| Date: | 03/23/2017 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Sales and Use Tax
March 23, 2017
On behalf of your client ************************************* (“Company”), you seek guidance with respect to the Massachusetts sales and use tax as it applies to the lease of a mobile point of sale device (herein “Device”) that contains pre-loaded software, which is used by restaurants for business and entertainment purposes. You request a letter ruling to clarify the sales tax treatment of certain transactions related to the Device under G.L. c. 64H, §§ 1 and 2. The following is your representation of the facts upon which we base this ruling.
I. FACTS
Company is the manufacturer of a mobile point of sale device specifically designed for the casual dining restaurant industry to enhance a restaurant customer’s satisfaction and increase food sales and restaurant efficiencies. The Device has been shown to increase food and beverage sales, quicken table turnover and increase customer satisfaction. The Device is a small android tablet, approximately seven inches by five inches, with a touch screen interface that is placed on each table within a restaurant. Company retains ownership of the Device and charges restaurants what it refers to as a “service fee” for each Device leased to a restaurant. Company is currently not charging sales tax on this transaction.
A restaurant that leases the Device obtains it with prewritten software that is pre-loaded on the Device and is used by the restaurant to facilitate and/or enhance its business. Restaurant owners and their customers can use the Device to facilitate order placement, request the check, scan coupons and pay the bill directly from the table using cash, credit, debit or gift cards. The Device provides access to detailed descriptions of food items on the menu, including dietary and nutritional information, and pictures and videos of food preparation for customer viewing. Additionally, at the time of payment, the Device is programmed to seek information from the customer concerning the dining experience, including prompts for customer satisfaction surveys, and enrollment in customer loyalty programs. The pre-loaded software on the Device includes a separate section, “Premium Content,” which is ancillary to the primary purpose of the Device. The restaurant customer is given the option to select and access licensed software programs preloaded on the Device for a one-time charge, referred to as a “Premium License Fee.” A customer that selects this option gains access to the Premium Content, which allows the customer to use the licensed software to gain access to and use non-taxable items such as educational applications, puzzles, cartoons and videos, as well as a limited number of taxable items such as games.[1] The one-time Premium License Fee provides unlimited access to all of the Premium Content items available for the duration of the dining experience. When a restaurant customer chooses to pay the Premium License Fee, the restaurant collects and temporarily retains the fee on the Company’s behalf. The Premium License Fee is added to and separately stated on the customer’s restaurant bill. Whether Company shares with the restaurant the proceeds from the Premium License Fees collected is dependent upon the terms of the contract between Company and the individual restaurant. Company is not aware whether any Massachusetts restaurants have been collecting sales tax on the Premium License Fee charged to customers.
II. ISSUES
1. Whether the lease of the Device, which includes prewritten software pre-loaded on the Device, by Company to a restaurant in Massachusetts, is subject to the Massachusetts sales tax under G.L. c. 64H, §§ 1, 2?
2. Whether the Premium License Fee, which allows a restaurant’s customer to utilize the Device for the purpose of accessing and using Premium Content software, pre-loaded on the Device, is subject to the Massachusetts sales tax under G.L. c. 64H, §§ 1, 2?
III. RULINGS
1. The lease of the Device, including prewritten software pre-loaded on the Device by Company to a restaurant in Massachusetts, is subject to the Massachusetts sales and use tax under G.L. c. 64H, §§ 1, 2 as the Device and its pre-loaded software are both tangible personal property. Company is responsible for collecting and remitting the tax on this transaction.
2. If a customer chooses to pay the Premium License Fee to access and use Premium Content software pre-loaded on the Device, such charge includes the ability to access both taxable and non-taxable items and the total charge is subject to the Massachusetts sales and use tax under G.L. c. 64H, §§ 1, 2. The restaurant is responsible for collecting and remitting the tax on this transaction.[2]
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. G.L. c. 64H, §§ 1, 2. Every vendor engaged in business in the Commonwealth is required to register with the Department of Revenue (“Department”) and collect sales tax in accordance with G.L. c. 64H, § 7 and G.L. c. 62C, § 67. A retail sale is defined as “a sale of tangible personal property for any purpose other than resale in the regular course of business.” G.L. c. 64H, § 1. See also 830 CMR 64H.8.1. The sales tax is calculated based on the sales price of the tangible personal property sold. “Sales price” is defined as the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise. G.L. c. 64H, § 1.
The rules relating to tax on computer hardware and software are set forth 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.
Prewritten computer software or prewritten software, also known as canned software and standardized software, is defined as computer software, including prewritten upgrades, which is not designed and developed by the author or other creator to the specifications of a specific purchaser. See 830 CMR 64H.1.3(2).
The Device is tangible personal property the lease of which is subject to the sales tax under G.L. c. 64H, § 2. The software pre-loaded on the Device is neither designed nor developed by the Company to the specifications of any specific restaurant. Moreover, Company does not perform any modifications or enhancements to the software for any restaurant. The Premium Content is universally available to each restaurant that elects to lease the Device. Thus, the software pre-loaded on the Device is “prewritten software” and is subject to the sales tax pursuant to 830 CMR 64H.1.3(2). Additionally, the Device and its software are used by restaurants for numerous business purposes, such as to facilitate customer orders, check-out and bill payment, to describe dietary and nutritional information of food on the menu, and to elicit customer satisfaction surveys and enrollment in customer loyalty programs.
Payment of the Premium License Fee by a restaurant’s customer allows the customer to gain access to and use Premium Content pre-loaded on the Device. The Premium Content includes both taxable and nontaxable items, such as educational applications, puzzles, videos and games. The Premium Content is available only to customers that have agreed to pay the Premium License Fee. Generally, where the object of the transaction is to use software to play a game, the sale involves the transfer of a license or right to use pre-written software and is subject to tax under G.L. c. 64H, as described in 830 CMR 64H.1.3(3)(a). In cases where a game is accessed and/or downloaded by a customer free of charge, no sale occurs and therefore the sales tax does not apply. Massachusetts sales tax does not apply to sales of other digital products in general. “Digital products” are defined as products that are transferred electronically, including downloaded music, books and videos obtained on-line. Thus, on-line access to news, books, magazines, sports, social media, music and streaming video is not subject to sales tax. See 830 CMR 64H.1.3(13); Technical Information Release 05-8.
The Department concludes that the “service fee” paid by a restaurant to Company for the lease of the Device, which includes prewritten software pre-loaded on the Device, constitutes a sale of tangible personal property that is subject to the sales tax under G.L. c. 64H, §§ 1, 2. The Premium License Fee, which provides access to and use of Premium Content located on the Device, in forms that are both taxable and nontaxable, for one price, is an additional taxable transfer of a license or right to use prewritten software under G.L. c. 64H, §§ 1, 2. The total Premium License Fee charged is subject to tax and must be separately stated on a restaurant customer’s bill. Sales tax is imposed on the Premium License Fee charged to the customer separate and apart from any other charges subject to other taxes[3] and should be remitted to the Department pursuant to G.L. c. 64H, § 2.[4]
V. CONCLUSION
The lease of the Device by a restaurant, together with its pre-loaded software, is subject to the Massachusetts sales and use tax. Company is responsible for collecting the sales tax at the time it charges a service fee to a restaurant, on the total sales price of the Device, which includes all charges for prewritten software pre-loaded on the Device. Additionally, the Premium License Fee charged by a restaurant to its customers for access to and use of Premium Content located on the Device while dining, is a taxable transfer of a license or right to use prewritten software. The restaurant is responsible for collecting sales tax on the Premium License Fee charged to its customer, and for remitting it to the Department.
Very truly yours,
Michael J. Heffernan
Michael J. Heffernan
Commissioner of Revenue
MJH:RHF:wem
LR 17-1
[1] The software accessed on the Device by the customer is neither designed nor developed by the Company to the specifications of any specific restaurant.
[2] Note that a restaurant, as the consumer of the software pre-loaded on the Device, reaches an agreement with Company regarding whether it will charge its customers for use of the Premium Content and what it will do with such proceeds. If the taxable items included in the sale of the Premium Content were separately stated from the nontaxable items on the customer’s bill, then only the charges for the taxable items would be subject to the sales tax.
[3] Such taxes may include the sales tax on meals under G.L. c. 64H, and the local option sales tax on meals tax under G.L. c. 64L.
[4] Note that if charges for the taxable items of Premium Content located on the Device were separately stated on the bill to a restaurant’s customer, then only the taxable items would be subject to tax.