Massachusetts – Taxability of Cloud Computing Products and Services

SALT Report 1633 – The Massachusetts Department of Revenue released a Letter Ruling regarding a Taxpayer’s charges for cloud computing products and services. The Taxpayer provides resources that run software applications and provides access to computing resources and storage capacity through the Internet. This allows the Taxpayer’s customers to have access to these services without the expense of hardware or software purchases. The Commissioner determined the taxability of these services as follows:
Cloud Computing with no Software Provided by Seller
Sales that use the customer’s own software (not purchased from Company) or use open-source (free) software available on the Internet do not involve taxable sales of prewritten software under G.L. c. 64H, §1 or 830 CMR 64H.1.3.
Cloud Computing with Prewritten Software Provided by Seller
Sales that include Cloud Computing software licensed by the Taxpayer are taxable because the cost of the software license is included in the charge to the customer. This determination will not change even if there is (a) no contract to sub-license the software to the Taxpayer’s customers and (b) the charge for the software is not separately stated.  Also, the fact that the software is not downloaded onto the customer’s computer is not used to determine the taxability as the object of the transaction is the right to use the software.
Data Transfer Fees
Data Transfer charges relate to data transferred to and from customers in Massachusetts and the Taxpayer’s server located outside of Massachusetts. Interstate telecommunications occur and are taxable in Massachusetts if the telecommunication either originates or is received at a location within Massachusetts and the service is charged to a service address in Massachusetts. Taxable telecommunications includes charges for the transmission of data or information by various means, including transmission over the Internet.
Remote Storage
In regards to sales of remote storage, the object of the transaction is the use of the Taxpayer’s hardware to store or back-up the customer’s information. This type of transaction is not taxable as the lease of hardware because the customer doers not direct or control the computer hardware. Therefore, the object of the transaction is a nontaxable service as described in 830 CMR 64H.1.3(14).
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