Massachusetts – Taxability of Virtual Computing Offerings

SALT Report 1877 – The Massachusetts Department of Revenue issued a letter ruling regarding a Taxpayer’s sales of virtual computing offerings. The Taxpayer’s company designs, develops and markets technologies that enable people to securely access information through the use of software housed on the customer’s computer.  In some cases, the services are provided on-line through a connection between the customer and the Taxpayer’s servers.

Each offering involves a screen-sharing connection between the host computer and one or more remote computers connected to the Internet.  This allows the host computer to run its operating system, or an application, that allows the remote computer to share access to its desktop with the host computer.   In some cases, the remote computer may also share access to input control through its keyboard and a pointing device.

The Taxpayer maintains a dedicated network of switches, routers, servers, storage equipment and other hardware, which are used in conjunction with the software that is stored, executed, maintained, updated and controlled on the Taxpayer’s servers

When determining the taxability of the Taxpayer’s product the Commissioner must decide whether the product is a personal or professional service or a sale of the right to use pre-written software.  Because the Taxpayer sells both services and the right to use software as one transaction, the Commissioner used the “object of the transaction” test to determine taxability.

In his decision, the Commissioner stated that each of the Taxpayer’s services requires the customer to use the Taxpayer’s software.  Because each service is designed so that the customer uses the software with little or no interaction with the Taxpayer’s employees, and no analysis, content, or data is provided to the customer beyond the software itself, the customer is purchasing the right to use the Taxpayer’s software. Therefore, the Commissioner determined that the Taxpayer’s services are subject to sales and use tax because the object of the transaction in each case is the use of the prewritten computer software.

For Further Information:

Massachusetts Department of Revenue – Letter Ruling 12-10