Tennessee rules marketplace facilitator fees are not subject to sales tax

The Tennessee Department of Revenue confirmed that marketplace facilitator fees for connecting buyers and sellers and processing payments are nontaxable in a private letter ruling approved in April 2022.

In its analysis, the Department ruled that “Neither the Seller Fee nor the Service Fee are subject to Tennessee sales and use tax because the Taxpayer’s non-taxable lead generation and payment processing services are the true object of the transactions covered by these fees, and the taxable web-based interface and app are merely incidental.”

The letter explains that when a transaction involves taxable and non-taxable components, Tennessee uses the true object test to determine if the transaction is taxable. “If the transaction’s true object is subject to sales tax, the entire transaction is subject to sales tax” and “only if the true object of the transaction is not independently subject to sales tax and the items that would be subject to sales tax are ‘merely incidental’ to the true object of the transaction will the transaction not be subject to sales tax.”

In this private letter ruling, the taxpayer cited it is a “delivery network company” and elected to be a marketplace facilitator responsible for collecting and remitting sales tax to the state for its taxable sales of tangible personal property sold by sellers. Delivery of the goods sold was a separately provided by service providers.

The taxpayer provided an app or web-based interface to sellers without a fee. Fees were charged to the service providers to connect them with purchasers and only when a sale occurred between seller and purchaser. The taxpayer also provided the function of limited collection agent for payment processing from purchasers.

The ruling outlined the seller fee, service fee, web-based interface, and app. Considering the true object test, the state determined that because the software has limited functionality and grants access and facilitates lead generation and payment processing, the software is incidental as a mode for providing lead generation and payment processing services which resulted in the seller fee and service fee not being subject to tax.

Looking beyond form or format and reviewing the true object of certain transactions or fees requires knowing the true objectives of the parties involved. Ask what the desired outcome of the exchange is ultimately or what is being sought. Review definitions of taxable services and digital goods, which can vary state to state.

(Tennessee Department of Revenue, Letter Ruling #22-02, April 11, 2022)

Posted on August 11, 2022