Massachusetts – Determining Whether a Transaction is a Taxable Sale of Pre-written Software or a Non-taxable Service

2/21/2013

SALT Report 2176 – The Massachusetts Department of Revenue issued a draft Directive that addresses the application of sales and use tax to sales of software and computer services. The Directive was created to respond to the large number of ruling requests regarding the Computer Industry Services and Products regulation,830 CMR 64H.1.3.  Particularly addressed are the issues involving sales of software as a service, cloud computing, business solutions, and software that is bundled with non-taxable services.

Massachusetts has established rules that clearly state that software sales involving a tangible medium transferred to a customer are taxable; however, the focus of this Directive is on the taxability of software sales that involve remote access to software.

Because the Department does not have the resources to individually rule on every software product the Directive will list several factors that the DOR will use to determine if a sale is a taxable sale of software or a non-taxable sale of services. Decisions will be made cumulatively as no one factor will determine a product’s taxability.

In situations where both services and the right to use software are integrated or bundled in one transaction, the Commissioner will apply the “object of the transaction” test.  If the object of the transaction is the purchase or use of the software, the transaction will be taxable. If the object of the transaction is determined to be a non-taxable service, and any use or access to pre-written software is incidental, the transaction will be non-taxable.

Comments regarding the Directive will be accepted until February 22, 2013.

For Further Information

Massachusetts – Working Draft for Practitioner Comment