|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Sales and Use Tax
January 8, 2016
On behalf of your client ********** ******* (“**********” or the “Company”), you have requested a letter ruling with respect to the Massachusetts sales and use tax. Specifically, you request a ruling on whether sales of Company’s “employee recognition/rewards programs” (Hereinafter “ERP”), as described in your request, are subject to the sales and use tax imposed under G.L. c. 64H, §§ 1 and 2. The following is your representation of the facts upon which we base this ruling.
Company is a privately held multinational company headquartered in *******, *******, with a United States subsidiary named **********,*** (hereinafter “Inc.”), located in Massachusetts. Company provides its customers with online programs that allow a customer’s employees to recognize and reward each other for performing well, reaching employment milestones, and/or exhibiting behaviors that demonstrate company values.
In providing online ERPs, Company, through its subsidiary, Inc., works with customers’ human resources departments to create rewards programs that meet customers’ specific needs. Once an ERP has been finalized, Inc. configures and maintains a website that is used to administer the program. Each program and website is custom designed and configured. The ERP website is hosted by and links to Company’s online marketplace platform. Customers and their employees use the website to participate in the rewards program, and to retrieve custom reports on how the program is working.
Company’s website can be accessed through a customer’s human resources portal or through a separate username/password log-in. Based on the specific program parameters chosen and information provided to Company, customers authorize the granting of various abilities within the website. For example, a customer may provide a list of all of the employees who can participate in the program as well as a list of all employees who are allowed to nominate and/or approve rewards within the program. Company or Inc. then uploads these names onto the website and grants the appropriate authority to the various employees. If the customer wants to change the employees who can nominate others or approve requests, the customer must submit these changes for upload by Company. Other changes to the program, such as modifying reward values or content are submitted to Inc. and then Inc.’s employees make the changes to the website. Accordingly, customers cannot directly implement, change or manipulate any functionality of the website or change any of the parameters of the rewards program. All changes must be made by Company or Inc. Customers can, however, grant their employees access to the website through an application available for mobile devices. There is no additional charge for the mobile application.
Company’s service agreement grants its customer a “non-exclusive, non-transferrable right and license to use and access the website and the related software for its administration and fulfillment of any Program.” However, as stated above, Company’s customers have no control over the platform or website itself. Customers can run reports on how the program is being used and who has been giving and receiving rewards, but this information is proprietary to each individual customer.
Company uses information from customers’ reports to evaluate the effectiveness of its services. The services that are provided for the startup of a customized website include (1) consulting services regarding a customer’s specific needs for an ERP; (2) creation of the customer’s tailored recognition and rewards website; and (3) training customers’ employees for effective use of the website. The Company or Inc. also manages the marketplace website, to which the customers’ employees have access for browsing or tracking orders. Company’s customers notify Company if there is merchandise it wants added to or removed from the website and Company makes the change. Company also manages the rewards program website for its customers, processing employee nominations, notifying employees via email that they have been nominated or rewarded. Company then issues rewards electronically to employees who have earned them. Questions regarding the spending of a reward, or the shipment of merchandise or gift cards, are made to Company’s call center and handled by Company’s employees. In addition, Company’s employees are in frequent contact with its customers to update the customers’ websites with respect to which employees have access to the sites, what types of rewards are provided, and what types of rewards have been selected by employees in the past. Company also maintains the overall appearance and design features of its customers' websites.
Company’s ERPs can be structured in a number of ways. However, generally, either fellow colleagues nominate each other for rewards or employees are honored based on their length of time with the customer’s business. Employees receive reward points called “Company Certificates” which may be redeemed for gift cards or merchandise from Company’s marketplace website. Company charges its customers the U.S. dollar value of the Company Certificates plus transaction fees. Transaction fees are calculated as a percentage of the U.S. dollar value of the Company Certificates and are incurred upon each issuance of a Company Certificate. If no Company Certificates are issued in a particular period, Company does not charge any transaction fees during that period. Customers may request certain vendors or merchandise, but Company makes the ultimate decision on what is offered via its marketplace website.
To acquire merchandise for its marketplace website, Inc. purchases items from U.S. distributors and Company negotiates directly with retailers for gift cards. Merchandise items are purchased at wholesale prices and treated as sales for resale, with Inc. as Company’s purchasing agent in the U.S. Inc. provides a resale certificate, ST-4 to its merchandise suppliers. When employees purchase merchandise, Company has its suppliers drop ship the merchandise to its customers’ employees upon redemption of the employee’s Company Certificates. The price of the merchandise (including shipping, handling and sales tax) is set by Company and is displayed on its marketplace website.
In the case of gift cards, Company purchases them at a retailer’s store and sells them on its marketplace website for the gift card’s actual value plus shipping and handling. Vendor gift cards are purchased by Company, held in inventory, and upon redemption of employees’ Company Certificates, Inc. ships the gift card directly to the employee. Both merchandise and gift cards are purchased by the employees with their Company Certificates earned in the ERP. Multiple Company Certificates can be combined to purchase a single item. Currently, Company collects and remits sales tax on the retail sales value of the taxable merchandise sold to Massachusetts customers paid with the employees’ Company Certificates, at the time of redemption of the Company Certificate. All sales associated with redemption of Company Certificates and the applicable sales tax are retained in Company’s database. No sales tax is collected or remitted upon the sale of Company Certificates to customers or upon the use of Company Certificates to purchase gift cards.
1. Whether charges for the consulting, startup and website design of an online employee recognition program (ERP) as well as related program managing services sold by Company to Massachusetts customers are subject to the Massachusetts sales or use tax?
2. Whether transaction fees charged by Company to its customers (when “Company Certificates” are rewarded or redeemed) are subject to Massachusetts sales or use tax?
3. Whether the Massachusetts sales or use tax applies to sales of merchandise and/or gift cards sold by Company under the ERP, and if yes, to what extent does the tax apply to these transactions?
1. Charges for the consulting, startup and website design associated with Company’s online employee recognition programs and related program management services are not subject to the Massachusetts sales and use tax.
2. The object of the transaction is to obtain Company’s services, which consist of managing an online ERP, therefore the transaction fees associated with running the program, and specifically the fees associated with the reward or redemption of Company Certificates, are not subject to the sales and use tax.
3. Massachusetts sales and use tax applies to the retail sales price of merchandise in Massachusetts from the marketplace website. Company is responsible for collecting and remitting the sales or use tax when a customer’s employee redeems Company Certificates for merchandise offered through an ERP. Since taxable merchandise purchased with gift cards is taxed by the vendor at the time of purchase, Company is not liable for sales or use tax with respect to gift cards.
IV. LAW AND ANALYSIS
Massachusetts imposes a 6.25% sales tax on sales of telecommunication services and tangible personal property in 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. Generally, where the object of a transaction is to obtain services other than (a) the use of software or (b) standard reports of information on tangible media, the transaction is not subject to tax.
Sales of reports or other information on printed matter or magnetic media, which are sold or intended to be sold to two or more purchasers, are generally taxable. 830 CMR 64H.1.3(8)(a). Such reports may reflect collection, compilation, or analysis of information. Id. Examples include database files, mailing lists, market research, and surveys. Id. However, there is an exemption for sales of reports of individual information, whether printed or on magnetic media; such personal and individual information is not taxable if the report may not be or is not substantially incorporated into reports furnished to other persons. 830 CMR 64H.1.3(8)(b).
Generally, a resale certificate relieves a vendor from sales tax when the vendor will resell the item in the regular course of business or is unable to ascertain at the time of purchase whether the property will be sold or will be used for some other purpose. G.L. c. 64H, § 8(b). Additionally, pursuant to the Service Enterprises regulation found at 830 CMR 64H.1.1, a service enterprise may give a resale certificate to its vendor when the service enterprise purchases property that it intends to resell, or when it is unable to ascertain at the time of purchase whether it will sell the property separately or use it in a service transaction. 830 CMR 64H.1.1(4). If in addition to rendering a service, a service enterprise sells tangible personal property in the regular course of business, it is a retailer with respect to such sales and shall collect the sales tax from the customer. Id.
First, Company represents that it is providing non-taxable services that include consulting, establishing and starting up an ERP, designing a website, and managing the ERP. Company believes that the true object of the transaction is to contract with Company for the establishment and ongoing management of an ERP, not for the purchase of a software application to be used independently by customers for the purpose of running their own program. Although there is some use of the software for purposes of monitoring the program, nominating employees for rewards, and purchasing merchandise with Company Certificates, we agree with Company’s conclusion that such use is incidental to the true object of the transaction, which is to provide a service.
Second, since Company has established that the object of the transaction is to obtain Company’s services, which involve establishing and managing an online ERP, it follows that the transaction fees associated with running the program, and specifically the fees associated with the reward or redemption of Company Certificates, are not subject to the sales and use tax.
Third, Company is in the business of establishing and managing employee rewards programs, not in the business of selling tangible personal property as a vendor. However, Company purchases and resells merchandise to its customers in the ordinary course of its business of providing a service. The merchandise is charged to the customers separately from the ERP service and the sales tax is collected in the following manner. When an employee redeems his/her Company Certificates for a merchandise item, Company immediately purchases the merchandise at the wholesale price, takes title from the vendor, and then directs the vendor to drop ship the merchandise to the employee. The employee pays for the retail value of the merchandise, plus shipping and sales tax, by using the Company Certificates. The sales tax is collected by Company and remitted to the Department on the retail sales price of the merchandise. We rule that, as long as charges for sales of merchandise are separately stated from charges to customers for services provided with respect to ERPs, and sales tax is collected and remitted to the Department in a timely manner, Company’s treatment of these transactions is correct.
Finally, Company’s sales tax treatment of gift cards is correct. Company purchases the cards, holds them in inventory and displays them on Company’s marketplace website until an employee redeems Company Certificates for the gift card. The gift card is then shipped directly to the employee. When the employee redeems the gift card with a vendor, sales tax is collected at that time by the vendor with respect to taxable items being purchased with the gift card. See Letter Ruling 81-4.
The Department rules that charges for the consulting, startup, and website design associated with Company’s online employee recognition programs and related program management services are not subject to the Massachusetts sales and use tax. The object of the transaction is to obtain a rewards program and management of the program, which includes the provision of numerous services performed by Company’s employees as well as the provision of reports of individual and personal information unique to the customer purchasing the services. Therefore, the transaction fees associated with subscribing to, purchasing, or managing a rewards program, including transaction fees associated with administrative tasks performed by Company employees for the reward or redemption of Company Certificates, are not subject to the sales and use tax. However, with regard to purchases of items found on Company’s marketplace website that are made with Company Certificates, the applicable Massachusetts sales tax, on the retail sales price of taxable items, must be collected at the time of such purchases and remitted to the Department. Purchases of taxable merchandise made with gift cards that were purchased by employees with Company Certificates are subject to tax when redeemed with the vendor.
Very truly yours,
/s/Mark E. Nunnelly
Mark E. Nunnelly
Commissioner of Revenue