The Tennessee Department of Revenue recently issued a letter ruling stating that the service of converting and sending information to the SEC via the EDGAR filing system is a "telecommunications service" for Tennessee sales tax purposes. The SEC filing service provider addressed in the ruling converts the financial information submitted by its customers, including Tennessee customers, from a Word, Excel, or PowerPoint format into an SEC-compliant format, or "EDGARizes" the information, before filing the documents with the SEC. If the service provider or the SEC were located in Tennessee, the SEC filing service would be considered a taxable telecommunications service under the ruling.
The end result for the service provider in this case, however, was that its services were not subject to Tennessee sales tax. The service provider charged customers on a per-page or per-document basis, which the DOR considers to be like a call-by-call basis. In this case, the service provider's server, where the conversion of customer information takes place, and the SEC were both outside Tennessee, so the transmission of documents did not originate or terminate in Tennessee. Therefore, the charges were not sourced to Tennessee and not taxable by Tennessee even though the service provider's customers were in Tennessee.
The DOR's analysis of the "telecommunications service" definition is interesting and could potentially have a broader application because Tennessee is an associate member of the Streamlined Sales and Use Tax (SST) Agreement and the state has adopted the Agreement definition of "telecommunications service." In considering whether the conversion of information for the EDGAR filing system falls within the definition of "telecommunications service," the DOR reasoned that "[t]he entire process of transferring and converting information between companies constitutes an electronic data interchange ('EDI') process." Since the filing service is performed entirely electronically, computers are used to receive the financial information from customers and to convert the information from a Word, Excel, or PowerPoint document into an SEC-compliant document, and the purpose of the conversion was to create a document that the SEC can receive, the DOR found that the conversion process falls within the parameters of a taxable telecommunications service.
The DOR also found that the SEC filing service is not "data processing," which is excluded from the definition of "telecommunications service" but not specifically defined under the SST Agreement or Tennessee law. "Data processing" is defined in the online
In its analysis of the data processing issue, the DOR focused on the purchaser's primary purpose, which is to be considered under the language excluding data processing and information services from the definition of "telecommunications service." Under that language, data processing and information services are described as services "that allow data to be generated, acquired, stored, processed, or retrieved and delivered by electronic transmission to a purchaser, where such purchaser's primary purpose for the underlying transaction is the processed data or information." The DOR found that the purchaser’s primary purpose in using the SEC filing service was not for data processing or retrieval, but was rather to have the financial information converted to an SEC-compliant format and electronically transmitted to the SEC. The DOR noted in the ruling: "In fact, the purchaser already has all of the data that is filed with the SEC and is not seeking to gain additional data or information; the Taxpayer’s service does not include generating any additional data."
Daniel Schibley of CCH, who has been following the Streamlined Sales Tax project since its beginning, notes: "If the filing system provider sends the processed data to the purchaser, and the purchaser then transmits the data to the SEC, would the transaction then fall within the definition of “data processing”? If so, it seems odd that the result changes if the provider sends the data directly to the SEC. This might be a good subject for an interpretation request directed to the SST’s Compliance Review and Interpretations Committee."