July 16, 2012
You request a ruling on behalf of your client, **************** (“Company”), EIN ********* , with offices at ****************************************, as to the application of Massachusetts sales tax to sales of certain products, generally described as “Cloud Computing,” to customers in Massachusetts. You describe Cloud Computing as incorporating infrastructure, a platform, and software on which Company’s customers can access Company’s resources to perform a variety of activities, including, but not limited to running software applications. Company’s customers can access computing resources and storage capacity through the Internet without a significant capital outlay for the purchase of hardware or software.
Customers must use some operating system software and/or applications to use the Cloud Computing product. Customers have several options – they may: (1) use their own software or they can utilize open-source operating system software or (2) utilize designated third-party operating system software that Company has licensed. You describe open-source software as software that is free to access by anyone via the Internet; there is no charge to the customers relating to this software. With regard to option (2), Company licenses the software from a third party provider. The software is not downloaded or transferred to the customers and there is no contractual sublicensing of the software which remains on Company’s servers. Customers have the ability to access and configure the software and its functionality within the Cloud Computing product.
Company charges customers for Cloud Computing 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 software or applications, however where the customer has elected to use a third party operating system 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 for uploading or downloading data, which is 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.
- Are sales of Cloud Computing that involve use of the customer’s own software or use of open-source (free) software provided by third parties taxable when sold to customers in Massachusetts?
- Are sales of Cloud Computing that include use of software licensed by Company taxable when sold to customers in Massachusetts?
- Are separately stated data transfer fees taxable when sold to customers in Massachusetts?
- Are sales of Remote Storage Service taxable when sold to customers in Massachusetts?
- Sales of Cloud computing that involve the customer’s use of its own software or software available free on the Internet are not taxable when sold to customers in Massachusetts.
- Sales of Cloud Computing that use software licensed by Company are taxable when sold to customers in Massachusetts, whether or not there is a separately stated charge for the software and whether or not there is a sub-license of the software to the customer.
- Separately stated data transfer fees are taxable telecommunications services when sold to customers in Massachusetts provided the sourcing rules in 830 CMR 64H.1.6(4) are met.
- 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.
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). 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).
Telecommunications services are broadly defined in G.L. c. 64H, § 1, and 830 CMR 64H.1.6, as any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiber‑optics, laser, microwave, radio, satellite, or similar facilities, but not including cable television. St. 1990, c. 121, § 42. In general, telecommunications services include telephone and other transmissions between or among specific parties or specific locations, but do not include public broadcasts. A seller of telecommunications services may give a resale certificate for services purchased from other vendors under the rules in 830 CMR 64H.1.6(6).
The Commissioner applies these principles to the stated facts describing the four types of products sold by Company as follows:
- Cloud Computing with no Software Provided by Seller. Sales of Cloud Computing that either use the customer’s own software (not purchased from Company) or use open-source (free) software available on the Internet 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 with Prewritten Software provided by Seller. Sales of Cloud Computing that include software licensed by Company are taxable. The cost of the software license is included in the charge to the customer. This result is unchanged by the facts that there is (a) no contractual sub-licensing of software from Company to its customers and (b) no separately stated charge for the software. In this transaction, the charges for Cloud Computing are for services that are part of the sales price of the taxable prewritten software. Also, the fact that the software is not downloaded onto the customer’s computer is not determinative. The object of the transaction is acquiring the right to use the software as described in 830 CMR 64H.1.3(3).
- Data Transfer Fees. Based on the facts supplied, this charge relates to data transferred to/from the customer in Massachusetts and Company’s server located outside of Massachusetts. Interstate telecommunications are deemed to occur and taxable in Massachusetts if the telecommunication either originates or is received at a location within Massachusetts and the service is charged to a service address in Massachusetts. 830 CMR 64H.1.6(4). Taxable telecommunications include charges for transmission of data or information by various means, including transmission over the Internet. See TIR 05-8, Section VII. A. 1. and 11.
- 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 only computing capacity or storage are being sold, provided that the transaction does not also include access to prewritten software or applications provided by the seller. As to the specific products described in this ruling request, the sales of Cloud Computing involving bundled charges for prewritten software and the charges for data transfer are taxable; the other services described in this ruling are not. Since Taxpayer has come forward voluntarily, it may file with the Voluntary Disclosure Unit of the Audit Division under the provisions of TIR 11-1 concerning its liability for taxable sales in prior periods.
Very truly yours,
Commissioner of Revenue