September 25, 2012
On behalf of your client, ************ ( “Company”), you have requested a letter ruling with respect to the Massachusetts sales and use tax as it applies to the Company’s back-up and restoration offering ,” (hereinafter “B & R Offering”). Specifically, you request a ruling on whether the sales of the B&R Offering are subject to the sales tax imposed under G.L. c. 64H, §§ 1 and 2 when sold to Massachusetts customers. The following is your representation of the facts upon which we base this ruling.
Company is a Delaware corporation that provides customers with online computer back-up storage and restoration. While the specific functionality depends upon the subscription level chosen by the customer, in general the “B & R Offering” includes the following:
1) Automatic and continuous back-up of customer computer files on remote servers maintained by the Company;
2) Duplication of customer computer files;
3) Secure transmission and storage of duplicated files via the Internet to Company’s data centers;
4) Routine integrity checks on backed-up files to ensure the stored version matches the current customer version;
5) Access to stored files from remote locations not tied to a specific computer; and
6) Restoration of stored files.
The B &R Offering operates continuously in the background on the customer’s computer and transfers copies of revised customer files from the customer’s hard drive(s) through an encrypted and secure connection to the Company’s servers in their data centers. Both programs and operating systems are backed-up in this manner. Once in place, the B & R Offering operates invisibly to the customer.
Customers using the B & R Offering may use any computer (not just the computer holding the files that are continuously backed-up) or mobile device to access their files by means of a “virtual desktop.” The B & R Offering also allows for unlimited customer support by e-mail, chat and phone. In addition, a customer can have a copy of its backed up files shipped to them on an external hard drive upon request.
The software utilized by the Company in managing its datacenters and the stored electronic files is not licensed to the Company’s customers. Customers purchase the Company’s B & R Offering via the Internet by logging on to the Company’s website, subscribing to the B & R Offering and agreeing to pay a time-based (i.e., 1, 2 or 3 year) subscription fee, the amount of which depends on the level of “service” purchased. The subscription fee is not charged on a per-transaction basis. At the time of subscription, the customer agrees to the Company’s “Terms of Service” which sets forth the rights of the parties, the terms and conditions of the subscription and the rules governing the customers’ conduct. Furthermore, the “Terms of Service” contain a license agreement which provides that the software agent (the “Agent”) (as described below), which is downloaded onto the customer’s computer at the time of subscription, is provided solely for the purpose of accessing the B & R Offering and cannot be used or sublicensed for any other purpose.
The Agent functions solely as a conduit to connect in a secure manner the customer’s computer to the Company’s remote technology platform and databases that serve to deliver the B & R Offering. Additionally, the Agent allows customers to access and restore remotely their backed up files through the Company’s website. The Agent is effectively a portal through which data transfers from the customer to the Company and back, so that Company can back-up and restore the customer’s files. The Agent is the only software directly accessed by the customer.
There is no separately stated charge for the Agent. The Agent is downloaded from the Company’s website by the customer at no charge. Anyone can download the Agent from the Company’s website. However, by itself, the Agent offers no functionality without a paid subscription to the B & R Offering.
Whether sales to Massachusetts customers of the Company’s B & R Offering are subject to the Massachusetts sales and use tax.
Sales of the Company’s B & R Offering to Massachusetts customers are not subject to the Massachusetts sales and use tax because the object of the transaction is the purchase of back-up data storage and restoration. To the extent that hard drives or discs with backed-up files are provided to customers in Massachusetts, Company is responsible for sales or use tax on those items of tangible personal property.
IV. LAW AND ANALYSIS
Massachusetts imposes a 6.25% sales tax on sales of tangible personal property and telecommunication services within the Commonwealth including sales of prewritten (also called “canned” or “standardized”) software regardless of the method of delivery. Charges for prewritten software, whether it is electronically downloaded to the customer or accessed by the customer on the seller’s server (including in the context of the ‘Software as a Service’ business model), are generally taxable. The rules relating to tax on computer hardware and software are contained in the Computer Industry Services and Products Regulation, 830 CMR 64H.1.3. Section (3) provides the following:
(3) General Rules.
(a) Sales Tax. 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.
The transfer of a license or right to use software on a server hosted by the taxpayer or a third party, as described in 830 CMR 64H.1.3(3)(a), is taxable as a sale of software under Massachusetts sales and use tax laws. In addition, where the object of the transaction is to obtain access to the organizational tools provided by the seller’s software, the transaction may be characterized as a sale of prewritten software. However, where there is no charge for the use of the software and the object of the transaction is acquiring a good or service other than the use of the software, sales or use tax on software does not apply. See 830 CMR 64H.1.3(14)(a); LR 10-1.
In Letter Ruling 12-8, the Commissioner ruled that sales of Cloud Computing that either use the customer’s own software (not purchased from the seller) or use open-source (free) software available on the Internet are not taxable sales of prewritten software within the meaning of G.L. c. 64H, §1 or 830 CMR 64H.1.3. That ruling also provided that remote data storage services are not taxable.
In sales of “remote storage,” the object of the transaction is the use of the capacity in seller’s hardware to safely store or back-up the customer’s information. Thus, the object of the transaction in such sales is a nontaxable data storage service as described in 830 CMR 64H.1.3(14). However, it is a taxable lease of hardware where the customer or the customer’s employee operates, directs or controls the computer hardware as described in 830 CMR 64H.1.3(4)(d).
The Company states that the software agent that is downloaded onto the customer’s computer at the time of subscription is incidentally necessary for the purpose of accessing the B & R Offering and cannot be used or sublicensed for any other purpose. The Agent functions solely as a conduit to connect in a secure manner the customer’s computer to the Company’s remote technology platform and databases that deliver the back-up and restore services. Anyone can download the Agent from the website free of charge. Therefore, since the Agent is open-source (free) software available on the Internet and the object of the transaction is to acquire back-up and restoration, Massachusetts sales tax does not apply to Company’s sales of the B & R Offering.
With respect to the specific offering described in this ruling request, the Commissioner rules the object of the transaction is to acquire remote data back-up storage and restoration, therefore the sales tax does not apply to sales of the B & R Offering to Massachusetts customers. The incidental transfer of the software agent to the customer’s computer does not change this result. Company must pay sales or use tax on any disks or hard drives provided to customers in Massachusetts, depending on whether there is a separately stated charge for those items.
Very truly yours,
Commissioner of Revenue