Tennessee Court Holds that Wide Area Network Service Is a Taxable Telecommunications Service

State & Local Tax Alert: Tennessee Edition



A Tennessee trial court has ruled that wide area network (WAN) services provided by IBM are taxable “telecommunication services” for Tennessee sales and use tax purposes. IBM Corporation v. Farr, Civil No. 09-2144-I (Davidson County, Tenn. Chancery Ct. filed July 20, 2012). The Court’s holding is premised on its conclusion that the “service consisted of the provision of links and hubs that transmitted IBM’s customers’ own information from one point to another. Further, IBM did not provide any original information to its customers. What IBM was selling, therefore, was the means of transmitting its customers’ information and not information that IBM itself provided.” Id., slip op. at 6-7 (emphasis added).

During the tax period at issue, IBM provided WAN services to numerous customers in Tennessee. The WAN consisted of a group of transmission lines or dedicated circuits from one location to another. The WAN also included routers, hubs, and other equipment that made up the infrastructure through which customers accessed information. According to IBM, the WAN services also included design, management, monitoring, and troubleshooting the WAN.

IBM’s customers used the WAN services to allow its geographically separated managers, employees, and other authorized users to gain access to information critical to the customer’s day-to-day business operations. Customers used computers and dedicated phone lines to log onto the WAN and gain access to the available information. The WAN did not, however, provide IBM’s customers with the ability to send messages from one person to another.

IBM argued that the “true-object” test applied and that WAN services were similar to the non-taxable online services provided in Prodigy Services Corp., Inc. v. Johnson, 125 S.W.3d 413 (Tenn. Ct. App. 2003) and the truck location service in Qualcomm, Inc. v. Chumley, 2007 WL 2827513 (Tenn. Ct. App. Sept. 26, 2007). The trial court, however, relied on the fact that IBM did not create or gather the information made available to the users of the WAN services in reaching the conclusion that the WAN service was a telecommunications service more closely resembling the voicemail services that were found to be taxable telecommunications in Bellsouth Telecommunications, Inc. v. Johnson, 2006 WL 3071250 (Tenn. Ct. App. Oct. 27, 2006).

This case presents another in a continuing line of “true-object” cases in Tennessee in which the state has argued that a network service is a taxable telecommunications service. Thus, it is likely that an appeal will follow.

The deadline to file an appeal to the Tennessee Court of Appeals is mid-August.

Practice Pointer: The Department of Revenue continues to aggressively pursue providers of enhanced network services such as IBM, taking the position that those services are taxable telecommunications. Providers of these and other types of network services should closely monitor this and other cases to determine whether the Court of Appeals will uphold this case on appeal.