• Business Software in Jeopardy of Becoming Taxable Personal Property under Proposed Rule
  • December 7, 2005 | Authors: J. Leigh Griffith; Michael Stewart; Charles A. Trost
  • Law Firm: Waller Lansden Dortch & Davis, LLP - Nashville Office
  • The Tennessee State Board of Equalization is proposing rule changes that would, among other things, make application software taxable "tangible personal property" for property tax purposes. Currently, for property tax purposes software other than operating software embedded in equipment (such as DOS or Windows) is considered intangible property not subject to tax. This is a material change for taxpayers with significant applications software (e.g. SAP, Peoplesoft, Oracle, etc.) as it will mean a significant property tax increase if made. The Board will hold a hearing on January 23 at 10:30 to formally hear public comments on these rules.

    The proposed rule change would also cause service providers with equipment (leased or otherwise) in consumer's homes (for example cable boxes, modems and security systems) to be taxable on such equipment. With respect to used equipment the proposed amendments would inexplicably require the original cost (cost incurred by the original owner and any additional costs incurred by the original or subsequent owners against which may be asserted a claim for depreciation) to be used as the tax base as the normal rule. Fortunately, taxpayers may provide proof that the price paid or allocated as the current owner's cost approximates the current value of the used tangible personal property in lieu of the default rule.

    Kelsie Jones, the Executive Director of the State Board of Equalization has also indicated that the Board would consider other rule changes in this process to clarify other areas of their rules if suggested by the public. Therefore, it is possible that other rule changes will emerge as this process continues. We recommend that business closely watch these rule changes as they develop, as there may be additional surprises.