May 29, 2014




You have requested a letter ruling on behalf of your client, ************************************** ************* (the “Company”) with respect to the Massachusetts sales and use tax.  You state that the Company provides compliance and training programs that help build organizational integrity and manage compliance risk for various industries.  You ask whether Company’s on-line training programs would be subject to the sales tax imposed under G.L. c. 64H, § 2 when sold to Massachusetts customers.  The following is your representation of the facts upon which we base this ruling.

I.  FACTS

The Company is a ************* corporation that develops and sells training applications to customers in various industries. Customers can choose from a library of training programs. The Company provides the content for these training programs, but the content can also be customized for individual customers. Company can add a corporation’s name, branding and colors, etc.  Company describes the content as its proprietary information.  Company’s training programs are not delivered in tangible form, but are available for purchase on-line and hosted on a third party server.  Available programs address corporate compliance management, including Code of Conduct, Compliance and Ethics Learning, Case Management, and Operationalizing the business processes of a compliance office.  Customers create an account that allows them access to the training programs through use of an ID number and password.

The training programs are interactive, generally including some form of participation by the customer, such as embedded questions and quizzes.  The training programs contain both an audio and visual component.  Customers do not have the ability to direct or control the underlying software.  In fact, the training applications are completely automated modules.  You believe that although Company’s customers have the limited ability to answer questions and take quizzes, this limited functionality is not sufficient to render the transaction a sale of software.  Moreover, you assert that the object of the transaction is the information provided in the training, not use of Company’s software application.
 

II.  ISSUE

Whether sales of Company’s compliance and ethics on-line training programs to Massachusetts customers are subject to the Massachusetts sales and use tax.
 

III.  RULING

Company’s on-line training programs  provide the customer with access to digital content in the Company’s library of training modules which involve audio, graphics and some minor user interaction.  Since the object of the transaction is access to the information provided by the seller, this product will be treated as database access services that are not subject to Massachusetts sales and use tax if such services are purchased alone or are separately stated on a customer’s invoice from any other optional services or business management solutions sold by Company.
 

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 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 sale 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 under Massachusetts sales and use tax laws.  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.  Generally, Massachusetts does not impose sales/use tax on electronically provided reports of standard information, reports of personal and individual information (even if provided in tangible form), or database access.  See 830 CMR 64H.1.3 (8) and (13).

Under the facts provided here, the Department rules that on-line training programs are not subject to the sales tax in Massachusetts when sold by Company in a single or separately stated transaction. Where the Company is the primary source of the content or information accessed by customers on-line, and customers are purchasing a Web-based training program, the Department rules that the object of the transaction is the information and not the use of any software used to communicate that information to the user.  This result is unchanged if the on-line training is customized to a specific customer by adding a corporation’s name, branding and colors, etc., or if the training materials are downloaded or printed by the customer using its own equipment and paper, whether or not an additional charge is applied.

Also, please note that any training materials provided by Company to the customer in tangible form, such as printouts or disks would be subject to tax.  In addition, any additional features purchased by the customer for operation or use by the customer, such as the use of Company’s software to generate reports, or to aggregate data for management, distribution or reporting of on-line training statistics would be subject to tax in Massachusetts.  Although the issue is not raised in this ruling request, we note that the sale of prewritten software that enables the purchaser to create its own training programs may be taxable, depending on the facts. 
 

V.  CONCLUSION

We rule that Company’s compliance and ethics training solutions, sold alone, provide the customer with access to digital content in the Company’s library of training modules which involve audio, graphics and some minor user interaction.  Since the object of the transaction is access to the information provided by the seller, this product will be treated as database access services that are not subject to the Massachusetts sales tax.  The Commissioner will consider all the facts and circumstances when determining whether a product is providing a service or is 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.  If Company were to offer its on-line training programs in a bundled transaction that included the transfer or use of prewritten software, then Company’s sales of such programs in Massachusetts may be subject to tax.


Very truly yours,

/s/Amy Pitter

Amy Pitter
Commissioner of Revenue


AP:MTF:wm

LR 14-4