February 10, 2014
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 with its principal place of business located in New York City. Company also has an office located in **************, MA. Company is in the business of selling access to a website that contains a large database of information regarding suppliers and purchasers of various products. The database is a means of identifying sources of products for prospective buyers and locating prospective buyers of products for suppliers. Essentially, the website is a matchmaker for suppliers and purchasers of goods. Company gathers information from many sources, including customer supplied data, Dun & Bradstreet and U.S. Customs data. The database contains information regarding waterborne shipments and also provides general trends data for top exporters and most active trade ports.
Customers can obtain information about businesses, and recent shipments they have made, including accuracy of filling orders, reliability, and customer service. Customers can identify suppliers and manufacturers in over 190 countries. A keyword search for anything from coffee beans to guitars returns results from the database of over one million suppliers worldwide. Customers can also limit their search to a specific country or weed out suppliers based on ratings, red flags or number of recent shipments, to find the most reliable and most active suppliers. Company’s database not only provides customers important details and contact information for suppliers, but also shows who their customers are, so customers can identify which suppliers their competitors are purchasing from.
In addition, suppliers and purchasers can enter a profile of their business for all other customers to view on the website. Customers can make notes about a supplier or purchaser which can be kept confidential or made available to other customers. Customers can upload information about their own business or about other businesses. Customers can receive advice from a Company analyst who will interpret data on the website and who can provide such advice in the form of a report. Customers can also email suppliers or purchasers through Company’s website.
Company’s software organizes data, extracts relevant information from the data, combines data with other data, and identifies patterns in data, resulting in a database that is easily accessible and customer friendly. Customers enter an agreement that allows them to access the website to obtain data. No software is downloaded by the customer. Company claims that its software is used by the Company, not the customer, in collecting and organizing data in a manner that allows the customer easy access to the data.
Currently, Company offers three different plans that contain different content and are available at different prices. Plans differ based on the number of available databases and personal services provided. Each plan includes the ability to send an unlimited number of messages to suppliers and to store data for future use at no additional cost to the customer. General customer support services provided by telephone or email are available to all subscribers. Analyst support, which includes reports specifically prepared for customers, is available as part of some of the more expensive plans. Reports are prepared for and emailed to individual customers, and such reports are not substantially incorporated into reports furnished to other customers.
Are sales of subscriptions to Company’s database to Massachusetts customers, whether or not they are bundled with any additional support or services described above, subject to the Massachusetts sales and use tax?
Company’s sales to Massachusetts customers of subscriptions to its database, bundled with any additional support or services described above, and included in one subscription price, or sold separately, are not 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 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. 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 nontaxable services such as database access or data processing, the object of the transaction may be the nontaxable service rather than a sale of software. See LR 12-5. The use of software to make inquiries in a seller’s database is generally not treated as a sale of software. See 830 CMR 64H.1.3(14)(a); LR 10-1. If a taxpayer is providing the source of the content or information, which is accessed by customers on-line, the Department has ruled that this qualifies as “database services” and is not subject to the Massachusetts sales and use tax. See 830 CMR 64H.1.3(13)(a); See also LR 11-2.
Purchases of subscriptions to Company’s database, as described above, do not involve a transfer of prewritten software, either in tangible or electronic form, or a license to use software on a server hosted by Company or a third party, as described in 830 CMR 64H.1.3(3)(a). The object of the transaction is to access data for the purpose of obtaining information, including reports, about prospective vendors and purchasers of goods, not the use of any software used to make that information available to the user.
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 prewritten 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 offering is the sale of database services and as such is not subject to the Massachusetts sales tax.
Very truly yours,
Commissioner of Revenue