LR 12-8 has been revised and reissued due to additional information provided by the taxpayer that changed some conclusions in the original version.
November 8, 2013
You request a ruling on behalf of *************************, with offices at *************************, as to the application of Massachusetts sales and use tax to sales of certain products, generally described as “Cloud Computing,” to customers in Massachusetts. You describe Cloud Computing as providing Company’s customers with the use of infrastructure, a platform, and operating system software with which such customers can access these Company’s resources to perform a variety of activities, including, but not limited to, running the customers’ software applications (which are not provided to customers by Company as part of the Cloud Computing product). Company’s Cloud Computing products enable Company’s customers to access computing resources and storage capacity through the Internet without a significant capital outlay for the purchase of hardware or operating system software. Based on additional information you have provided, the original ruling on this subject dated July 16, 2012 is revoked in part and replaced with the following.
Customers must use some operating system software to use the Cloud Computing products. Customers have several options in this respect – they may: (1) utilize their own operating system software or open-source operating system software or (2) utilize designated third-party operating system software that Company has licensed from the third party. You describe open-source software as software that is free to access by anyone via the Internet; there is no charge by Company to its customers relating to open-source operating system software. With regard to option (2), in which Company licenses the operating system software from a third party provider, the software is not downloaded or transferred to the customers and there is no contractual sublicensing of the operating system software, which remains on Company’s servers. Company does not impose a specific charge to customers for the use of this operating system software, although as described below Company charges higher prices for Cloud Computing products that utilize this third-party operating system software as compared with corresponding products that utilize open-source operating system software.
Customers have a limited ability to access and configure administrative functions within the operating system software. For example, a customer who has purchased computing power from Company in order to run a proprietary software application owned by the customer will initially use operating system software to install the proprietary application onto the Company’s servers.
Company charges customers for Cloud Computing products based on hourly rates and the computing resources they consume. Alternatively, customers may reserve capacity by paying a one-time fee and receive a discount on the hourly rate. Company does not separately state the price of operating system software; however where the customer has elected to use third party operating system software that Company has licensed for its use, a higher rate applies than if the customer had elected to use open-source (free) operating system software. Company also charges its customers a data transfer fee to the extent the customer is actively managing its own data while using the cloud computing service. There is no separate “data transfer” service that merely allows customers to transmit data. Activities that trigger data transfer fees include customer requests for saved files in multiple locations on the network, customer requests for computing resources working in multiple data centers, and customer downloads of personal content stored in the cloud, back to their own hardware. These charges are separately stated on the invoice. Other factors also impact the rate charged to the customer, including the amount of computing resources (memory and storage) consumed.
In addition to Cloud Computing, Company offers a separate Remote Storage Service, which allows customers to store, retrieve, and maintain content, data, applications, and software on Company’s servers. Customers can store and retrieve data at any time from any location through the Internet with minimal restrictions relating to the amount of the data and type of content. Remote Storage may be used to backup data or store large amounts of data for which the customer does not have adequate memory capacity. Customers using this Remote Storage Service retain ownership of their content. Company provides only the infrastructure to store digital content. Customers purchasing the storage service do not utilize any applications or software provided by Company. Pricing for the Remote Storage Service is based on storage capacity used in a given month as well as the amount of data uploaded or downloaded. The Remote Storage Service may be purchased independently from Cloud Computing products.
- Are sales of Cloud Computing products that involve use of the customer’s own application software or use of open-source (free) operating system software taxable when sold to customers in Massachusetts?
- Are sales of Cloud Computing products that include use of operating system software licensed by Company from a third party taxable when sold to customers in Massachusetts?
- Are sales of Remote Storage Service taxable when sold to customers in Massachusetts?
- Sales of Cloud Computing products, including the various charges described above, which involve the customer’s use of its own application software or open-source operating system software are not taxable when sold to customers in Massachusetts.
- Sales of Cloud Computing, including the various charges described above, which use operating system software licensed by Company from a third party are not taxable when sold to customers in Massachusetts under the facts presented in this request.
- Sales of Remote Storage Service are not taxable when sold to customers in Massachusetts.
Discussion of Law
Massachusetts imposes a 6.25% sales tax on sales of tangible personal property and telecommunications services within the Commonwealth, including sales of prewritten (also called “canned” or “standardized”) software regardless of the method of delivery. See G.L. c. 64H, § 1, definition of “tangible personal property.” Generally, the “sales price” of tangible personal property subject to tax includes services that are part of the sale, whether or not they are separately stated. See G.L. c. 64H, § 1, definition of “sales price.”
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 either as “software-as-a-service” or “cloud computing” or a “business solution” 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 determine whether a charge is for access and use of prewritten software.
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. Using industry terminology, the access to software described in the preceding sentence is a virtual download of prewritten software; the customer acquires the same functionality as if the software was actually downloaded to the customer’s hardware.
In those instances where both services and the right to use software are integrated or bundled in one transaction, the Commissioner will apply an “object of the transaction” test. Where the object of the transaction is the purchase or use of the software, the transaction will be taxable. Where 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. See 830 CMR 64H.1.3(14)(a). See also, e.g., LR 12-5 (in which the object of the transaction was substantial personal and professional services provided to doctors’ offices bundled with the use of software).
The Commissioner applies these principles to the stated facts describing the three types of Company’s product offerings that are the subject of these ruling requests as follows:
- Cloud Computing products with no software provided by Company: Sales of Cloud Computing products in which the customers use their own application software (not purchased from Company) and open-source (free) operating system software or their own operating system software do not involve taxable sales of prewritten software within the meaning of G.L. c. 64H, §1 or 830 CMR 64H.1.3. Also see 830 CMR 64H.1.3(9).
- Cloud Computing products comparable to those described in the preceding paragraph # 1 but utilizing prewritten third-party operating system software made available to customers by Company: Sales of Cloud Computing products that also include the use of operating system software licensed by Company from a third party under the facts described in this letter ruling are not taxable. The cost of the operating system software license is included in the charge to the customer but there is (a) no contractual sub-licensing of software from Company to its customers and (b) no separately-stated charge for the software. On all of the facts described in this letter ruling, the object of the transaction remains the access to Company’s computing resources and storage capacity; the inclusion of the operating system software is incidental as the operating system software merely facilitates the customer’s use of seller’s computing resources and storage capacity. However, Company is liable for use tax on the apportioned cost of prewritten operating system software that it consumes in the provision of the nontaxable services to customers in Massachusetts.
- Remote Storage. 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. However, the transaction is not 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 object of the transaction is a nontaxable service as described in 830 CMR 64H.1.3(14).
Software-related products, and the terminology used to describe and market them, are evolving at a rapid rate. At one time, a purchaser of prewritten software had to install or download the software on the purchaser’s own hardware. As technology has developed, it has become the case that a purchaser can purchase the same software functionality without an investment in hardware through Application Service Providers and products marketed as Software-as-a-Service and Cloud Computing. Generally, sales of such products to customers in Massachusetts are taxable sales of prewritten software, except where the customer is acquiring only non-taxable computing resources or storage capacity (as opposed to acquiring the use of software), or where, as in the facts described in this ruling, the non-taxable computing resources or storage capacity services are bundled with the provision of prewritten operating system software that is incidental to the acquisition of those services, such that the object of the transaction remains the acquisition of non-taxable services.
Very truly yours,
Commissioner of Revenue
Revised LR 12-8