November 9, 2012
On behalf of your client ******************** (the “Company”), you have requested a letter ruling with respect to the Massachusetts sales and use tax as it applies to Company’s sales of subscriptions to Massachusetts customers. Specifically, you request a ruling on whether such sales are subject to the sales tax on prewritten software imposed under G.L. c. 64H, §§ 1, 2. The following is your representation of the facts upon which we base this ruling.
The Company is incorporated in ******** and operates almost exclusively out of ************ where all product development takes place and almost all employees are based. You state that the Company has recently employed one individual in Massachusetts and has also established sales tax nexus by virtue of traveling sales representatives. The Company has developed an Internet-based marketing and customer-communications solution which allows physicians and other service-industry businesses (e.g., automotive, health spa, and beauty) (the “Clients”) to communicate with their patients and customers (the “Customers”) and track results, based upon a social networking model and by utilizing automated, e-mail communications and marketing messages.
******************'s solution includes a multi-component offering that is collectively designed to maximize the ability of its Clients to communicate with, track and retain existing and potential customers via the Internet. Company enters into a contract (the “Agreement”) with each Client under which Company agrees to provide Client with a non-exclusive software license for ******************** and any other offerings chosen by Client and included in the Agreement. Company charges a one-time set-up fee of $***** and a base subscription fee of $*****/month. Two products, ***************** and *********************** are Add-On Components for which a separate fee is charged and therefore are outside the scope of this ruling request. Each of the remaining products described in the ruling request, *********** Connect for Websites, ********** Mobile and *********** Webfeed are included in the subscription price for Platform. Company’s Internet-based offerings include the following components:
(a) ************ (“Platform”)
The *********** Platform provides Clients with a non-exclusive right to access the Platform which is a Web-based portal that is hosted entirely on Company’s servers and accessed by Clients via the Internet. The ********* Platform allows Clients to communicate with their Customers automatically via e-mail, text and postcard. Automated e-mail communications include: (i) pre-appointment reminders; (ii) post-appointment “thank-you” and “customer-review” communications; (iii) “continuing care” communications to schedule next appointment; and (iv) “promotional” communications including birthday messages, coupons or newsletters.
The Platform integrates directly with the Client’s customer-management software via a plug-in application which allows the Platform to extract data from the Client’s customer-management software, such as customer contact information and appointment schedules. The Client’s customer-management system then “syncs up” nightly with the Platform, via this plug-in. All integration support is conducted electronically via the Internet and no tangible personal property is transferred. The plug-in is merely a portal through which the Client’s customer information is extracted by Company. The Client never accesses, uses or manipulates the plug-in. Therefore, Company argues that the plug-in is merely incidental to the object of the transaction.
The automated communications described above are set up to operate with default parameters. However, the client is able to modify the parameters via the Platform to accommodate personal preference and maximize the effectiveness of the solution. The solution can operate entirely on an automated basis without any interaction or manipulation from the Client. Although the vast majority of Clients choose to more proactively utilize the solution in order to maximize its benefits, some Clients let the solution run entirely on its own via the default parameters.
With regard to the thank-you and customer-review communications, a post-appointment e-mail message is automatically sent to each Customer thanking them for their business and providing a link for submitting a review. The Client is able to view all submitted Customer reviews from the ****** Platform. If the Client chooses to utilize ************** Connect for Websites and/or Connect for Facebook, as described below, then the Client will be able to see reviews directly on its website and/or Facebook page. Company provides support services to the Clients in relation to these features at no extra charge. If a Client objects to a particular review, the Client can submit a request for removal and Company will determine whether removal is warranted pursuant to established protocols. Company employs a team of nine individuals on a full-time basis to support Clients in this role.
Pursuant to Webfeed, Company helps its Clients manage and maintain a highly visible and consistent on-line profile. Company regularly submits the Client’s business profile information to at least 90 Internet sites. In doing so, Company contracts with multiple third parties (“Profile Managers”) that specifically engage in the business of managing merchants’ on-line profiles such that their business profile will accurately appear on Internet yellow pages and other Internet search engines. Company typically pays a fee to these third party vendors while providing them with Clients’ up-to-date profile information on a regular basis. In addition to managing the relations with these Profile Managers, the process of “pushing” the profile information out to the Profile Managers requires oversight and involvement of Company personnel.
(c) *************** (Connect for Websites”)
Connect for Websites allows Clients to integrate portions or elements of the Platform directly to their websites, thereby (i) displaying Customer reviews on the Client’s website; (ii) integrating the scheduling tool so that Customers can schedule appointments directly from the Client’s website; and (iii) integrating the marketing and promotional tool so that promotional materials (e.g., offers and coupons) can be displayed on the Client’s Facebook and Internet business profile.
(d) *************** (“Connect for Facebook”)
Connect for Facebook allows Clients to link Platform to their Facebook pages (similar to the Connect for Websites offering). Through the client’s Facebook page, Customers can schedule appointments, provide reviews and access promotional material offered by the Client.
(e) ********************** (“Mobile”)
Mobile provides Clients with the ability to access Company’s offerings from any smartphone, for up to two users, via the Client’s mobile web browser. The Client simply accesses the browser via Company’s website. No applications are downloaded onto the Client’s smartphone.
Whether sales of Platform to Massachusetts customers, bundled with any or all of the additional offerings included in the subscription price and described above, are subject to the Massachusetts sales and use tax.
Based on the facts that have been presented, the Department rules that sales of Platform to Massachusetts customers, bundled with any or all of the additional offerings included in the subscription price, are subject to Massachusetts sales or use tax for the reasons discussed below.
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. 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.
Charges for prewritten software, whether it is electronically downloaded to the customer or accessed by the customer on the seller’s server (including the “Software as a Service” business model), are generally taxable. However, the marketing description of a product as “software-as-a-service” does not determine taxability of that product, nor does the fact that customers do not download software or otherwise install software on their own computers or other devices.
The sale, license, lease or other transfer of a 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 generally taxable under Massachusetts sales and use tax law. However, where there is no separate 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 generally does not apply. See 830 CMR 64H.1.3(14)(a); LR 10-1. Where use of a software application is bundled with substantial non-taxable personal or professional services or non-taxable services such as database access or data processing, the object of the transaction may be the non-taxable service rather than a sale of software.
In Letter Ruling 12-5, the Department ruled that office management software used in physician practices was inconsequential when bundled with substantial personal and professional services provided by the taxpayer. The Department ruled that each component involved the sale of a non-taxable service. However, the outcome in LR 12-5 was based on unique facts involving substantial nontaxable personal services that were part of the sale and provided for a bundled price. Generally, business management software of the type described in this ruling, which operates on an almost entirely automated basis, is taxable.
We also note that where there is a sale or transfer of a license or right to use software on a server hosted by the taxpayer or third party, as described in 830 CMR 64H.1.3(3)(a), such sale is generally taxable. You have provided a copy of a “service agreement” which states that upon payment of the subscription fee, the customer purchases and receives a non-exclusive right or license to use Company’s software. This agreement also indicates that such transactions are subject to the Massachusetts sales tax.
Nonetheless, we first address the Platform. This product allows Clients to communicate with their Customers automatically via e-mail, text and postcard. Automated e-mail communications include: (i) pre-appointment reminders; (ii) post-appointment “thank-you” and “customer-review” communications; (iii) “continuing care” communications to schedule next appointment; and (iv) “promotional” communications such as coupons and newsletters. The solution can operate via the default parameters entirely on an automated basis without any interaction or manipulation from the Client. The Commissioner treats automated software systems as pre-written software the transfer of which is subject to the sales and use tax in Massachusetts. In addition, the Client is able to modify the parameters of the Platform to accommodate personal preference and maximize the effectiveness of the solution. You state that the vast majority of Clients choose to more proactively utilize the solution. This also constitutes a taxable use of the software. Therefore, in both situations, the transaction is subject to the Massachusetts sales tax.
With regard to Webfeed, Company contracts with multiple third parties or Profile Managers that are in the business of managing merchants’ on-line profiles. Company personnel manage relations with Profile Managers on behalf of Company’s Clients. We rule that although there may be some personal services provided with respect to this product, such as submitting up-to-date profile information to third parties, such services are an inconsequential part of the sale.
Both Connect for Websites and Connect for Facebook allow Clients to integrate elements of the Platform directly to their website or Facebook page; display Customer reviews on the Client’s website; integrate the scheduling tool so Customers can schedule appointments directly from the Clients website; and integrate marketing and promotional tools so all can be displayed on the Client’s Facebook page and Internet business profile. These tools provide Clients with access and control over Company’s integrative software independent of Company personnel. Therefore, purchases of both these products are subject to Massachusetts sales tax.
Finally, Mobile provides Clients with the ability to access Company’s offerings from any smartphone, via the Client’s mobile web browser. The Department has recently ruled that software that enables access from a remote location either via desktop computer or handheld device is taxable. See Letter Ruling 12-10. Here, as in that ruling, the Customer initiates and terminates the connection to the Company’s server, and also identifies, selects and manipulates the desired tools that are available through use of the software that is hosted on the Company’s server. All other aspects of the connection are a function of the software itself. Therefore, sales of Mobile constitute a transfer of a right to use software and are subject to the Massachusetts sales tax.
The Commissioner will consider all the facts and circumstances when determining whether a product is a personal or professional service or a sale of the right to use pre-written software. In certain instances both services and the right to use software may be integrated or bundled in one transaction. In those cases, the Commissioner looks to an “object of the transaction” test to determine taxability.
Here, we rule that the Company’s offerings bundled together under one subscription price are subject to the Massachusetts sales tax. Although Company staff may provide some personal services, incidental services are deemed inconsequential when applying the object of the transaction test, if it can be shown that substantial use of the software is performed by the Client and the value of such use outweighs the value attributable to any services provided. We conclude that any personal or professional services provided by Company to its Clients in connection with these offerings are inconsequential. This is evident due to the automated functionality of each of the products, as advertised on Company’s website. In addition, the fact that Company’s Clients use the software in each case, with very little interaction with or assistance from Company’s employees, as well as the fact that the transaction is structured as a license to use software, are significant factors in the determination that this is a taxable transfer of software.
Very truly yours,
Commissioner of Revenue