SALT Report 1907 – The Massachusetts Department of Revenue issued a Letter Ruling regarding whether an out-of-state Taxpayer’s sales of internet subscription services are taxable sales of prewritten software. With the purchase of a subscription, the Taxpayer provides a product that allows its clients to send automated messages, such as appointment reminders, thank-you notes, customer review surveys, and other promotions to their customers. The subscription also allows clients to integrate the Taxpayer’s product with their website, social media page, or smartphone app.
In addition to the above services, the Taxpayer also helps its clients better manage their online presence by submitting their business profiles to internet sites or by contracting with third parties to further develop and manage the client’s online profiles.
The Taxpayer requested guidance regarding whether sales of its Internet-based marketing and customer-communications platform are subject to Massachusetts sales and use tax.
Massachusetts imposes a 6.25% sales tax on sales of tangible personal property, including sales of prewritten software, under 830 CMR 64H.1.3. Section (3) which states:
“(a) Sales in Massachusetts of computer hardware, computer equipment, and prewritten computer software, regardless of the method of delivery, and reports of standard information in tangible form are generally subject to the Massachusetts sales tax. Taxable transfers of prewritten software include sales effected in any of the following ways regardless of the method of delivery, including electronic delivery or load and leave: licenses and leases, transfers of rights to use software installed on a remote server, upgrades, and license upgrades. The vendor collects sales tax from the purchaser and pays the sales tax to the Commissioner.”
Therefore the sale, license, lease or transfer of a right to use software is taxable. However, in the Taxpayer’s case where the software application is bundled with non-taxable personal services and non-taxable database access or data processing, the Commissioner must decide what the true “object of the transaction” is to determine the product’s taxability.
The Department determined that the taxpayer’s product is subject to Massachusetts sales and use tax because the true object of the transaction was the use of software. This is supported by the automated nature of the product as well as the fact that the Taxpayer’s clients typically use the software with very little interaction or assistance from the Taxpayer’s employees. Further, the Department notes that the Taxpayer structures the transaction as a license to use the software which was a significant factor when determining whether the transaction was a taxable transfer of software.
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