably approximate the audience for advertising in a state using a
percentage that reflects the ratio of the state's subscribers in the specific
geographic area in which the advertising is delivered relative to the total
subscribers in such area. For a taxpayer with less information about its
audience, the taxpayer shall reasonably approximate the audience in a state
using the percentage that reflects the ratio of the state's population in the
specific geographic area in which the advertising is delivered relative to the
total population in such area.
II.
Where a taxpayer's service is the delivery of a service to a customer that then
acts as the taxpayer's intermediary in reselling such service to end users or
other third-party recipients, if the taxpayer lacks sufficient information
regarding the location of the end users or other third-party recipients from
which it can determine or reasonably approximate such location, the taxpayer
shall reasonably approximate the extent to which the service is received in a
state by using the percentage that reflects the ratio of the state's population
in the specific geographic area in which the taxpayer's intermediary resells
such services, relative to the total population in such area.
(IV) Examples. Assume in each of
these examples that the taxpayer that provides the service is taxable in
Tennessee and is to apportion its income pursuant to T.C.A. § 67-4-2012.
Example 1: Web Corp, a corporation that is based outside
Tennessee, provides Internet content to viewers in Tennessee and other states.
Web Corp sells advertising space to business customers pursuant to which the
customers' advertisements will appear in connection with Web Corp's Internet
content. Web Corp receives a fee for running the advertisements that is
determined by reference to the number of times the advertisement is viewed or
clicked upon by the viewers of its website. Web Corp's sale of advertising
space to its business customers is assigned to Tennessee to the extent that the
viewers of the Internet content are in Tennessee, as measured by viewings or
clicks. See Rule 1320-06-01-.42(4)(c)2(iii)(I). If Web Corp is unable to
determine the actual location of its viewers, and lacks sufficient information
regarding the location of its viewers to reasonably approximate such location,
Web Corp must approximate the amount of its Tennessee sales by multiplying the
amount of such sales by a percentage that reflects the Tennessee population in
the specific geographic area in which the content containing the advertising is
delivered relative to the total population in such area. See Rule
1320-06-01-.42(4)(c)2(iii)(III).
Example 2: Retail Corp, a corporation that is based outside
of Tennessee, sells tangible property through its retail stores located in
Tennessee and other states, and through a mail order catalog. Answer Co, a
corporation that operates call centers in multiple states, contracts with
Retail Corp to answer telephone calls from individuals placing orders for
products found in Retail Corp's catalogs. In this case, the phone answering
services of Answer Co are being delivered to Retail Corp's customers and
prospective customers. Therefore, Answer Co is delivering a service
electronically to Retail Corp's customers or prospective customers on behalf of
Retail Corp, and must assign the proceeds from this service to the state or
states from which the phone calls are placed by such customers or prospective
customers. If Answer Co cannot determine the actual locations from which phone
calls are placed, and lacks sufficient information regarding the locations to
reasonably approximate such locations, Answer Co must approximate the amount of
its Tennessee sales by multiplying the amount of its fee from Retail Corp by a
percentage that reflects the Tennessee population in the specific geographic
area from which the calls are placed relative to the total population in such
area. See Rule 1320-06-01-.42(4)(c)2(iii)(III)I.
Example 3: Web Corp, a corporation that is based outside of
Tennessee, sells tangible property to customers via its Internet website.
Design Co designed and maintains Web Corp's website, including making changes
to the site based on customer feedback received through the site. Design Co's
services are delivered to Web Corp, the proceeds from which are assigned
pursuant to Rule 1320-06-01-.42(4)(c)2(ii). The fact that Web Corp's customers
and prospective customers incidentally benefit from Design Co's services, and
may even interact with Design Co in the course of providing feedback, does not
transform the service into one delivered "on behalf of" Web Corp to Web Corp's
customers and prospective customers.
Example 4: Wholesale Corp, a corporation that is based
outside Tennessee, develops an Internet-based information database outside
Tennessee and enters into a contract with Retail Corp whereby Retail Corp will
market and sell access to this database to end users. Depending on the facts,
the provision of database access may be either the sale of a service or the
license of intangible property or may have elements of both. Assume that on the
particular facts applicable in this example Wholesale Corp is selling database
access in transactions properly characterized as involving the performance of a
service. When an end user purchases access to Wholesale Corp's database from
Retail Corp, Retail Corp in turn compensates Wholesale Corp in connection with
that transaction. In this case, Wholesale Corp's services are being delivered
through Retail Corp to the end user. Wholesale Corp must assign its sales to
Retail Corp to the state or states in which the end users receive access to
Wholesale Corp's database. If Wholesale Corp cannot determine the state or
states where the end users actually receive access to Wholesale Corp's
database, and lacks sufficient information regarding the location from which
the end users access the database to reasonably approximate such location,
Wholesale Corp must approximate the extent to which its services are received
by end users in Tennessee by using a percentage that reflects the ratio of the
Tennessee population in the specific geographic area in which Retail Corp
regularly markets and sells Wholesale Corp's database relative to the total
population in such area. See Rule 1320-06-01-.42(4)(c)2(iii)(III)II. Note that
it does not matter for purposes of the analysis whether Wholesale Corp's sale
of database access constitutes a service or a license of intangible property,
or some combination of both. See Rule 1320-06-1-.42(5)(f).
(d)
Professional Services.
1. In General. Except
as otherwise provided in Rule 1320-06-01-.42(4)(d)2, professional services are
services that require specialized knowledge and in some cases require a
professional certification, license or degree. Professional services include,
without limitation, management services, bank and financial services, financial
custodial services, investment and brokerage services, fiduciary services, tax
preparation, payroll and accounting services, lending and credit card services,
legal services, consulting services, video production services, graphic and
other design services, engineering services, and architectural
services.
2. Overlap with Other
Categories of Services.
(i) Certain services
that fall within the definition of "professional services" set forth in Rule
1320-06-01-.42(4)(d)1 are nevertheless treated as "in-person services" within
the meaning of Rule 1320-06-01-.42(4)(b), and are assigned under Rule
1320-06-01-.42(4)(b). Specifically, professional services that are physically
provided in person by the taxpayer such as carpentry, certain medical and
dental services or child care services, where the customer or the customer's
real or tangible property upon which the services are provided is in the same
location as the service provider at the time the services are performed, are
"in-person services" and are assigned as such, notwithstanding that they may
also be considered to be "professional services". However, professional
services where the service is of an intellectual or intangible nature, such as
legal, accounting, financial and consulting services, are assigned as
professional services under Rule 1320-06-01-.42(4)(d), notwithstanding the fact
that such services may involve some amount of in-person contact.
(ii) Professional services may in some cases
include the transmission of one or more documents or other communications by
mail or by electronic means. However, in such cases, despite this transmission,
the assignment rules that apply are those set forth in Rule
1320-06-01-.42(4)(d), and not those set forth in Rule 1320-06-01-.42(4)(c),
pertaining to services delivered to a customer or through or on behalf of a
customer.
3. Assignment
of Sales. In the case of a professional service, it is generally possible to
characterize the location of delivery in multiple ways by emphasizing different
elements of the service provided, no one of which will consistently represent
the market for the services. Therefore, for purposes of consistent application
of the market-sourcing rule stated in T.C.A. § 67-4-2012, the Commissioner
has concluded that the location of delivery in the case of professional
services is not susceptible to a general rule of determination, and must be
reasonably approximated. The assignment of a sale of a professional service
depends in many cases upon whether the customer is an individual or business
customer. In any instance in which the taxpayer, acting in good faith, cannot
reasonably determine whether the customer is an individual or business
customer, the taxpayer shall treat the customer as a business customer. For
purposes of assigning the sale of a professional service, a taxpayer's customer
is the person who contracts for such service, irrespective of whether another
person pays for or also benefits from the taxpayer's services.
(i) General Rule. Sales of professional
services other than those services described in Rule 1320-06-01-.42(4)(d)3(ii)
(architectural and engineering services) are assigned in accordance with this
section.
(I) Professional Services Delivered
to Individual Customers. Except as otherwise provided in this section, Rule
1320-06-01-.42(4)(d), in any instance in which the service provided is a
professional service and the taxpayer's customer is an individual customer, the
state or states in which the service is delivered shall be reasonably
approximated as set forth in this section, Rule 1320-06-01-.42(4)(d)3(i)(I). In
particular, the taxpayer shall assign the sale to the customer's state of
primary residence, or, if the taxpayer cannot reasonably identify the
customer's state of primary residence, to the state of the customer's billing
address; provided, however, in any instance in which the taxpayer derives more
than 5% of its sales of services from an individual customer, the taxpayer is
required to identify the customer's state of primary residence and must assign
the receipts from the service or services provided to that customer to that
state.
(II) Professional Services
Delivered to Business Customers. Except as otherwise provided in this section,
Rule 1320-06-01-.42(4)(d), in any instance in which the service provided is a
professional service and the taxpayer's customer is a business customer, the
state or states in which the service is delivered shall be reasonably
approximated as set forth in this section, 1320-06-01-.42(4)(d)3(i)(II). In
particular, unless the taxpayer may use the safe harbor set forth at
1320-06-01-.42(4)(d)3(i)(III), the taxpayer shall assign the sale as follows:
first, by assigning the receipts to the state where the contract of sale is
principally managed by the customer; second, if such place of customer
management is not reasonably determinable, to the customer's place of order;
and third, if such customer's place of order is not reasonably determinable, to
the customer's billing address; provided, however, in any instance in which the
taxpayer derives more than 5% of its sales of services from a customer, the
taxpayer is required to identify the state in which the contract of sale is
principally managed by the customer.
(III) Safe Harbor; Large Volume of
Transactions. Notwithstanding the rules set forth in Rule
1320-06-01-.42(4)(d)3(i)(I) and (II), a taxpayer may assign its sales to a
particular customer based on the customer's billing address in any taxable year
in which the taxpayer (1) engages in substantially similar service transactions
with more than 250 customers, whether individual or business, and (2) does not
derive more than 5% of its sales of services from such customer.
This safe harbor applies only for purposes of Rule
1320-06-01-.42(4)(d)3(i), and not otherwise.
(ii) Architectural and Engineering Services
with Respect to Real or Tangible Personal Property. Architectural and
engineering services with respect to real or tangible personal property are
professional services within the meaning of this section Rule
1320-06-01-.42(4)(d). However, unlike in the case of the general rule that
applies to professional services, (1) the sale of such an architectural service
is assigned to a state or states if and to the extent that the services are
with respect to real estate improvements located, or expected to be located, in
such state or states; and (2) the sale of such an engineering service is
assigned to a state or states if and to the extent that the services are with
respect to tangible or real property located in such state or states, including
real estate improvements located in, or expected to be located in, such state
or states. These rules apply whether or not the customer is an individual or
business customer. In any instance in which architectural or engineering
services are not described in this section (Rule 1320-06-01-.42(4)(d)3(ii)),
the sale of such services shall be assigned under the general rule for
professional services. See Rule 1320-06-01-.42(4)(d)3(i).
Example 1: Architecture Corp provides building design
services as to buildings located, or expected to be located, in Tennessee to
individual customers who are residents of Tennessee and other states, and to
business customers that are based in Tennessee and other states. Architecture
Corp's sales are assigned to Tennessee because the locations of the buildings
to which its design services relate are in Tennessee, or are expected to be in
Tennessee. For purposes of assigning these sales, it is not relevant where, in
the case of an individual customer, the customer primarily resides or is billed
for such services, and it is not relevant where, in the case of a business
customer, the customer principally manages the contract, placed the order for
the services or is billed for such services. Further, such sales are assigned
to Tennessee even if Architecture Corp's designs are either physically
delivered to its customer in paper form in a state other than Tennessee or are
electronically delivered to its customer in a state other than Tennessee. See
Rule 1320-06-01-.42(4)(d)3(ii).
Example 2: Law Corp provides legal services to individual
clients who are residents of Tennessee and other states. In some cases, Law
Corp may prepare one or more legal documents for its client as a result of
these services and/or the legal work may be related to litigation or a legal
matter that is ongoing in a state other than where the client is resident.
Assume that Law Corp knows the state of primary residence for many of its
clients, and where it does not know this state of primary residence, it knows
the client's billing address. Also assume that Law Corp does not derive more
than 5% of its sales of services from any one individual client. Where Law Corp
knows its client's state of primary residence, it shall assign the sale to that
state. Where Law Corp does not know its client's state of primary residence,
but rather knows the client's billing address, it shall assign the sale to that
state. For purposes of the analysis it is irrelevant whether the legal
documents relating to the service are mailed or otherwise delivered to a
location in another state, or the litigation or other legal matter that is the
underlying predicate for the services is in another state. See Rule
1320-06-01-.42(4)(d)2(ii) and 3(i)(I).
Example 3: Law Corp provides legal services to several
multistate business clients. In each case, Law Corp knows the state in which
the agreement for legal services that governs the client relationship is
principally managed by the client. In one case, the agreement is principally
managed in Tennessee; in the other cases, the agreement is principally managed
in a state other than Tennessee. Where the agreement for legal services is
principally managed by the client in Tennessee, the sale of the services shall
be assigned to Tennessee; in the other cases, the sale is not assigned to
Tennessee. In the case of the sale that is assigned to Tennessee, the sale
shall be so assigned even if (1) the legal documents relating to the service
are mailed or otherwise delivered to a location in another state, or (2) the
litigation or other legal matter that is the underlying predicate for the
services is in another state. See Rule 1320-06-01-.42(4)(d)2(ii) and
3(i)(II).
Example 4: Consulting Corp, a company that provides
consulting services to law firms and other customers, is hired by Law Corp in
connection with legal representation that Law Corp provides to Client Co.
Specifically, Consulting Corp is hired to provide expert testimony at a trial
being conducted by Law Corp on behalf of Client Co. Client Co pays for
Consulting Corp's services directly. Assuming that Consulting Corp knows that
its agreement with Law Corp is principally managed by Law Corp in Tennessee,
the sale of Consulting Corp's services shall be assigned to Tennessee. It is
not relevant for purposes of the analysis that Client Co is the ultimate
beneficiary of Consulting Corp's services, or that Client Co pays for
Consulting Corp's services directly. See Rule
1320-06-01-.42(4)(d)3(i)(II).
Example 5: Advisor Corp, a corporation that provides
investment advisory services, provides such advisory services to Investment Co.
Investment Co is a multistate business client of Advisor Corp that uses Advisor
Corp's services in connection with investment accounts that it manages for
individual clients, who are the ultimate beneficiaries of Advisor Corp's
services. Assume that Investment Co's individual clients are persons that are
residents of numerous states, which may or may not include Tennessee. Assuming
that Advisor Corp knows that its agreement with Investment Co is principally
managed by Investment Co in Tennessee, the sale of Advisor Corp's services
shall be assigned to Tennessee. It is not relevant for purposes of the analysis
that the ultimate beneficiaries of Advisor Corp's services may be Investment
Co's clients, who are residents of numerous states. See Rule
1320-06-01-.42(4)(d)3(i)(II).
Example 6: Design Corp is a corporation based outside
Tennessee that provides graphic design and similar services in Tennessee and in
neighboring states. Design Corp enters into a contract at a location outside
Tennessee with an individual customer to design fliers for the customer. Assume
that Design Corp does not know the individual customer's state of primary
residence and does not derive more than 5% of its sales of services from the
individual customer. All of the design work is performed outside Tennessee. The
sale is in Tennessee if the customer's billing address is in Tennessee. See
Rule 1320-06-01-.42(4)(d)3(i)(I).
(e) Broadcast Advertising Services.
Notwithstanding anything herein to the contrary, receipts from a broadcaster's
sale of advertising services to a broadcast customer are assigned to Tennessee
if the commercial domicile of the broadcast customer is in Tennessee. For
purposes of this provision, "advertising services" means an agreement to
include the broadcast customer's advertising content in the broadcaster's film
programming.
(5) Rental,
Lease, or License of Intangible Property.
(a)
General Rule.
1. The receipts from the rental,
lease, or license of intangible property are in Tennessee if and to the extent
the intangible is used in Tennessee. In general, the term "use" shall be
construed to refer to the location of the taxpayer's market for the use of the
intangible property that is being rented, leased, or licensed and is not to be
construed to refer to the location of the property or payroll of the
taxpayer.
2. In general, a rental,
lease, or license of intangible property that conveys all substantial rights in
such property is treated as a sale of intangible property for tax purposes. See
Rule 1320-06-01-.42(6). Note, however, that for purposes of Rule
1320-06-01-.42(5) and (6), a sale or exchange of intangible property is treated
as a license of such property where the receipts from the sale or exchange
derive from payments that are contingent on the productivity, use or
disposition of the property.
3.
Intangible property rented, leased, or licensed as part of the sale or lease of
tangible property is treated under Rule 1320-06-01-.42 as the sale or lease of
tangible property.
(b)
License of a Marketing Intangible. Where a license is granted for the right to
use intangible property in connection with the sale, rental, lease, license, or
other marketing of goods, services, or other items (i.e., a marketing
intangible), the royalties or other licensing fees paid by the licensee for
such right are assigned to Tennessee to the extent that the fees are
attributable to the sale or other provision of goods, services, or other items
purchased or otherwise acquired by customers in Tennessee. Examples of a
license of a marketing intangible include, without limitation, the license of a
service mark, trademark, or trade name; certain copyrights and a franchise
agreement. In each of these instances the license of the marketing intangible
is intended to promote consumer sales. In the case of the license of a
marketing intangible, where a taxpayer has actual evidence of the amount or
proportion of its receipts that is attributable to Tennessee, it shall assign
such amount or proportion to Tennessee. In the absence of actual evidence of
the amount or proportion of the licensee's receipts that are derived from
Tennessee customers, the portion of the licensing fee to be assigned to
Tennessee shall be reasonably approximated by multiplying the total fee by a
percentage that reflects the ratio of the Tennessee population in the specific
geographic area in which the licensee makes material use of the intangible
property to regularly market its goods, services or other items relative to the
total population in such area. Where the license of a marketing intangible is
for the right to use the intangible property in connection with sales or other
transfers at wholesale rather than directly to retail customers, the portion of
the licensing fee to be assigned to Tennessee shall be reasonably approximated
by multiplying the total fee by a percentage that reflects the ratio of the
Tennessee population in the specific geographic area in which the licensee's
goods, services, or other items are ultimately marketed using the intangible
property relative to the total population of such area.
(c) License of a Production Intangible. Where
a license is granted for the right to use intangible property other than in
connection with the sale, lease, license, or other marketing of goods,
services, or other items, and the license is to be used in a production
capacity (a "production intangible"), the licensing fees paid by the licensee
for such right are assigned to Tennessee to the extent that the use for which
the fees are paid takes place in Tennessee. Examples of a license of a
production intangible include, without limitation, the license of a patent, a
copyright, or trade secrets to be used in a manufacturing process, where the
value of the intangible lies predominately in its use in such process. In the
case of a license of a production intangible, it shall be presumed that the use
of the intangible property takes place in the state of the licensee's
commercial domicile (where the licensee is a business) or the licensee's state
of primary residence (where the licensee is an individual) unless the taxpayer
or the Commissioner can reasonably establish the location(s) of actual use.
Where the Commissioner can reasonably establish that the actual use of
intangible property pursuant to a license of a production intangible takes
place in part in Tennessee, it shall be presumed that the entire use is in
Tennessee except to the extent that the taxpayer can demonstrate that the
actual location of a portion of the use takes place outside
Tennessee.
(d) License of a
Broadcasting Intangible. Where a broadcaster grants a license to a broadcast
customer for the right to use film programming, the licensing fees paid by the
licensee for such right are assigned to Tennessee to the extent that the
broadcast customer is located in Tennessee. In the case of business customers,
the broadcast customer's location shall be determined using the broadcast
customer's commercial domicile. In the case of individual customers, the
broadcast customer's location shall be determined using the address of the
broadcast customer listed in the broadcaster's records.
(e) License of a Mixed Intangible. Where a
license of intangible property includes both a license of a marketing
intangible and a license of a production intangible (a "mixed intangible") and
the fees to be paid in each instance are separately and reasonably stated in
the licensing contract, the Commissioner will accept such separate statement
for purposes of this section if it is reasonable. Where a license of intangible
property includes both a license of a marketing intangible and a license of a
production intangible and the fees to be paid in each instance are not
separately and reasonably stated in the contract, it shall be presumed that the
licensing fees are paid entirely for the license of the marketing intangible
except to the extent that the taxpayer or the Commissioner can reasonably
establish otherwise.
(f) License of
Intangible Property where Substance of Transaction Resembles a Sale of Goods or
Services.
1. In general. In some cases, the
license of intangible property will resemble the sale of an
electronically-delivered good or service rather than the license of a marketing
intangible or a production intangible. In such cases, the receipts from the
licensing transaction shall be assigned by applying the rules set forth in Rule
1320-06-01-.42(4)(c)2(ii) and (iii), as if the transaction were a service
delivered to an individual or business customer or delivered electronically
through an individual or business customer, as applicable. Examples of
transactions to be assigned under this section (1320-06-01-.42(5)(f)) include,
without limitation, the license of database access, the license of access to
information, the license of digital goods (see Rule 1320-06-01-.42(7)(b)), and
the license of certain software (e.g., where the transaction is not the license
of pre-written software that is treated as the sale of tangible personal
property, see Rule 1320-06-01-.42(7)(a)).
2. Sublicenses. Pursuant to Rule
1320-06-01-.42(5)(f)1, Rule 1320-06-01-.42(4)(c)2(iii) may apply where a
taxpayer licenses intangible property to a customer that in turn sublicenses
the intangible property to end users as if the transaction were a service
delivered electronically through a customer to end users. In particular, the
rules set forth at Rule 1320-06-01-.42(4)(c)2(iii) that apply to services
delivered electronically to a customer for purposes of resale and subsequent
electronic delivery in substantially identical form to end users or other
recipients may also apply with respect to licenses of intangible property for
purposes of sublicense to end users, provided that for this purpose the
intangible property sublicensed to an end user shall not fail to be
substantially identical to the property that was licensed to the sublicensor
merely because the sublicense transfers a reduced bundle of rights with respect
to such property (e.g., because the sublicensee's rights are limited to its own
use of the property and do not include the ability to grant a further
sublicense), or because such property is bundled with additional services or
items of property.
(g)
Examples. Assume in each of these examples that the taxpayer that licenses the
intangible property is taxable in Tennessee and is to apportion its income
pursuant to T.C.A. § 67-4-2012.
Example 1: Crayon Corp and Dealer Co enter into a license
contract under which Dealer Co as licensee is permitted to use trademarks that
are owned by Crayon Corp in connection with Dealer Co's sale of certain
products to retail customers. Under the contract, Dealer Co is required to pay
Crayon Corp a licensing fee that is a fixed percentage of the total volume of
monthly sales made by Dealer Co of products using the Crayon Corp trademarks.
Under the contract, Dealer Co is permitted to sell the products at multiple
store locations, including store locations that are both within and without
Tennessee. Further, the licensing fees that are paid by Dealer Co are broken
out on a per-store basis. The licensing fees paid to Crayon Corp by Dealer Co
represent fees from the license of a marketing intangible. The portion of the
fees to be assigned to Tennessee shall be determined by multiplying the fees by
a percentage that reflects the ratio of Dealer Co's receipts that are derived
from its Tennessee stores relative to Dealer Co's total receipts. See Rule
1320-06-01-.42(5)(b).
Example 2: Network Corp is a broadcaster that licenses rights
to its film programming to both platform distribution companies and individual
customers. Platform distribution companies pay licensing fees to Network Corp
for the rights to distribute Network Corp's film programming to the platform
distribution companies' customers. Network Corp's individual customers pay
access fees to Network Corp for the right to directly access and view Network
Corp's film programming. Network Corp's receipts from each platform
distribution company will be assigned to Tennessee if the broadcast customer's
commercial domicile is in Tennessee. Network Corp's receipts from each
individual broadcast customer will be assigned to Tennessee if the address of
the broadcast customer listed in the broadcaster's records is in Tennessee. See
Rule 1320-06-01-.42(5)(d).
Example 3: Moniker Corp enters into a license contract with
Wholesale Co. Pursuant to the contract Wholesale Co is granted the right to use
trademarks owned by Moniker Corp to brand sports equipment that is to be
manufactured by Wholesale Co or an unrelated entity, and to sell the
manufactured equipment to unrelated companies that will ultimately market the
equipment to consumers in a specific geographic region, including a foreign
country. The license agreement confers a license of a marketing intangible,
even though the trademarks in question will be affixed to property to be
manufactured. In addition, the license of the marketing intangible is for the
right to use the intangible property in connection with sales to be made at
wholesale rather than directly to retail customers. The component of the
licensing fee that constitutes the Tennessee sales of Moniker Corp is
determined by multiplying the amount of the fee by a percentage that reflects
the ratio of the Tennessee population in the specific geographic region
relative to the total population in such region. See Rule
1320-06-01-.42(5)(b).
Example 4: Formula, Inc and Appliance Co enter into a license
contract under which Appliance Co is permitted to use a patent owned by
Formula, Inc to manufacture appliances. The license contract specifies that
Appliance Co is to pay Formula, Inc a royalty that is a fixed percentage of the
gross receipts from the products that are later sold. The contract does not
specify any other fees. The appliances are both manufactured and sold in
Tennessee and several other states. Assume the licensing fees are paid for the
license of a production intangible, even though the royalty is to be paid based
upon the sales of a manufactured product (i.e., the license is not one that
includes a marketing intangible). Because the Commissioner can reasonably
establish that the actual use of the intangible property takes place in part in
Tennessee, the royalty is assigned based on the location of such use rather
than to location of the licensee's commercial domicile, in accordance with Rule
1320-06-01-.42(5)(c). It is presumed that the entire use is in Tennessee except
to the extent that the taxpayer can demonstrate that the actual location of
some or all of the use takes place outside Tennessee. Assuming that Formula,
Inc can demonstrate the percentage of manufacturing that takes place in
Tennessee using the patent relative to such manufacturing in other states, that
percentage of the total licensing fee paid to Formula, Inc under the contract
will constitute Formula, Inc's Tennessee sales. See Rule
1320-06-01-.42(5)(c).
Example 5: Axel Corp enters into a license agreement with
Biker Co in which Biker Co is granted the right to produce motor scooters using
patented technology owned by Axel Corp, and also to sell such scooters by
marketing the fact that the scooters were manufactured using the special
technology. The contract is a license of both a marketing and production
intangible, i.e., a mixed intangible. The scooters are manufactured outside
Tennessee. Assume that Axel Corp lacks actual information regarding the
proportion of Biker Co's receipts that are derived from Tennessee customers.
Also assume that Biker Co is granted the right to sell the scooters in a U.S.
geographic region in which the Tennessee population constitutes 25% of the
total population during the period in question. The licensing contract requires
an upfront licensing fee to be paid by Biker Co to Axel Corp and does not
specify what percentage of the fee derives from Biker Co's right to use Axel
Corp's patented technology. Because the fees for the license of the marketing
and production intangible are not separately and reasonably stated in the
contract, it is presumed that the licensing fees are paid entirely for the
license of a marketing intangible, unless either the taxpayer or Commissioner
reasonably establishes otherwise. Assuming that neither party establishes
otherwise, 25% of the licensing fee constitutes Tennessee sales. See Rule
1320-06-01-.42(5)(b) and (e).
Example 6: Same facts as Example 5, except that the license
contract specifies separate fees to be paid for the right to produce the motor
scooters and for the right to sell the scooters by marketing the fact that the
scooters were manufactured using the special technology. The licensing contract
constitutes both the license of a marketing intangible and the license of a
production intangible. Assuming that the separately stated fees are reasonable,
the Commissioner will:
(1) assign no
part of the licensing fee paid for the production intangible to Tennessee, and
(2) assign 25% of the licensing fee
paid for the marketing intangible to Tennessee. See Rule 1320-06-01-.42(5)(e).
Example 7: Better Burger Corp, which is based outside
Tennessee, enters into franchise contracts with franchisees who agree to
operate Better Burger restaurants as franchisees in various states. Several of
the Better Burger Corp franchises are in Tennessee. In each case, the franchise
contract between the individual and Better Burger provides that the franchisee
is to pay Better Burger Corp an upfront fee for the receipt of the franchise
and monthly franchise fees, which cover, among other things, the right to use
the Better Burger name and service marks, food processes and cooking know-how,
as well as fees for management services. The upfront fees for the receipt of
the Tennessee franchises constitute fees paid for the licensing of a marketing
intangible. These fees constitute Tennessee sales because the franchises are
for the right to make Tennessee sales. The monthly franchise fees paid by
Tennessee franchisees constitute fees paid for (1) the license of marketing
intangibles (the Better Burger name and service marks), (2) the license of
production intangibles (food processes and know-how) and (3) personal services
(management fees). The fees paid for the license of the marketing intangibles
and the production intangibles constitute Tennessee sales because in each case
the use of the intangibles is to take place in Tennessee. See Rule
1320-06-01-.42(5)(b)-(c). The fees paid for the personal services are to be
assigned pursuant to Rule 1320-06-01-.42(4).
Example 8: Online Corp, a corporation based outside
Tennessee, licenses an information database through the means of the Internet
to individual customers that are residents of Tennessee and other states. These
customers access Online Corp's information database primarily in their states
of residence, and sometimes, while traveling, in other states. The license is a
license of intangible property that resembles a sale of goods or services and
shall be assigned in accordance with Rule 1320-06-01-.42(5)(f). If Online Corp
can determine or reasonably approximate the state or states where its database
is accessed, then it must do so. Assuming that Online Corp cannot determine or
reasonably approximate the location where its database is accessed, Online Corp
must assign the sales made to the individual customers using the customers'
billing addresses to the extent known. Assume for purposes of this example that
Online Corp knows the billing address for each of its customers. In this case,
Online Corp's sales made to its individual customers are in Tennessee in any
case in which the customer's billing address is in Tennessee. See Rule
1320-06-01-.42(4)(c)2(ii)(I).
Example 9: Net Corp, a corporation based outside Tennessee,
licenses an information database through the means of the Internet to a
business customer, Business Corp, a company with offices in Tennessee and two
neighboring states. The license is a license of intangible property that
resembles a sale of goods or services and shall be assigned in accordance with
Rule 1320-06-01-.42(5)(f). Assume that Net Corp cannot determine where its
database is accessed but reasonably approximates that 75% of Business Corp's
database access took place in Tennessee, and 25% of Business Corp's database
access took place in other states. In such case, 75% of the receipts from
database access is in Tennessee. Assume alternatively that Net Corp lacks
sufficient information regarding the location where its database is accessed to
reasonably approximate such location. Under these circumstances, if Net Corp
derives 5% or less of its receipts from database access from Business Corp, Net
Corp must assign the sale under Rule 1320-06-01-.42(4)(c)2(ii)(II) to the state
where Business Corp principally managed the contract, or if that state is not
reasonably determinable to the state where Business Corp placed the order for
the services, or if that state is not reasonably determinable to the state of
Business Corp's billing address. If Net Corp derives more than 5% of its
receipts from database access from Business Corp, Net Corp is required to
identify the state in which its contract of sale is principally managed by
Business Corp and must assign the receipts to that state. See Rule
1320-06-01-.42(4)(c)2(ii)(II).
Example 10: Net Corp, a corporation based outside Tennessee,
licenses an information database through the means of the Internet to more than
250 individual and business customers in Tennessee and in other states. The
license is a license of intangible property that resembles a sale of goods or
services and shall be assigned in accordance with Rule 1320-06-01-.42(5)(f).
Assume that Net Corp cannot determine or reasonably approximate the location
where its information database is accessed. Also assume that Net Corp does not
derive more than 5% of its sales of database access from any single customer.
Net Corp may apply the safe harbor stated in Rule
1320-06-01-.42(4)(c)2(ii)(II)IV, and may assign its sales to a state or states
using each customer's billing address.
Example 11: Web Corp, a corporation based outside of
Tennessee, licenses an Internet-based information database to business
customers who then sublicense the database to individual end users that are
residents of Tennessee and other states. These end users access Web Corp's
information database primarily in their states of residence, and sometimes,
while traveling, in other states. Web Corp's license of the database to its
customers includes the right to sublicense the database to end users, while the
sublicenses provide that the rights to access and use the database are limited
to the end users' own use and prohibit the individual end users from further
sublicensing the database. Web Corp receives a fee from each customer based
upon the number of sublicenses issued to end users. The license is a license of
intangible property that resembles a sale of goods or services and shall be
assigned by applying the rules set forth in Rule 1320-06-01-.42(4)(c)2(iii).
See 1320-06-01-.42(5)(f). If Web Corp can determine or reasonably approximate
the state or states where its database is accessed by end users, then it must
do so. Assuming that Web Corp lacks sufficient information from which it can
determine or reasonably approximate the location where its database is accessed
by end users, Web Corp must approximate the extent to which its database is
accessed in Tennessee using a percentage that represents the ratio of the
Tennessee population in the specific geographic area in which Web Corp's
customer sublicenses the database access relative to the total population in
such area. See Rule 1320-06-01-.42(4)(c)2(iii)(II).
(6) Sale of Intangible
Property.
(a) Assignment of Sales. The
assignment of a sale to a state or states in the instance of a sale or exchange
of intangible property depends upon the nature of the intangible property sold.
For purposes of this section (Rule 1320-06-01-.42(6)), a sale or exchange of
intangible property includes a license of such property where the transaction
is treated for tax purposes as a sale of all substantial rights in the property
and the receipts from transaction are not contingent on the productivity, use
or disposition of the property. For the rules that apply where the
consideration for the transfer of rights is contingent on the productivity, use
or disposition of the property, see Rule 1320-06-01-.42(5)(a) and (6)(a)3.
1. Contract Right or Government License that
Authorizes Business Activity in Specific Geographic Area. In the case of a sale
or exchange of intangible property where the property sold or exchanged is a
contract right, government license or similar intangible property that
authorizes the holder to conduct a business activity in a specific geographic
area, the sale is assigned to a state if and to the extent that the intangible
property is used or otherwise associated with the state. Where the intangible
property is used in, or otherwise associated with, only Tennessee, the taxpayer
shall assign the sale to Tennessee. Where the intangible property is used in or
is otherwise associated with Tennessee and one or more other states, the
taxpayer shall assign the sale to Tennessee to the extent that the intangible
property is used in, or associated with, Tennessee, through the means of a
reasonable approximation.
2.
Agreement Not to Compete. An agreement or covenant not to compete in a
specified geographic area requires the contract party to refrain from
conducting certain business activity in that specified area. In the case of an
agreement or covenant not to compete the receipts are to be assigned to a state
based upon the percentage that reflects the state's population in the U.S.
geographic area specified in the contract relative to the total population in
such area.
3. Sale that Resembles a
License (Receipts are Contingent on Productivity, Use or Disposition of the
Intangible Property). In the case of a sale or exchange of intangible property
where the receipts from the sale or exchange are contingent on the
productivity, use or disposition of the property, the receipts from the sale
shall be assigned by applying the rules set forth in Rule 1320-06-01-.42(5)
(pertaining to the license or lease of intangible property).
4. Sale that Resembles a Sale of Goods and
Services. In the case of a sale or exchange of intangible property where the
substance of the transaction resembles a sale of goods or services and where
the receipts from the sale or exchange do not derive from payments contingent
on the productivity, use or disposition of the property, the receipts from the
sale shall be assigned by applying the rules set forth in Rule
1320-06-01-.42(5)(f) (relating to licenses of intangible property that resemble
sales of goods and services). Examples of such transactions include those that
are analogous to the license transactions cited as examples in Rule
1320-06-01-.42(5)(f).
5. Except as
otherwise provided in this section, the sale of intangible property that is not
referenced in Rule 1320-06-01-.42(6)(a)1,2,4, or 5 shall be excluded from the
numerator and the denominator of the taxpayer's sales factor.
(b) Examples. Assume in each of
these examples that the taxpayer that provides the service is taxable in
Tennessee and is to apportion its income pursuant to T.C.A. § 67-4-2012.
Example 1: Airline Corp, a corporation based outside
Tennessee, sells its rights to use several gates at an airport located in
Tennessee to Buyer Corp, a corporation that is based outside Tennessee. The
contract of sale is negotiated and signed outside of Tennessee. The sale is in
Tennessee because the intangible property sold is a contract right that
authorizes the holder to conduct a business activity solely in Tennessee. See
Rule 1320-06-01-.42(6)(a)1.
Example 2: Wireless Corp, a corporation based outside
Tennessee, sells a license issued by the Federal Communications Commission
(FCC) to operate wireless telecommunications services in a designated area in
Tennessee to Buyer Corp, a corporation that is based outside Tennessee. The
contract of sale is negotiated and signed outside of Tennessee. The sale is in
Tennessee because the intangible property sold is a government license that
authorizes the holder to conduct business activity solely in Tennessee. See
Rule 1320-06-01-.42(6)(a)1.
Example 3: Same facts as in Example 2 except that Wireless
Corp sells to Buyer Corp an FCC license to operate wireless telecommunications
services in a designated area in Tennessee and an adjacent state. Wireless Corp
must attempt to reasonably approximate the extent to which the intangible
property is used in or associated with Tennessee. For purposes of making this
reasonable approximation, Wireless Corp may rely upon credible data that
identifies the percentage of persons that use wireless telecommunications in
the two states covered by the license. See Rule 1320-06-01-.42(6)(a)1.
Example 4: Sports League Corp, a corporation that is based
outside Tennessee, sells the rights to broadcast the sporting events played by
the teams in its league in all 50 U.S. states to Network Corp. Although the
games played by Sports League Corp will be broadcast in all 50 states, the
games are of greater interest in the southeast region of the country, including
Tennessee. Because the intangible property sold is a contract right that
authorizes the holder to conduct a business activity in a specified geographic
area, Sports League Corp must attempt to reasonably approximate the extent to
which the intangible property is used in or associated with Tennessee. For
purposes of making this reasonable approximation, Sports League Corp may rely
upon audience measurement information that identifies the percentage of the
audience for its sporting events in Tennessee and the other states. See Rule
1320-06-01-.42(6)(a)1.
Example 5: Business Corp, a corporation based outside
Tennessee engaged in business activities in Tennessee and other states, enters
into a covenant not to compete with Competition Corp, a corporation that is
based outside Tennessee, in exchange for a fee. The agreement requires Business
Corp to refrain from engaging in certain business activity in Tennessee and
other states. The component of the fee that constitutes a Tennessee sale is
determined by multiplying the amount of the fee by a fraction represented by
the percentage of the Tennessee population over the total population in the
specified geographic region. See Rule 1320-06-01-.42(6)(a)2.
Example 6: Inventor Corp, a corporation that is based outside
Tennessee, sells patented technology that it has developed to Buyer Corp, a
business customer that is based in Tennessee. Assume that the sale is not one
in which the receipts derive from payments that are contingent on the
productivity, use or disposition of the property. See Rule
1320-06-01-.42(6)(a)4. Inventor Corp understands that Buyer Corp is likely to
use the patented technology in Tennessee, but the patented technology can be
used anywhere (i.e., the rights sold are not rights that authorize the holder
to conduct a business activity in a specific geographic area). The sale of the
patented technology shall be excluded from the numerator and denominator of
Inventor Corp's sales factor. See Rule 1320-06-01-.42(6)(a)5.
(7) Special Rules.
(a) Software Transactions. A license or sale
of pre-written software for purposes other than commercial reproduction (or
other exploitation of the intellectual property rights), when transferred on a
tangible medium, is treated as the sale of tangible personal property, rather
than as either the license or sale of intangible property or the performance of
a service. In such cases, the receipts are assigned to Tennessee as a sale of
tangible personal property. In all other cases, the receipts from a license or
sale of software are to be assigned to Tennessee as determined otherwise under
this regulation (e.g., depending on the facts, as the development and sale of
custom software, see Rule 1320-06-01-.42(4)(c), as a license of a marketing
intangible, see Rule 1320-06-01-.42(5)(b), as a license of a production
intangible, see Rule 1320-06-01-.42(5)(c), as a license of intangible property
where the substance of the transaction resembles a sale of goods or services,
see Rule 1320-06-01-.42(5)(f), or as a sale of intangible property, see Rule
1320-06-01-.42(6)).
(b) Sales or
Licenses of Digital Goods or Services. In the case of a sale or license of
digital goods or services, including, among other things, the sale of various
video, audio and software products or similar transactions, the receipts from
the sale or license shall be assigned by applying the same rules as are set
forth in Rule 1320-06-01-.42(4)(c)2(ii) or (iii), as if the transaction were a
service delivered to an individual or business customer or delivered through or
on behalf of an individual or business customer. For purposes of the analysis,
it is not relevant what the terms of the contractual relationship are or
whether the sale or license might be characterized, depending upon the
particular facts, as, for example, the sale or license of intangible property
or the performance of a service. See Rules 1320-06-01-.42(5)(f) and
(6)(a)5.
(c) Enforcement of Legal
Rights. Receipts attributable to the protection or enforcement of legal rights
of a taxpayer through litigation, arbitration, or settlement of legal disputes
or claims, including the filing and pursuit of claims under insurance
contracts, shall be excluded from the numerator and denominator of the
taxpayer's sales factor. For purposes of this rule, in the case of a settlement
agreement, it shall not be relevant how the parties to the agreement
characterize the payment made under the agreement.
