On May 13, the Tennessee Court of Appeals issued its opinion in SAP America, Inc. v. Gerregano¹ and held that SAP’s receipts from sales and licensing of computer software were receipts from sales of intangible personal property and therefore not subject to Tennessee Business Tax. The court also held that SAP’s cloud hosting and cloud-based services were taxable services delivered to locations in Tennessee and therefore such receipts were subject to Business Tax. Both parties may appeal the court’s decision to the Tennessee Supreme Court, which possesses discretionary authority to pick up the case.
 
Taxpayers that have paid Business Tax on receipts from selling or licensing software to Tennessee customers should consider filing claims for refund to preserve their rights. Relatedly, businesses selling cloud-based hosting and computer services to Tennessee customers should evaluate how this decision impacts their Business Tax liabilities. 

Background

The case arose from a Department of Revenue audit of SAP for tax years 2014 through 2018. Following that audit, the Department assessed Business Tax, interest, and penalty on SAP’s receipts from software licensing, cloud hosting, and cloud-based services. In its assessment, the Department classified all those activities as sales of taxable services under Business Tax Classification 3.²

SAP filed suit against the Commissioner of Revenue in Chancery Court and challenged the assessment on the grounds that its software receipts were receipts from the sale of nontaxable intangible property, that its cloud hosting receipts were receipts from the leasing of tangible property located outside Tennessee (rather than services), and that its cloud-based services were not delivered in Tennessee. The trial court ruled in favor of SAP on the software and cloud hosting issues but ruled in favor of the Commissioner on the cloud-based services issue.³ The Commissioner then appealed to the Court of Appeals.

The decision

The Court of Appeals affirmed the trial court’s ruling that SAP’s software receipts were not subject to Business Tax. The court primarily relied on the Tennessee Supreme Court’s decision in Commerce Union Bank v. Tidwell,⁴ which held that computer software was intangible property. The Court of Appeals noted that although the Tennessee General Assembly had abrogated the Commerce Union Bank ruling with respect to the Sales and Use Tax, the General Assembly had not done so for the Business Tax. The court then acknowledged that although the definition of taxable “services” under the Business Tax Act is extremely broad,⁵ the definition clearly did not include sales of tangible and intangible property. Thus, the sale of intangible property—such as software—could not be construed as the sale of a taxable service. The court also rejected the Commissioner’s reliance on the Standard Industrial Classification Index to characterize software as a service, explaining that the SIC Index is relevant only to determining whether Classification 3(C) exemptions apply,⁶ and not whether software is intangible property for Business Tax purposes. 

Although it affirmed SAP’s win on the software issue, the Court of Appeals reversed the trial court’s ruling on the cloud hosting issue, reasoning that SAP did not physically transfer possession or control of its servers, hardware, and software platform to its customers. Accordingly, the “true object” of the cloud hosting was not the lease of tangible property because a genuine lease grants the lessee control or possession of the property, and SAP transferred neither to its customers. Instead, the court held that cloud hosting was a taxable service because its true object was providing access to SAP’s hardware, servers, and software platform. 

The court then ruled that SAP’s cloud hosting and cloud-based services were delivered in Tennessee because SAP’s Tennessee customers electronically “accessed” those services from Tennessee locations. Importantly, the court found that the customer access point may be determined by reference to the invoice “ship-to” location, especially in instances where the Department does not possess evidence that might otherwise demonstrate the customer’s actual access points.

Taxpayer considerations

It remains to be seen whether the Commissioner or SAP will appeal the Court of Appeals decision. Regardless, taxpayers that have reported and paid Tennessee Business Tax on receipts from software sales or software licenses to Tennessee customers should consider preserving their rights to a refund in the event the decision stands. When evaluating refund opportunities, taxpayers should isolate their software sales and licensing receipts from receipts for cloud hosting, support, training, consulting, implementation, configuration, data migration, and other related service offerings. Taxpayers should also evaluate their invoice and related customer data to determine whether cloud-based and remotely provided computer services are properly sourced to Tennessee according to the court’s customer access point rule. 

1. SAP America, Inc. v. Gerregano, No. M2024-01399-COA-R3-CV (filed May 13, 2026).
2. Tenn. Code Ann. § 67-4-708(3).
3. SAP America, Inc. v. Gerregano, No. 20-1249-II (filed August 9, 2023); SAP America, Inc. v. Gerregano, No. 20-1249-II (filed November 3, 2023) (order on motion to alter or amend).
4. Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976).
5. Tenn. Code Ann. § 67-4-702(a)(21).
6. Tenn. Code Ann. § 67-4-708(3)(C)(i)–(xvi).
Client Alert 2026-111