June 4, 2013
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.
Company is a Delaware corporation that is domiciled in ***********. On ******************, Company was acquired by a ********** holding company in a stock sale. On ******************, the Company’s assets were again sold to ***************, who now operates the VEC line of business as discussed below. The Company continues to operate in the same manner as it did prior to these sales. As part of due diligence associated with these sales, Company seeks guidance with respect to the sales tax treatment of sales of its products in Massachusetts.
Company’s Virtual Event Center (“VEC” or “Event”) is an event platform that consists of a customizable website that allows qualified and registered customers to gain entry for the purpose of creating their own on-line event. Customers, attendants, sponsors and presenters utilize text, audio, video and voice technologies to interact among the multiple venues in the event. A typical event with a customized venue includes (i) an entranceway branded by customers and/or customer sponsors; (ii) a conference hall for keynote speeches, panels and multiple conference sessions; (iii) an exhibition hall with vendors/sponsor booths; (iv) a resource center; and (v) professional networking lounges.
Company Intellectual Property (“Company IP”) is defined by Company as including “concepts, methodologies, trade secrets, related writings and works of authorship, and other intellectual property rights that consist of and underlie the configuration and execution of the Event, excluding any and all customer content.” Company IP is embodied in software that supports Internet based events where Company’s customers want to (i) communicate with geographically dispersed attendants; (ii) provide an interactive event experience; (iii) customize the experience to the attendant; and/or (iv) promote a particular idea, concept, brand and/or product. Persons accessing the VEC (“attendants”) typically have an employee or contractual relationship or connection to the customer who subscribes to the offering which enables them to access the Event. Certain on-line events are offered to the general public (e.g., virtual job fairs). Events are scalable, global and significantly less expensive than events that take place in the physical world.
Company’s customers access the VEC or Event website via their personal Internet connection. Software is not downloaded by the customer. All content used for the customer’s event is provided to Company by the customer. Customers upload data onto the Internet which is stored on Company’s server. Upon subscription, customers receive a license to use the VEC 9.0 version, which is the software used to create their event. Customers cannot control or access Company’s operating systems, hardware and/or network infrastructure within the Company data center while producing an event. However, customers use the “design tools” provided to them by VEC 9.0, to design their own event website. Through use of these “design tools” the customer uses the software to personally create and brand their event.
Company charges its customers a fixed rate which allows access to the Event website for a fixed period of time as stated in the customer’s contract with Company. The fee generally represents the minimum charge to be incurred by the customer before any additional Web or service add-ons. The fees for additional, optional Web services and other professional services depend on customer event requirements and features. Any added features or changes to the contract, after execution of the contract, are managed through a change order process.
Company’s Fees for Use of the VEC and Company IP Software Include:
- A fixed fee for a defined event time period based on criteria such as location or attendant hours (e.g., fixed price based on 10,000 attendant hours)
- Basic Web hosting for the event.
- Additional fixed fee items outside the standard event fee such as additional halls, booths, etc. which may be added as the event commences.
- Self-service design tools for VEC.
- Broadcasting of audio or video in both live and on-demand environment from the cloud.
Company provides event project management services to the extent that it involves using technology effectively and sharing “best practices” for conducting a virtual event. Company provides the customer with reports related to attendant demographics and responses to optional surveys while at the event. Data is not shared with third parties nor is it retained for purposes other than the event itself.
Company’s Fees for Optional Services Include:
- Non-standard additional assistance with design execution and event planning through VEC.
- Non-standard additional technical project management.
- Language translation services.
- Technical support and troubleshooting.
Whether sales of subscriptions to Company’s Virtual Event Center and Company IP software to Massachusetts customers, bundled with any or all of the additional offerings described above, are subject to the Massachusetts sales and use tax.
The Department rules that sales of subscriptions to Company’s Virtual Event Center and Company IP software to Massachusetts customers, whether sold alone or bundled with any of the additional offerings and included in one subscription price, are subject to Massachusetts sales or use tax for the reasons discussed below. The Department also rules that some of the taxpayer’s event project management services, as described above, may be personal or professional services that may not be subject to Massachusetts sales and use tax if such services were unbundled, that is, optional and separately stated on the customer’s invoice.
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 a 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 (LR) 12-10, the taxpayer sold On-line Conferencing software similar to the product offered by Company in the present case. The taxpayer’s customers were able to navigate, choose and use tools, such as power point, spreadsheets and tables, made available through the taxpayer’s software, to set up on-line meetings and/or conferences. The Department ruled in LR 12-10 that sales of the taxpayer’s On-line Conferencing product as well as its other products were subject to the Massachusetts sales and use tax as the object of the transaction was the use of the software.
In the present case, Customers use the "design tools" offered through the software to create a customized on-line trade show or event. Thus, the Department rules that the use of the software is the object of the transaction. Moreover, in both LR 12-10 and here, the Company’s customers have been explicitly given a license to use the software which is generally a taxable transaction.
Company’s VEC event platform and Company IP software allow customers to create and customize an on-line event by providing a unique software application that stores and displays information in a variety of ways. Customers can create conferences, networking lounges, exhibition halls or trade shows. Attendants of the on-line event can navigate the halls, booths and kiosks within the event, where they can obtain, through audio, video, text and images, information about the customer’s products. We rule that this is achieved through the customer’s use of Company’s pre-written software and, therefore, sales of a subscription to this offering are subject to the Massachusetts sales and use tax. The object of the transaction is the use of the software to create an on-line event that is made to the exact specifications of the customer by the customer.
Company’s employees may provide some personal or professional services in connection with this offering such as assistance with design execution and event planning through VEC, technical project management, and/or language translation services. These services may involve interaction between Company’s employees and customers on an ongoing basis. However, these services are subject to the sales tax in Massachusetts when sold by Company in a bundled transaction with the prewritten software described above, for one subscription price. If Company were to sell any of the personal or professional services as a separately stated option, they may not be 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. If Company were to sell personal or professional services, as a separate, unbundled option, then Company’s sales of such services in Massachusetts may be treated as non-taxable personal or professional services.
Very truly yours,
Commissioner of Revenue