A recent Tennessee Court of Appeals decision may present an
opportunity for sales and use tax refunds for tax paid on software
developed by contract workers from staff augmentation companies.
Tennessee sales and use tax applies to the transfer, installation,
maintenance, or repair of computer software. However, Tennessee
also provides an exemption from the tax for "in-house
software," which allows a business to develop software tax
free for its own use. The Tennessee Court of Appeals recently held
in TEKsystems, Inc. v. Chumley that the
in-house software exemption applied to code created by
"information technology professionals" employed by a
staff augmentation service, but who worked under the direct
supervision and direction of the staff augmentation service's
clients. In the TEKsystems case, TEKsystems, Inc. (TEK)
engaged in business as a staff augmentation company furnishing
temporary information technology workers to supplement clients'
existing IT departments. Although contracts between TEK and its
clients provided that TEK was an independent contractor, the Court
held that the in-house software exemption applied to code created
by TEK's contract workers because TEK's clients exerted a
sufficient degree of control over the workers so as to render them
agents of the clients and, therefore, the clients (via the contract
workers) created the code for their own use. In support of its
ruling that an agency relationship existed, the Court noted that
TEK's clients decided whether to hire each contract worker;
approved contract workers' timesheets, vacation days, sick
days, and personal days; assigned workspace; managed contract
workers' assignments and deadlines; and also required contract
workers to comply with the client's firm policies and
standards, such as standards of conduct or dress codes.
The TEKsystems ruling presents potential refund opportunities for businesses that have created software through the use of contract workers from staff augmentation companies, depending upon the nature of the relationship. Companies that have self-assessed use tax may file refund claims directly with the Tennessee Department of Revenue. In cases where businesses paid sales tax directly to staff augmentation companies, however, those businesses will need to request that the staff augmentation companies file claims for refund. Pursuant to Tenn. Code Ann. § 67-1-1801(a), claims for refund must generally be within three years from December 31 of the year in which the payment was made. Legislation is pending that will overturn this result for services provided after July 1, 2009, but the legislation will not prevent existing claims for prior periods.
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