February 22, 2010

Your firm represents **********, a provider of litigation support services, hereafter called "Taxpayer." You have requested a letter ruling from DOR as to whether the services provided by Taxpayer are subject to Massachusetts sales or use tax. You believe these services are not taxable under applicable Massachusetts law and regulations.

I. Facts: Taxpayer's Business Operations

Taxpayer is a privately held corporation headquartered in [City outside of Massachusetts] that conducts business in Massachusetts through an office located in the Commonwealth. Taxpayer is also registered as a vendor for sales/use tax collection in Massachusetts. Taxpayer provides a variety of litigation support services using proprietary software named "**********," as well as various types of consulting services.

Typically, a client preparing for litigation comes to Taxpayer seeking assistance in the processing of documentation. Taxpayer gathers copies of the data, which are often on hard drive. The client then decides how it would like the data processed through [the proprietary software], which indexes and sorts the data, making it searchable. [The proprietary software] creates a unique record identifier which can then be used to process the data in a variety of different ways. [1] The requested reports are run by Taxpayer's employees using the [proprietary] software and provided to the client; the client does not receive or access the software nor does the client have the ability to enter data, manipulate data, or run reports using Taxpayer's software.

Taxpayer also provides numerous other specialized services (generally on an hourly basis) as follows:

a. [Proprietary software] hosting;

b. Foreign language translation;

c. Clustering;

d. File filtering;

e. Project management;

f. E-discovery consulting; and

g. Training.

You state that none of the above services involves the transfer of tangible personal property from Taxpayer to its clients nor are any of these services provided as a mandatory part of the sale of computer hardware or prewritten software. Further, the taxpayer does not transfer, license, or give access to software to its clients either on the Taxpayer's or the client's server.

Taxpayer has a standard form contract for the provision of these services. In that contract, the "Scope of Work" is described as constituting litigation support services. The contract does not provide for the transfer or license of prewritten software in connection with the litigation services. The contract also contains a detailed listing of applicable fees. There are charges for data collection, data filtering, processing and uploading, and various forms of data creation. There are also separately stated charges for various deliverables using DVDs, CDs and hard drives. These deliverables contain the original information processed by [the proprietary software], and you state that the information contained within them is personal and individual in nature and is not incorporated into reports furnished by the Taxpayer to other persons. Finally, there are specific hourly charges for the various types of supplemental services noted above.

II. Discussion

As you note, DOR Regulation 830 CMR 64H.1.3 discusses the general application of Massachusetts' sales and use taxes to computer industry services and products, including the furnishing of "reports of standard information in tangible form" to customers. Under 830 CMR 64H.1.3(8)(a)

Sales of reports or other information on printed matter or magnetic media, sold or intended to be sold to two or more purchasers, are generally taxable. Such reports may reflect collection, compilation, or analysis of information. Examples include database files, mailing lists, market research, and surveys.

Under 8(b), however, there is a exemption for sales of reports of individual information. These are not taxable regardless of whether they are printed or on magnetic media, if the report may not be or is not substantially incorporated into reports furnished to other persons. Id. See also G.L. c. 64H, § 1, "Sale."

In addition, 830 CMR 64H.1.3(9) states that "[c]harges for processing data furnished by customers are generally exempt from sales tax, regardless of the method of delivery of the processed information to the customer." Under 64H.1.3(2) "processing of data furnished by customers" is defined as "the processing of raw data provided by customers into reports delivered in tangible form or delivered electronically that are not or may not be incorporated in reports furnished to other persons." "Processing data may include the following: summarizing data, computing data, extracting data, sorting files, and sequencing data as well as services that provide the customer or subscriber with additional, different, or restructured information." Id.3(9)(a).

DOR has on several occasions considered the application of Regulation 64H.1.3 to information and data processing services. In Letter Ruling 87-12 we ruled that a taxpayer that inputs customer furnished data into a computer, summarizes the data and then provides original information from the data to the customer and that also provides the customer access to the processed information via a central computer program, provides a nontaxable data processing service. None of the following charges were considered subject to the sales tax: (1) the charges for the data processing service, (2) the charges for providing access, or (3) the charges for the cost of transferring the processed information to the taxpayer.

Similarly, in Letter Ruling 03-11, we considered the application of Massachusetts sales and use tax to a taxpayer in the business of gathering copies of information from a customer, scanning and securing the acquired information and finally proceeding to process such information. Under that ruling charges for transmitting reports or other information to a customer "through electronic means. . .are exempt from taxation" and even if the report or information is sent in tangible form, a taxable sale has not occurred if the information furnished is "personal or individual information" that "may not be substantially incorporated in reports furnished to other persons." The ruling also provides that if a particular transaction does not constitute a taxable sale, then any "charges associated with the transactions are not taxable." Accordingly, none of the component services provided by the taxpayer to its customers were taxable.

Finally, in Letter Ruling 87-1, we considered the sales tax treatment of a taxpayer using a computer program to provide patients with individualized medication schedules. The taxpayer received information from patients, processed this information with a computer program that organized and printed out a medication schedule, and then furnished a personal medical schedule to the patient. We ruled that "the [taxpayers] furnishing of patient medication schedules and other information is not taxable" because "[t]he [taxpayer] is providing information personal and individual in nature that is not substantially incorporated in reports furnished to other persons." [2]

III. Ruling Requested

Taxpayer requests a ruling that the various business services it provides are not subject to Massachusetts' sales and use tax, and that neither the collection of the data and its processing and delivery to the customer, nor the separately stated charges for various deliverables using DVDs, CDs and hard drives will be subject to tax.

IV. Ruling

We agree with the Taxpayer that the information services and data processing services it provides are similar in nature to the nontaxable services provided by the businesses in the rulings discussed above. Taxpayer, through [the proprietary software], provides data processing services to its clients and furnishes the processed information. These services do not involve transfers of prewritten software, either in tangible or electronic form, or a license to use software on a server hosted by Taxpayer or a third party, as described in 830 CMR 64H.1.3(3)(a). Although software is used to create the reports for Taxpayer's clients, Taxpayer's employees and not its clients input the data and run reports in connection with the litigation support services. Finally, the reports themselves are individual and personal in nature, and none of the data contained in them is available to the Taxpayer's other clients. Accordingly, the amounts the Taxpayer charges for such services are not taxable under Massachusetts' sale and use tax laws, regardless of the form in which the reports are furnished.

Very truly yours,

/s/Navjeet K. Bal

Navjeet K. Bal
Commissioner of Revenue

NKB:MTF:lr

LR 10-1



[1] You state that [proprietary software] can run searches across databases by creating a searchable index which can pinpoint documents through prioritized fields, fuzzy logic searches, Boolean, and other data criteria.

[2] We note that Letter Rulings 87-1 and 87-12 were issued before the statutory change imposing tax on all transfers of prewritten software and are relevant only to the extent they are not inconsistent with that change. See TIR 05-15.