I contacted the TN Revenue dept on this very issue:
I am trying to find out if I am responsible for charging TN sales tax on “software” that will reside on a server out-of state.
I did find this on the Tennessee,gov,revenue website which is the exact opposite of what I want to find out:
[I]". Should a Tennessee software developer collect Tennessee sales tax on software it installs on a server located in Tennessee if the customer buying the software is located outside Tennessee and only accesses the software via the Internet?
Yes. The software is located on a server in Tennessee and is used by the out-of-state customer on a server in Tennessee. Thus, title and/or possession of the software have transferred to the customer in Tennessee. This is a taxable sale of software, and the developer should collect Tennessee sales tax on the transaction."[/I]
This leads me to believe that my customer is subject to whatever taxes are relevant in the state the server resides in...
Their reply was:
No, software developed in Tennessee for hosting on a server in another state is not subject to the sales or use tax in Tennessee. Websites are computer software, therefore the same rule applies. Ray Todd
Any opinion from tax law or regulations given herein is believed to be a correct interpretation. However, the opinions cannot constitute a revenue or letter ruling pursuant to the provisions of Tenn. Code Ann. Sect. 67-1-109.
If you go to Tennessee,gov,revenue website There is a lot of great information there. For example, if the software is delivered physically (on a CD-ROM) than you must charge Sales and Use Tax.
Should a Tennessee dealer selling merchandise through the Internet collect sales tax?
When a Tennessee dealer accepts an order through the Internet and delivers a product to a Tennessee customer, the charge is subject to sales or use tax. If the Tennessee dealer delivers a product to a consumer located in another state, the sale is not subject to Tennessee sales or use tax.
So the bottom line here is that if it is delivered or stored on a server in TN you must charge the sales and use tax. If the software resides out of state, it may be subject to the use and sales tax governing that state. The company buying the website is responsible for paying their own use tax. Many states do not tax on services though.
Hope this helps!