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.
