|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Sales and Use Tax
March 11, 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 clients. 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’s products enable its clients to capture, display and analyze on-line consumer-generated ratings and reviews, questions and answers, stories, recommendations, photographs, videos and other information about the client’s products, services or brands. Through a combination of Company’s technology and personalized services, clients can build an on-line community which allows their customer’s voices to be advertisements for the client’s product or brand. In addition, Company’s social media marketing and advertising solutions automatically distribute information among retail websites both within and outside the Company network (“syndication”). Specifically, Company’s Internet-based offerings include the following components:
(a) “Primary Offering”
Company provides through the use of its proprietary software, Primary Offering, an automated software system that is embedded onto the client’s website or other on-line properties, such as Facebook. The software collects, organizes and displays customer ratings, questions, answers and stories on the customer’s website or Facebook page. It is offered as a bundled “service” that Company’s clients pay for in the form of a subscription agreement. The subscription is not formally structured as a license or right to use or control the software that is embedded on the client’s website. However, clients can use the Dataview component of the software to view data and answer “Q & A” questions for its customers.
Company customizes the look and feel of its software to match the design of its client’s website and other on-line offerings, effectively “adding to” the creation of the client’s website. Primary Offering is designed to increase sales and lower returns by allowing the clients’ customers to make informed choices about the products they buy. Clients gain insight into how consumers buy, what they value most and how the client’s brand can fulfill their customers’ needs, so they can market these attributes strategically to current and future customers.
Company’s Primary Offering includes: “******* "Reviews" ********** (allows Company’s clients to examine the opinions of other customers regarding products), ********* (“Q & A”) (allows Company’s clients to answer questions about specific products), “StoryTeller” (allows clients to observe customers’ feedback), “Moderation” (Company’s employees filter or moderate on-line “word-of-mouth” on behalf of its clients), “Syndication” (automatically allows manufacturers that have Company-powered User Generated Content on their website to syndicate that content to selected retailers), “ShoppersAsk” (allows clients to see shopper questions across their entire network through a single portal); and “DataView” (allows clients to view and track data such as how many customers purchased a product after reading a review). Charges for this Offering are usually bundled in one subscription price.
“Moderation” involves Company's employees filtering on-line reviews captured on the client’s website, continuously (24 hours per day, 365 days per year), and providing active support for 21 languages and multiple dialects. Content moderators filter customer reviews for irrelevant, obscene or illegal material to ensure the client’s valuable brand is protected. Content moderators also assist in attaching pre-defined labels, or “meta-tags,” to categorize on-line word of mouth, such as shipping complaints, liability concerns, inaccurate product descriptions and product suggestions which highlight product and/or marketing issues.
(b) “Customer Insights” (“CI”)
Customer Insights allows clients to perform sophisticated trend and pattern analysis on the information collected from consumers. The CI application is provided as “Software-as-a-Service” (“SaaS”) and is always sold and billed separately from the Primary Offering. The CI software extracts insights on consumer preferences from customer reviews and conversations and helps the client understand how different customers and customer segments experience their products. It reveals customer purchase motivations by displaying product and service experiences, and highlights product flaws and improvement possibilities. Ultimately, CI allows the client to drive highly-targeted marketing campaigns.
(c) “Client Services Team”
Company’s Client Services Team works with the client to assist Company’s social media marketing platform in maximizing the impact of on-line product reviews and feedback. These employees are social media marketing advisors. They work as a liaison between the implementation team and the client to ensure that implementation of the software compliments the social media marketing strategies that have been developed with the client. These employees typically have marketing experience and work with the client to set their social commerce marketing strategies, which are reassessed and reviewed on an ongoing basis.
They also advise clients on how to integrate customer reviews into key business processes, such as business analytics, improving product design, targeting research & development, marketing and sales efforts, and improving customer service issues.
1) Whether sales of Primary Offering to Massachusetts clients, bundled with any or all of the additional offerings described above, are subject to the Massachusetts sales and use tax.
2) Whether sales of Customer Insights to Massachusetts clients, bundled with any or all of the additional offerings described above, are subject to the Massachusetts sales and use tax.
3) Whether sales of the Client Services Team offering to Massachusetts clients, bundled with any or all of the additional offerings described above, are subject to the Massachusetts sales and use tax.
1) The Department rules that sales of Primary Offering to Massachusetts clients, 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. However, the Department also rules that the taxpayer’s content moderation services, called Moderation, which are part of Primary Offering as described above, are personal or professional services that would 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.
2) The Department rules that sales of Customer Insights to Massachusetts clients, 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.
3) The Department rules that sales of the Client Services Team offering to Massachusetts clients, if bundled with any or all of the additional offerings and included in one subscription price, are subject to Massachusetts sales or use tax for the reasons discussed below. However, the Department rules that sales of the Client Services Team offering would not be subject to Massachusetts sales or 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 in 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 12-13, the taxpayer’s products or offerings were similar to the products offered by Company in the present case. In that case, the Company’s clients were explicitly given a license to use the software. The Department ruled that sales of such products were subject to the Massachusetts sales and use tax. The Department also ruled in LR 12-13 that products that operate via default parameters on an automated basis, without any interaction or manipulation from the customer, will generally be treated as pre-written software, the transfer of the use of which is subject to the sales and use tax in Massachusetts.
Company’s Primary Offering software functions on an automated basis with little interaction from the Company or Company’s employees. Primary Offering involves several components but mainly consists of software that automatically collects, manages and displays customer ratings and embeds the information on the client’s Facebook page, which in turn allows the client who purchases the offering from Company to go on-line and view such ratings and answer “Q&A” questions for its customers. We rule that sales of Primary Offering are subject to the Massachusetts sales and use tax because the client purchases the use of the pre-written software to manage its consumer and marketing information, and also uses the software to connect with customers, thereby improving customer satisfaction and maintaining a relationship with customers.
Primary Offering includes the component, Moderation, which would not be subject to the sales and use tax if it were optional and separately stated. Moderation involves employees that work around the clock filtering clients’ customers’ ratings and reviews for irrelevant, obscene or illegal material to ensure the clients’ valuable brands are protected. Applying the facts as presented, we rule that although some personal services may be provided, such services are deemed inconsequential if they are bundled with other taxable products offered by Company for one subscription price. If Moderation services were optional and separately stated on the invoice provided to customer, such services would not be subject to the Massachusetts sales and use tax.
Customer Insights allows the client to drive highly-targeted marketing campaigns by providing the client with a software application that extracts information from customer data and conversations and helps clients understand how different customers and customer segments experience their products. The client uses the software to perform sophisticated trend and pattern analysis on the information collected from consumers. We rule that this is a use of software by the client and, therefore, sales of this offering are subject to the Massachusetts sales and use tax.
Company’s Client Services Team works with clients as social media marketing advisors. These employees work with the client to set their social commerce marketing strategies, which are reassessed and reviewed on an ongoing basis. Since these services involve substantial interaction between Company’s employees and clients on a continual basis, we view this as a non-taxable service. However, this offering is subject to the sales tax in Massachusetts when it is sold by Company as a bundled transaction with the prewritten software described above, for one subscription price. If the Company sold this offering as a separately stated option, it would 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 the Moderation services and/or the Client Services Team offering as a separate, unbundled option, then Company’s sales of such offerings in Massachusetts would be non-taxable personal or professional services.
Very truly yours,
Commissioner of Revenue