TENNESSEE DEPARTMENT OF REVENUE LETTER RULING # 11-10 THIS LETTER RULING # 11-10 RESCINDS AND REPLACES LETTER RULING # 11-09 WARNING

TENNESSEE DEPARTMENT OF REVENUE LETTER RULING # 11-10 THIS LETTER RULING # 11-10 RESCINDS AND REPLACES LETTER RULING # 11-09 WARNING Letter rulings are binding on the Department only with respect to the individual taxpayer being addressed in the ruling. This presentation of the ruling in a redacted form is information only. Rulings are made in response to particular facts presented and are not intended necessarily as statements of Department policy. SUBJECT Requirements concerning Tennessee s franchise, excise industrial machinery credit provided in Tenn. Code Ann. 67-4-2009(4) for purchases of certain computer equipment for a qualified data center established under the provisions of Tenn. Code Ann. 67-6-102(42)(K) and (68) (2008 Supp.). SCOPE This letter ruling is an interpretation and application of the tax law as it relates to a specific set of existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon the Department, and are applicable only to the individual taxpayer being addressed. This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation or modification shall be effective retroactively unless the following conditions are met, in which case the revocation shall be prospective only: (A) The taxpayer must not have misstated or omitted material facts involved in the transaction; (B) Facts that develop later must not be materially different from the facts upon which the ruling was based; (C) The applicable law must not have been changed or amended; (D) The ruling must have been issued originally with respect to a prospective or proposed transaction; and (E) The taxpayer directly involved must have acted in good faith in relying upon the ruling and a retroactive revocation of the ruling must inure to his detriment. FACTS 1 1 [REDACTED INFORMATION]. 02021104-02 1 03/22/11 10:35 AM

In [YEAR], the [TAXPAYER], established a Tennessee qualified headquarters facility (the Facility ), as the term is defined in Tenn. Code Ann. 67-6-224(b)(9). The Facility consisted of two separate locations in the [TENNESSEE CITY] metropolitan statistical area (the MSA ). The first location is a production facility (the Production Facility ) [REDACTED INFORMATION]. The second location is a back-up facility (the Back-up Facility ), which [REDACTED INFORMATION]. The Production Facility and the Back-up Facility are treated as a single location for purposes of the qualified headquarters facility credit provided by Tenn. Code Ann. 67-6-224. In [YEAR], [TAXPAYER] announced a plan to significantly increase capacity following a merger with [COMPANY X]. Under the plan, the Production Facility would handle all production for [TAXPAYER]. [REDACTED INFORMATION]. In connection with its application as a qualified data center ( QDC ), as the term is defined in Tenn. Code Ann. 67-6-102(68) (2008 Supp.), [TAXPAYER] announced plans to spend [DOLLAR AMOUNT TOTAL INVESTMENTS ARE SUFFICIENT TO QUALIFY FOR TAX INCENTIVES SOUGHT] in capital improvements in Tennessee. The majority of this expenditure related to servers, computer software and other hardware ( Computer Equipment ). [TAXPAYER] also committed to create at least [NUMBER NUMBER OF JOBS CREATED ARE SUFFICIENT TO QUALIFY FOR TAX INCENTIVES SOUGHT] new jobs in connection with the investment ( Investment 2 ). [REDACTED INFORMATION] Also in connection with the new investment, [TAXPAYER] submitted its Application for Enhanced Industrial Machinery Credit and received a letter from the Department dated [DATE] tentatively approving its Enhanced Industrial Machinery Business Plan filed pursuant to Tenn. Code Ann. 67-4-2009(4)(I)(v) for the investment period starting with the fiscal year beginning [DATE] and ending [DATE]. 2 The Department issued a letter dated [DATE] advising that [TAXPAYER], will qualify for industrial machinery exemption for sales tax purposes, the job tax credit for franchise tax purposes and the industrial machinery credit for franchise, excise tax purposes. The computer equipment that [TAXPAYER] will use in its QDC may be purchased, leased or licensed and is typically replaced at least every 5 years due to obsolescence, however, most software programs are updated more often. [TAXPAYER] was granted an industrial machinery exemption for sales tax purposes effective [DATE]. Because the Tennessee facilities are, in essence, computer centers, [TAXPAYER], has been purchasing, leasing, or licensing Computer Equipment since originally qualifying as a headquarters facility, as the term is defined in Tenn. Code Ann 67-6-224(b)(3). [TAXPAYER] uses its industrial machinery exemption to make purchases of various types of Computer Equipment and lists the following examples of types of Computer Equipment that it has or will likely purchase, lease or license as part of the operation of its QDC: 1. Various types, sizes and configurations of computer servers and peripheral devices acquired in connection with support of internal operations including but not limited to 2 In a letter dated [DATE], a copy of which was provided in connection with the request for this Letter Ruling, Economic and Community Development Commissioner Matthew Kisber extended the investment period for the QDC from three to five years. [TAXPAYER] is amending its Business Plan for the job tax credit to extend its investment period to [DATE] in accordance with Commissioner Kisber s letter. 02021104-02 2 03/22/11 10:35 AM

business applications, human resources, financial, sales support, electronic mail, regulatory monitoring and data security; 2. Various types, sizes and configurations of mainframe computers, and computer peripheral devices acquired in connection with or part of customer financial transaction processing, monitoring and data security; 3. Various types, sizes and configurations of personal computers, support devices, and peripheral equipment, including but not limited to, desktop computers and notebook computers; 4. Various types, sizes and configurations of routers, input/output devices necessary to support a computer network, central units, phone systems, handsets, video equipment, and teleconferencing equipment, including but not limited to related telecommunications equipment; 5. Various types, sizes and configurations of computers, computer systems and computer networking devices acquired in connection with or part of electrical power management, intrusion, theft detection, fire suppression and various other security systems; 6. Various types, sizes and configurations of printers, support devices and associated peripherals, including, but not limited to, fax machines, multi-function printers and battery and other backup facilities; 7. Associated software and procedures for all of the above, including any supporting materials or documentation; and 8. Repair parts and services, installation services, maintenance agreements, warranty or service agreements related to all of the above. [TAXPAYER] has a number of different types of contracts with vendors for the purchase of computer systems and software that are shipped to Tennessee and subsequently paid for by [TAXPAYER]. The contracts for computer hardware, software and related systems have generally fallen into six broad categories: Computer and communications hardware purchases and lease agreements. Unlimited perpetual license with annual maintenance agreement or value-based perpetual license with annual maintenance agreement. Fixed cost subscription software license or value-based subscription software license. Open infrastructure operating agreements. Enterprise software agreement. Software development agreement. 02021104-02 3 03/22/11 10:35 AM

[TAXPAYER], receives access to the hardware and software only after executing an agreement with its vendors. Most of the license and hardware agreements include maintenance and other professional services. Maintenance services may be bundled together or billed separately from software and hardware purchases; however, the renewal contract terms for maintenance and hardware, software, and licenses differ. Each of these types of agreements may be delivered electronically. A broader description of the agreements and their particulars is included below. Computer and Communications Hardware Purchases and Lease Agreements Computer and communications hardware may be purchased or leased. The agreements may be originally executed by [TAXPAYER] but the equipment is transferred to [TAXPAYER], paid for by [TAXPAYER] and depreciated by [TAXPAYER]. A purchase agreement may include waived or discounted maintenance fees for an initial period and then optional annual maintenance fees for subsequent periods. A lease agreement may include maintenance. In other cases maintenance is acquired for the hardware after an initial warranty period, either from the manufacturer or an approved third party maintenance provider. For both purchase and lease agreements, there are generally separate maintenance fees for the hardware and for the operating system if applicable. Unlimited and Value-Based Perpetual License/Annual Maintenance Agreement The Perpetual License/Annual Maintenance Agreement includes a perpetual, nonexclusive, worldwide software license to access and use the products. The product may be limited to a designated computer, but is generally licensed for an unlimited number of machines at one production location for the license fee. Additional no charge license rights may be included for installation at a disaster recovery backup location. The license permits [TAXPAYER] and its affiliates the rights to use the licensed software forever. Maintenance and support are sometimes included in the unlimited perpetual license agreement during the warranty period. Thereafter, maintenance and support services are generally renewed and billed annually. The maintenance agreements generally include upgrades and enhancements in the form of new versions and new releases of the software, help desk support, and programming services to fix errors in the software as well as to provide limited support for installation of new versions and new releases. The Value-Based Perpetual License/Annual Maintenance Agreement is the same as the unlimited perpetual license except there are upgrade fees for the license and maintenance based on a value parameter such as increasing the number of supported users or the capacity of the computer system on which the licensed software is run. Fixed Cost and Value-Based Subscription Software Licenses A Fixed Cost Subscription Software License includes a nontransferable and nonexclusive license to use a vendor s software products. There is no limitation on the number of [TAXPAYER] users entitled to use the licensed products. The license term for this 02021104-02 4 03/22/11 10:35 AM

agreement is generally a three to five year period but can vary. Payment for this license is remitted on an annual basis. Maintenance and support services are generally on the same invoice as the annual software subscription fee. Charges for maintenance and support services may be itemized separately, but are generally a part of the subscription fee. The maintenance included in the subscription agreement generally includes upgrades and enhancements in the form of new versions and new releases of the software, help desk support and programming services to fix errors in the software as well as to provide limited support for installation of new versions and new releases. A Value-Based Subscription Software License is the same as a Fixed Cost Subscription Software License except that there is direct correlation to a value parameter such as the number of [TAXPAYER] users entitled to use the licensed products and the annual subscription fee for the software. Open Infrastructure Operating Agreement The OIO Agreements are customized agreements that simplify the procurement process and provide favorable pricing terms for enterprise customers. These agreements typically include large capacity mainframe and smaller computers such as Windows or UNIX based server hardware plus software that runs on these computers. The equipment purchased or leased under the OIO may be for equipment physically located at [TAXPAYER] facilities. Again, the hardware and software for which [TAXPAYER] seeks exemption or credit is transferred to [TAXPAYER], paid for by [TAXPAYER] and is depreciated by [TAXPAYER]. Enterprise License Agreement For an Enterprise License, Enterprise is generally defined in one of two ways. The first grants unlimited use of the Software by all of an Enterprise (e.g. [TAXPAYER] and affiliates). The second allows unlimited use for a defined subset of the Enterprise (e.g. Asset Servicing). Note that all servers that support the users under an Enterprise License Agreement may be located at [TAXPAYER]. Annual maintenance for the license is generally included in the Enterprise license fee. In the rare case of a perpetual enterprise license, maintenance is generally included during the warranty period and then priced as a separate fee. Maintenance services provided under this contract type include: engineering product support, help desk support, programming support and fixes, as well as enhancements and upgrades that are distributed by the vendor in the form of new releases or new versions of the Software. Engineering product support services include vendor assisted problem analysis and correction. Software License, Development, and Maintenance Agreement The Software License, Development, and Maintenance Agreement generally includes custom software, enhancements to vendor software done specifically for [TAXPAYER] or the provision of implementation or upgrade services. This Agreement generally includes a perpetual, nonexclusive, worldwide software license for production software installed to 02021104-02 5 03/22/11 10:35 AM

support production at the [TAXPAYER] facility. Access and use of the software is generally permitted to users at any location. The license also includes pricing and terms for maintenance and support applicable to the perpetual license. Licenses and maintenance for multiple perpetual licenses can be included in one agreement. The agreement also governs the terms for professional services including fee installation, development and customization of software. Maintenance services may be provided at no additional charges during the warranty period and for an optional annual fee thereafter. Maintenance services in this contract are the same as most other perpetual licenses. This includes error remediation, upgrades, enhancements, helpdesk support, and assistance with installation of new releases and versions of the software. Upgrades include a release of electronically downloaded improvements to the software. Helpdesk support for this contract type typically includes a response to customers inquiries concerning the use of the software and customer work product. QUESTIONS PRESENTED 1. Will the Computer Equipment purchased during the investment period for the qualified data center, as the term is defined in Tenn. Code Ann. 67-6-102(68) (2008 Supp.), qualify as industrial machinery for purposes of the franchise, excise industrial machinery credit provided by Tenn. Code Ann. 67-4-2009(4)(A)? 2. If the answer to the above question is in the affirmative, is [TAXPAYER] entitled to the industrial machinery credit against its franchise, excise taxes authorized in Tenn. Code Ann. 67-4-2009(4)(I)(ii) equal to 7% of the purchase price of computer equipment acquired during the investment period for the qualified data center? 3. What percentage of franchise, excise tax will [TAXPAYER] be allowed to offset by its industrial machinery franchise, excise tax credit? RULINGS 1. Yes, assuming that [TAXPAYER] meets all of the requirements set forth in Tenn. Code Ann. 67-6-102(68) (2008 Supp.) and other applicable statutes for the creation of a qualified data center; provided, however, that computer software that is expensed and is not included in the franchise tax minimum measure (computer software not reported in Schedule G of the current franchise, excise tax return form) valued in accordance with generally accepted accounting principles will not qualify as industrial machinery for purposes of the franchise, excise tax industrial machinery credit provided by Tenn. Code Ann. 67-4-2109(4)(A) and will not count toward the required capital investment. Investments made in connection with the previous Facility creation (Investment 1) will be treated separately and will not count toward the new required capital investment (Investment 2). [TAXPAYER] will need to certify the purpose and use of any industrial machinery purchases proposed to be counted in the new capital investment requirement and show the Department documentation with regard to which purchases were made in connection with its 02021104-02 6 03/22/11 10:35 AM

prior creation of the Facility under Investment 1 and its subsequent expansion under Investment 2. 2. Yes, provided the $500,000,000 required capital investment threshold required by Tenn. Code Ann. 67-4-2009(4)(I)(ii) is met. If the required capital investment exceeds the $250,000,000 threshold but is not more than $500,000,000, Tenn. Code Ann. 67-4- 2009(4)(I)(iii), provides for a credit equal to 5% of the purchase price of computer equipment. If the required capital investment exceeds $100,000,000 threshold, but is not more than $250,000,000, Tenn. Code Ann. 67-4-2009(4)(I)(iv) provides for a credit equal to 3% of the purchase price of computer equipment. If none of the required capital investment thresholds set forth in Tenn. Code Ann. 67-4-2009(4)(I)(I)-(iv) are met, the franchise, excise industrial machinery excise tax credit of 1% of purchases of qualifying industrial machinery provided by Tenn. Code Ann. 67-4-2009(4)(A) will apply. Investments made in connection with the previous Facility creation (Investment 1) will be treated separately and will not count toward the new required capital investment (Investment 2). [TAXPAYER] will need to certify the purpose and use of any industrial machinery purchases proposed to be counted in the new capital investment requirement and show the Department documentation with regard to which purchases were made in connection with its prior creation of the Facility under Investment 1 and its subsequent expansion under Investment 2. 3. Assuming that [TAXPAYER] is able to meet all statutory requirements for its new capital investment to qualify for the industrial machinery credit, [TAXPAYER] will be entitled to offset 100% of its franchise, excise tax liability by the industrial machinery credit earned in connection with its new qualified data center investment in Tennessee; provided that, [TAXPAYER] obtains a letter from the Commissioner of Revenue and the Commissioner of Economic and Community Development that determines the 100% offset increase to be in the best interest of the State of Tennessee. ANALYSIS 1. The Computer Equipment Purchased During the Investment Period Will Qualify as Industrial Machinery for Purposes of the Franchise, Excise Tax Industrial Machinery Credit Provided that [TAXPAYER] Meets all Applicable Requirements of Tenn. Code Ann. 67-6-102(68) (2008 Supp.), 67-4-2009(4) and Other Applicable Statutes Tenn. Code Ann. 67-4-2009(4), set forth below, provides a credit against the Tennessee franchise and excise tax for industrial machinery: (A) There shall be allowed against the sum total of the taxes imposed by the franchise tax law, compiled in part 21 of this chapter, and by the excise tax law, compiled in this part, a credit equal to one percent (1%) of the purchase price of industrial machinery purchased during the tax period covered by the return and located in Tennessee. For purposes of this section, "industrial machinery" means: 02021104-02 7 03/22/11 10:35 AM

(i) "Industrial machinery" as defined by 67-6-102; or (ii) "Computer," "computer network," "computer software," or "computer system" as defined by 39-14-601, and any peripheral devices, including, but not limited to, hardware, such as printers, plotters, external disc drives, modems, and telephone units, purchased by a taxpayer in the process of making the required capital investment in Tennessee described in 67-4-2109(c)(1) [(2008 Supp.)], if as a result of making such purchase and meeting the other requirements set forth in 67-4-2109(c) [(2008 Supp.)], the taxpayer qualifies for the job tax credit provided therein; (B) The industrial machinery credit taken on any franchise and excise tax return, however, shall not exceed fifty percent (50%) of the combined franchise and excise tax liability shown by the return before the credit is taken; (C) Any unused credit may be carried forward in any tax period until the credit is taken; however, the credit may not be carried forward for more than fifteen (15) years; The purchase of the following types of property qualify for an industrial machinery credit under the provisions of Tenn. Code Ann. 67-4-2009(4)(A): 1. "Industrial machinery" as defined by 67-6-102 for sales and use tax purposes; or 2. Certain computer equipment defined in Tenn. Code Ann. 39-14-601 purchased in the process of making the required capital investment, as the term is defined by Tenn. Code Ann. 67-4-2109(c)(1) [(2008 Supp.)]; provided that the taxpayer qualifies for the job tax credit available in Tenn. Code Ann. 67-4-2109(c). The term industrial machinery is defined by Tenn. Code Ann. 67-6-102(42)(K) [(2008 Supp.)], for Tennessee sales and use tax purposes to include the following items: Industrial machinery also includes any computer, computer network, computer software, or computer system, as defined by 39-14-601, and any peripheral devices, including, but not limited to, hardware such as printers, plotters, external disc drives, modems, and telephone units, when such items are used in the operation of a qualified data center. For purposes of this subdivision (42)(K), industrial machinery includes repair parts, repair or installation services, and warranty or service contracts, purchased for such items used in the operation of a qualified data center[.] Tenn. Code Ann. 39-14-601(3), (5), (6), (7), (8), (9), (12), (15), and (20) define the terms computer, computer network, computer program, computer software, computer system, data, input, output, and to process as follows: (3) Computer means a device or collection of devices, including its support devices, peripheral equipment, or facilities, and the communication systems connected to it which can perform functions including, but not limited to, substantial computation, 02021104-02 8 03/22/11 10:35 AM

arithmetic or logical operations, information storage or retrieval operations, capable of being used with external files, one (1) or more operations which contain computer programs, electronic instructions, allows for input of data, and output data, (such operations or communications can occur with or without intervention by a human operator during the processing of a job)[.] (5) Computer network means a set of two (2) or more computer systems that transmit data over communication circuits connecting them, and input/output devices including, but not limited to, display terminals and printers, which may also be connected to telecommunication facilities[.] (6) Computer Program means an ordered set of data that are coded instructions or statements that, when executed by a computer, cause the computer to process data[.] (7) Computer software means a set of computer programs, procedures, and associated documentation concerned with the operation of a computer, computer system, or computer network whether imprinted or embodied in the computer in any manner or separate from it, including the supporting materials for the software and accompanying documentation[.] (8) Computer system means a set of connected devices including a computer and other devices including, but not limited to, one (1) or more of the following: data input, output, or storage devices, data communication circuits, and operating system computer programs that make the system capable of performing data processing tasks[.] (9) Data means a representation of information, knowledge, facts, concepts, or instructions which is being prepared or has been prepared in a formalized manner, and is intended to be stored or processed, or is being stored or processed, or has been stored or processed in a computer, computer system, or computer network[.] (12) Input means data, facts, concepts or instructions in a form appropriate for delivery to, or interpretation or processing by, a computer[.] (15) Output means data, facts, concepts or instructions produced or retrieved by computers from computers or computer memory storage devices[.] (20) To process means to use a computer to put data through a systematic sequence of operations for the purpose of producing a specified result. Tenn. Code Ann. 67-6-102(68) (2008 Supp.) defines a qualified data center as follows: Qualified data center means a data center that has made a required capital investment in excess of two hundred fifty million dollars ($250,000,000) during an investment period not to exceed three (3) years and that creates at least twenty-five (25) net new full-time employee jobs during the investment period paying at least one hundred fifty percent (150%) of the state's average occupational wage as defined in 67-4-2004. For purposes of this subdivision (68), "required capital investment" means an increase of a business investment in real or tangible personal property owned or leased in the state, or both valued in 02021104-02 9 03/22/11 10:35 AM

accordance 67-4-2108(a) or (b). A capital investment shall be deemed to have been made as of the date of payment or the date the taxpayer enters into a legally binding commitment or contract for purchase or construction. For purposes of this subdivision (68), "full-time employee job" means a permanent, rather than seasonal or part-time employment position for at least twelve (12) consecutive months to a person for at least thirty-seven and one half (37 1/2 ) hours per week with minimum health care, as described in title 56, chapter 7, part 22. The three-year period for making the required capital investment provided for in this subdivision (68) may be extended by the commissioner of economic and community development for a reasonable period, not to exceed two (2) years, for good cause shown. For purposes of this subdivision (68), good cause includes, but is not limited to, a determination by the commissioner of economic and community development that the capital investment is a result of the exemption for industrial machinery used by a qualified data center[.] A data center is defined by Tenn. Code Ann. 67-6-102(20) (2008 Supp.) as follows: Data center means a building or buildings, newly constructed, expanded, or remodeled, housing high-tech computer systems and related equipment[.] The purchase, license or lease of computer hardware, software, maintenance, and computer related services described in the facts presented by [TAXPAYER] for use in a facility that is a qualified data center clearly falls within the contemplation of the terms computer, computer network, computer software, and computer system, as those terms are defined by 39-14- 601. The facts presented state that [TAXPAYER] will purchase the Computer Equipment for use in its qualified data center. Assuming that all of the requirements set forth in Tenn. Code Ann. 67-6-102(68) (2008 Supp.) and other applicable statutes for the creation of a qualified data center are met, 3 [TAXPAYER] s purchase, license or lease of computer hardware, software, maintenance, and computer related services for use in its QDC will qualify as industrial machinery under Tenn. Code Ann. 67-6- 102(42)(K) (2008 Supp.). It follows that such Computer Equipment purchased during the investment period for the qualified data center, as the term is defined in Tenn. Code Ann. 67-6-102(68) (2008 Supp.), will qualify as industrial machinery for purposes of the franchise, excise industrial machinery credit provided by Tenn. Code Ann. 67-4-2009(4)(A) 4. Investments made in connection with the previous Facility creation (Investment 1) will be treated separately and will not count toward the new required capital investment (Investment 2). 3 It should be noted that the required capital investment that must be met in order to create a qualified data center under Tenn. Code Ann. 67-6-102(68) (2008 Supp.) must be made in real or tangible personal property owned or leased. Computer software that is expensed and is not included in the franchise tax minimum measure (i.e. computer software not reported in Schedule G of the current franchise tax return form) will not count toward the required capital investment. Licensed computer software whose possession is not transferred to the licensee does not meet the leased criterion. 4 Since the Computer Equipment purchased or leased by [TAXPAYER] qualifies under Tenn. Code Ann. 67-4- 2009(4)(A)(i) as industrial machinery for purposes of the franchise, excise industrial machinery credit provided by Tenn. Code Ann. 67-4-2009(4)(A), the question of whether such Computer Equipment also qualifies for the credit under Tenn. Code Ann. 67-4-2009(4)(A)(ii) is moot. 02021104-02 10 03/22/11 10:35 AM

[TAXPAYER] will need to certify the purpose and use of any industrial machinery purchases proposed to be counted in the new capital investment requirement and show the Department documentation with regard to which purchases were made in connection with its prior creation of the Facility under Investment 1 and its subsequent expansion under Investment 2. 2. [TAXPAYER] will be Entitled to the 7% Franchise, Excise Industrial Machinery Credit Provided the $500,000,000 Required Capital Investment Provision of Tenn. Code Ann. 67-4-2009(4)(I)(ii) is Met Tenn. Code Ann 67-4-2009(4)(I)(ii), set forth below, provides that a taxpayer who makes a required capital investment as the term is defined in Tenn. Code Ann. 67-4-2009(4)(I)(vii)(c), in excess of $500,000,000 is entitled an industrial machinery franchise, excise tax credit of 7% of the purchase price of industrial machinery purchased in the process of making such an investment. The 7% credit provided is available regardless of whether the taxpayer meets any of the requirements to qualify for the job tax credit provided in Tenn. Code Ann. 67-4-2109(c): If the taxpayer makes a required capital investment in excess of five hundred million dollars ($500,000,000) during the investment period, the credit allowed in subdivision (4)(A) shall be equal to seven percent (7%) of the purchase price of industrial machinery located in this state and purchased in the process of making the required capital investment. The credit shall be subject to subdivisions (4)(A)-(H), except that a taxpayer making the required capital investment for purposes of this subdivision (4)(I) shall be entitled to the credit for the items listed in subdivision (4)(A)(ii) regardless of whether the taxpayer meets any of the requirements of, or qualifies for, the job tax credit provided in 67-4-2109(c)[.] Unlike the 1% industrial machinery franchise, excise tax credit provided by Tenn. Code Ann. 67-4-2009(4)(A), the 7% industrial machinery franchise, excise tax credit provided by Tenn. Code Ann. 67-4-2009(4)(I)(ii) is contingent on the taxpayer making a required capital investment, as the term is defined in Tenn. Code Ann. 67-4-2009(4)(I)(vii)(c) (2008 Supp.), in excess of $500,000,000. However, the statute clearly states that the taxpayer making the required capital investment need not qualify for the job tax credit in order to take the 7% industrial machinery credit for franchise, excise tax purposes. In order for [TAXPAYER] s investment in its qualified data center to qualify as a required capital investment under Tenn. Code Ann. 67-4-2009(4)(I)(vii)(c) (2008 Supp.), set forth in pertinent part below, the investment must be made in... in real or tangible personal property owned in this state or leased in this state or both, valued according to 67-4-2108(a) or (b). For purposes of the franchise tax minimum measure, Tenn. Code Ann. 67-4-2108(a) and (b) require property to be valued in accordance with generally accepted accounting principles. Required capital investment means an increase of a business investment in real or tangible personal property owned in this state or leased in this state or both, valued according to 67-4-2108(a) or (b). A capital investment shall be deemed to have been made as of the date of payment or the date the taxpayer enters into a legally binding commitment or contract for purchase or construction[.] 02021104-02 11 03/22/11 10:35 AM

Unlike Tennessee s sales and use tax statutes, Tennessee s franchise, excise tax statutes do not define the term tangible personal property. The most basic rule of statutory construction is to ascertain and give effect to the intention and purpose of the legislature. Worrall v. Kroger Co., 545 S.W.2d 736 (Tenn. 1977). Legislative intent or purpose is to be ascertained primarily from the natural and ordinary meaning of the language used, without forced or subtle construction that would limit or extend the meaning of the language. National Gas Distributors, Inc. v. State, 804 S.W.2d 66 (Tenn. 1991). In seeking to determine the natural and ordinary meaning of statutory language, the usual and accepted source for such information is a dictionary. State v. Givens, Slip op. 1994 WL406187 (Tenn.Crim.App. Aug. 4, 1994). BLACK S LAW DICTIONARY 1494 (8 th ed. 2004) defines the word tangible as... having or possessing physical form; capable of being touched and seen; perceptible to touch; capable of being possessed.... Tangible property is defined by BLACK S LAW DICTIONARY 1254 (8 th ed. 2004) as... property that has physical form and characteristics and tangible personal property is defined as... property that can be weighed, measured, felt or touch, or is in any other way perceptible to the senses. Because computer hardware is in a physical form that is capable of being seen and touched, it is tangible personal property. Thus, [TAXPAYER] s investment in computer hardware for its facility expansion will be included in the calculation of the total required capital investment, as the term is defined by Tenn. Code Ann. 67-4-2009(4)(I)(vii)(c) (2008 Supp.) for purposes of the franchise, excise tax industrial machinery credit. Computer software is not defined for purposes of the required capital investment definition contained in Tenn. Code Ann. 67-4-2009(4)(I)(vii)(c) (2008 Supp.). However, Tenn. Code Ann. 67-4-2009(4)(A)(ii) references Tenn. Code Ann. 39-14-601 to define computer software and other related terms for purposes of the industrial machinery franchise, excise tax credit. Tenn. Code Ann. 39-14-601(7) defines computer software as follows: Computer software means a set of computer programs, procedures, and associated documentation concerned with the operation of a computer, computer system, or computer network whether imprinted or embodied in the computer in any manner or separate from it, including the supporting materials for the software and accompanying documentation. Since this definition is used to define computer software for purposes of industrial machinery that qualifies for the Tennessee franchise, excise tax industrial machinery credit, it appears reasonable to conclude that the intent of the Tennessee General Assembly when enacting the enhanced industrial machinery credit that is available to certain taxpayers under the provisions Tenn. Code Ann. 67-4-2009(4)(I)(i)-(iv) was that the term computer software would have the same meaning set forth in Tenn. Code Ann. 39-14-601(7). It does not make logical sense that the term computer software would somehow have a different definition when purchased for purposes of the required capital investment necessary to qualify for the enhanced industrial machinery credit. This especially true since no other definition of computer equipment is specified when the industrial machinery franchise, excise tax credit is enhanced due to a taxpayer s increased required capital investment level. 02021104-02 12 03/22/11 10:35 AM

The definition of computer software contained in Tenn. Code Ann. 39-14-601(7) makes no distinction between prewritten software, and custom software. Thus, [TAXPAYER] s investment in computer software, regardless of the type of software, will be included in the calculation of [TAXPAYER] s total required capital investment, as the term is defined in Tenn. Code Ann. 67-4-2009(4)(I)(vii)(c) (2008 Supp.), for purposes of the 7% enhanced industrial machinery franchise, excise tax credit provided by Tenn. Code Ann. 67-4-2009(4)(I)(ii), provided that the software is included in the franchise tax minimum measure valued in accordance with generally accepted accounting principles (i.e. reported in Schedule G of the current franchise, excise tax return form). If [TAXPAYER] is able to meet the $500,000,000 required capital investment threshold required by Tenn. Code Ann. 67-4-2009(4)(I)(ii), then it will qualify for the industrial machinery excise tax credit of 7% of the purchase price of computer equipment acquired during the investment period for the qualified data center. If the required capital investment made during the investment period exceeds the $250,000,000 threshold, but is not more than $500,000,000, Tenn. Code Ann. 67-4-2009(4)(I)(iii) provides a credit equal to 5% of the purchase price of computer equipment. If the required capital investment made during the investment period exceeds the $100,000,000 threshold, but is not more than $250,000,000, Tenn. Code Ann. 67-4-2009(4)(I)(iv) provides a credit equal to 3% of the purchase price of computer equipment. Otherwise, the franchise, excise industrial machinery tax credit of 1% of purchases of qualifying industrial machinery will apply. If none of the required capital investment thresholds set forth in Tenn. Code Ann. 67-4-2009(4)(I)(I)-(iv) are met, the franchise, excise industrial machinery excise tax credit of 1% of purchases of qualifying industrial machinery provided by Tenn. Code Ann. 67-4-2009(4)(A) will apply. Investments made in connection with the previous Facility creation (Investment 1) will be treated separately and will not count toward the new required capital investment (Investment 2). [TAXPAYER] will need to certify the purpose and use of any industrial machinery purchases proposed to be counted in the new capital investment requirement and show the Department documentation with regard to which purchases were made in connection with its prior creation of the Facility under Investment 1 and its subsequent expansion under Investment 2. 3. [TAXPAYER] is Entitled to Offset 100% of its Franchise, Excise Tax Liability by the Qualifying Industrial Machinery Credit Earned in Connection with Its New Required Capital Investment in Tennessee Provided that the Commissioner of Revenue and the Commissioner of Economic and Community Development so Determine Tenn. Code Ann. 67-4-2009(4)(B) limits the industrial machinery credit that may be taken against a taxpayer s franchise, excise tax liability to 50% of the liability shown on the return before the credit is taken. However, Tenn. Code Ann. 67-4-2009(4)(H), set forth below, allows an offset of up to 100% under certain circumstances: Notwithstanding any provision to the contrary, a taxpayer that has established its international, national, or regional headquarters in this state and has met the requirements to qualify for the credit provided in 67-6-224, or a taxpayer that has established an international, national, or regional warehousing or distribution hub in this state and has met 02021104-02 13 03/22/11 10:35 AM

the requirements to be a qualified new or expanded warehouse or distribution facility, shall be allowed to offset up to one hundred percent (100%) of its franchise and/or excise tax liability by the industrial machinery credit provided in this subdivision (4), or any carryforward of the industrial machinery credit, if the commissioner of revenue and the commissioner of economic and community development determine that increasing the percentage of offset above that allowed by subdivision (4)(B) is in the best interests of the state. For purposes of this subdivision (4)(H), "best interests of the state" includes, but is not limited to, a determination that the taxpayer established its headquarters or a warehousing or distribution hub in this state, or converted a regional headquarters or regional warehousing or distribution hub in this state into its national or international headquarters or a national or international warehousing or distribution hub, as a result of such action. The commissioner of revenue and the commissioner of economic and community development shall determine the percentage of franchise and/or excise tax liability allowed to be offset, above that otherwise allowed by subdivision (4)(B), and the period during which the increased offset shall continue. [TAXPAYER] has already established a regional headquarters in Tennessee and has met the requirements to qualify for the headquarters facility credit provided in Tenn. Code Ann. 67-6- 224. Assuming that [TAXPAYER] is able to meet all statutory requirements for its new capital investment to qualify for the franchise, excise industrial machinery credit, [TAXPAYER] is entitled to offset 100% of its franchise, excise tax liability by the industrial machinery credit earned in connection with the new investment in its Tennessee qualified data center; provided that, [TAXPAYER] obtains a letter from the Commissioner of Revenue and the Commissioner of Economic and Community Development determining that increasing the percentage of offset to 100% is in the best interests of this state. Arnold B. Clapp Special Counsel to the Commissioner APPROVED: Richard H. Roberts, Commissioner DATE: 3-22-11 02021104-02 14 03/22/11 10:35 AM