Soon, Tennessee Will Tax Software, Games And Apps — Even In The Cloud

Tennesseans will soon owe taxes on the latest video game or mobile app — even if they don’t download it.

In a change meant to keep Tennessee’s tax laws up to date with the latest technology, state lawmakers have approved a bill that extends sales taxes to software that remains in the cloud, those far-off servers that users can tap into anytime.

David Gerregano, deputy commissioner of the state Department of Revenue, says the law is a matter of fairness. 

Tennesseans have had to pay sales taxes on software since the 1970s — even as the technology evolved from floppy disks to Internet downloads. That same principle should apply to apps, even if users never copy them to their desktops or mobile devices.

“If I went home tonight and sat down to write you a letter or to play a video game, that software that I’m using … could reside on the PC or it might reside on the cloud,” says Gerregano.

“But I’m using the exact same software. I’m paying a fee. And it ought to be subject to tax.”

Fourteen states already tax cloud-based software. Tennessee’s law goes into effect July 1 and is part of a broader measure, House Bill 644, which Gov. Bill Haslam’s administration calls the Revenue Modernization Act. 

Tennessee’s levy would kick in anytime developers charge a fee. Those programs would be taxed the same as traditional software, a rate that varies but starts at 7 cents on the dollar.

Freeware — those programs that are given away free of charge — would not be taxed.

Businesses are expected to collect the taxes at the time of sale. The state estimates it’ll raise $11.3 million a year from the change, an amount that could grow with the spread of cloud computing.