May 21, 2012
On behalf of your client, ****************** (****** or the “Company”), you have requested a letter ruling with respect to the Massachusetts sales and use tax as it applies to the Company’s electronic newsletter offering (the “Offering”). Specifically, you request a ruling on whether the sales of such 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.
*** hosts business newsletters on its servers. The newsletters are generally placed on a micro-site, which is a website detailing a specific theme or subject. A micro-site, unlike a website, is very limited in scope and may outline a single business event or product. The Company’s e-communications platform combines built-in content management, publishing/layout and a full array of digital marketing delivery capabilities. The Company helps businesses stay in touch with their clients and customers through the use of electronic newsletters, e-mails, micro-sites, and blogs. The Company does this by allowing customers use of its on-line software to create customized electronic newsletters through the use of the Company’s proprietary technology.
Customers prepare and finalize their newsletters on this micro-site and the Company e-mails the prepared newsletters on behalf of its customers using customer provided mailing lists. Some customers use a combination of articles prepared by *** partners and freelance writers, and self-prepared articles.
Regardless of the specific services performed for the customer, pursuant to Company’s “Hosted Services Agreement” or the “Agreement,” in all instances, customers obtain a license to allow a certain number of users access to Company’s software solely for the customer’s internal business purposes and solely for the specific service Offering. A “user” means any employee of the customer or any of its affiliates or independent contractors.
Upon entering the Agreement with Company, customers obtain a license to use Company’s software, which includes the right to enter and manipulate data directly on the Company’s server. The Agreement provides that the customer has non-exclusive electronic access to Company’s server and storage system to store Customer’s e-newsletters, information and content, which may be supplied by Customer and modified by Customer from time to time.
Depending on the circumstances, the Company, or the customer, tracks and analyzes which of the customers’ subscribers read the newsletters, which of the articles in the newsletters were read, and how long each article was looked at. In addition, the data tracking and analysis results are summarized and placed in a confidential report by Company, which is either accessed by the customer electronically or e-mailed to the customer. Customers are given a password and are able to access newsletters and reports via the Internet twenty-four hours per day.
In addition, the Company markets the Offering on-line as an “easy-to-use e-newsletter platform.” Company’s website provides that customers can create and distribute a highly professional newsletter as an e-mail, Web page, and RSS feed. The website also states that customers can independently track the success of their campaigns, use flexible format templates to create professional, branded e-newsletters, precisely tailor content, and display information that is most useful to their subscribers. All of this can be accomplished by the customer, independent of the Company’s services.
Whether sales to Massachusetts customers of the Company’s electronic newsletter Offering, which provides businesses with some electronic newsletter support services combined with a transfer of a license to use Company’s proprietary software installed on a remote server, are subject to the Massachusetts sales and use tax.
Sales of the Company’s electronic newsletter Offering to Massachusetts customers are subject to the Massachusetts sales and use tax because the object of the transaction is the sale of a license to use Company’s proprietary software.
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 transfer 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 the present case, the Company maintains that it provides newsletter publishing services to its customers. While we agree that Company’s Offering involves the performance of some nontaxable services, such as bulk e-mailing, tracking newsletters and compiling reports for customers in some cases, it combines these services with a license or right to access and use of Company’s software on a remote server. Moreover, the customer is performing most of these tasks themselves. Pursuant to the Agreement, all of the Company’s customers have the ability to operate, direct, and substantially control the software and produce their own newsletters. We understand that Company compiles the customer’s articles and displays and formats the newsletter for the customer in some instances. However, the object of the customers’ purchase of the Offering is to obtain a right to use software on Company’s server for the purpose of creating a newsletter that will ultimately be distributed to the customer’s subscribers. The Offering includes a right to use software on a server hosted by the Company, as described in 830 CMR 64H.1.3(3)(a), and is subject to the Massachusetts sales tax.
Based on the facts provided, we rule that a customer’s purchase of the electronic newsletter Offering is subject to the Massachusetts sales and use tax. The object of the customers’ purchase of the Offering is to obtain a license or right to use software on Company’s server for the purpose of creating a business newsletter that will be distributed to the customer’s subscribers, and the provision of any personal or professional services, which varies depending on the customer, is incidental.
Very truly yours,
Commissioner of Revenue