| Date: | 11/15/2024 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Regulatory Authority: | Massachusetts General Laws |
| Official Version: | Published by the Massachusetts Register |
830 CMR: DEPARTMENT OF REVENUE
830 CMR 64H:00: SALES AND USE TAX
830 CMR 64H.1.3 is repealed and replaced with the following:
830 CMR 64H.1.3: Computer Software and Related Transactions
(a) Statement of Purpose. The purpose of 830 CMR 64H.1.3 is to explain the application of the Massachusetts sales and use taxes to the sale or use of computer software and other related computer products and services.
(b) Background and Overview.
1. Taxable Sales of Computer Software. Generally, the retail sale of tangible personal property in Massachusetts is subject to tax. Tangible personal property includes standardized computer software, regardless of the method of delivery or access of such software. Thus, a sale of standardized software is taxable without regard to whether the software may, for example, be delivered on a traditional tangible medium, such as a disk; downloaded from the Internet or other source; or accessed by the user over the Internet from a remote server.
2. Taxable Use of Computer Software. The Massachusetts use tax complements the Massachusetts sales tax and is imposed on the purchase of tangible personal property for use, storage, or other consumption in Massachusetts, including the purchase of standardized computer software for use in Massachusetts, regardless of the method of delivery. The Massachusetts use tax is imposed on the license, or other transfer, of a right to use or consume software in Massachusetts, regardless of the method of delivery, use, or consumption.
3. Exception for Professional, Insurance, or Personal Service Transactions. An otherwise taxable transfer of software to a purchaser, including the transfer of a right to use the software, will not be taxable to the purchaser if the software is an inconsequential element of a professional, insurance, or personal service transaction for which no separate charge for the software is stated.
4. Sales Price. Where there is a taxable sale of software in Massachusetts or a taxable purchase of software for use in Massachusetts, the sales price subject to tax includes the value of any services provided as part of the sale. See M.G.L. c. 64H, § 1. For example, a charge for services that are a required component of a software transaction are part of the sale and are included in the taxable sales price of the software, whether or not the charges are separately stated on a customer invoice. A required service component of a software transaction includes, but is not limited to, any service that is necessary for the purchaser to use the software. Charges for optional services, not required for the purchase or operation of software, but that are nonetheless provided by a software vendor at the time of the transaction, are not subject to tax if the charges for the optional services are reasonable and separately stated in good faith on the customer invoice at the time of the transaction.
5. Apportionment of Computer Software Sales. Sales of software transferred for business use in both Massachusetts and in one or more other states are subject to tax in Massachusetts, however in some circumstances the tax may be apportioned. To apportion the tax, a business purchaser of the software is required to register with the Commissioner and submit information regarding its software use. See 830 CMR 64H.1.3(5). Upon such registration, the Commissioner will provide the registrant with certification information that the registrant can (1) provide to its software vendor to substantiate the registrant’s right to apportion the tax at the time of the transaction or (2) use later to apportion the tax. See id.
830 CMR 64H.1.3, applies to tax periods on and after XXXX, 2025.
(c) Outline of Topics. 830 CMR 64H.1.3 is organized as follows:
1. Statement of Purpose; Background and Overview; Outline of Topics
2. Definitions
3. Taxable Sales of Standardized Computer Software
4. Standardized Computer Software Transferred as a Part of or In Connection with a Service Transaction
5. Apportioned Tax on Business Software Sales
6. Effect on Previously Issued Public Written Statements
Commissioner. The Commissioner of Revenue or the Commissioner's duly authorized designee.
Custom Software. A software program prepared to the special order of a customer that is not standardized computer software.
Electronic. Technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.
Lease. A lease, rental, or any other temporary transfer of possession or control of tangible personal property, such as standardized computer software, for a consideration.
License. The right to access, use, copy, modify or sublicense software for a consideration including an electronic transfer of a right to access or use software over the Internet.
Sale. A sale within the meaning of M.G.L. c. 64H, § 1, including the lease or license of tangible personal property, such as standardized computer software. The sale of software includes the sale of the right to access and use software installed on a vendor’s servers even when those servers are located outside the state.
Sales Price. The total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise as defined by M.G.L. c. 64H, § 1. The sales price shall include any amount paid for services that are part of the sale.
Software or Computer Software. An algorithm or set of coded instructions designed to cause a computer or other hardware to perform a task. References to “software” refer to standardized computer software unless the context requires otherwise.
Software-as-a-Service (SaaS). The transfer for consideration of a license or a right to use standardized computer software that is accessed online through a remote server.
Software Apportionment Certificate. A certificate, issued by the Commissioner, that allows a business purchaser to apportion sales and use tax on its purchase of software for use in more than one state.
Standardized Computer Software or Standardized Software (also known as canned software, “off the shelf” software, and prewritten software). Computer software, applications, or “apps,” including upgrades, that are not designed and developed by the author or other creator to the specifications of a specific purchaser. Standardized computer software includes the circumstance where two or more standardized computer software programs or standardized portions thereof are combined, as such combination does not cause the product to become custom software.
State. For purposes of 830 CMR 64H.1.3, unless the context requires otherwise, any state of the United States, the District of Columbia, U.S. territories, including Guam, Puerto Rico, and the U.S. Virgin Islands, and foreign countries.
Tangible Personal Property. See M.G.L. c. 64H, § 1. The term tangible personal property includes standardized computer software.
Telecommunications Services. Any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities but not including cable television. Telecommunications services are deemed to be services for purposes of M.G.L. chapter 64H and chapter 64I. See M.G.L. c. 64H, § 1.
Transfer. With respect to standardized software, the conveyance of such software or the right to access and use such software for a consideration by any means, including by electronic delivery, load or leave, a license, lease, a transfer or rights to use such software as installed on a server located in another state, upgrades and license upgrades.
Vendor’s Servers. Computer hardware and/or software that processes requests and delivers data or software for a vendor of computer software.
(a) General Rule. Sales in Massachusetts of standardized software for a consideration and transfers of the right to access or use standardized software in Massachusetts for a consideration are subject to the Massachusetts sales and use tax.
(b) Types of Standardized Software; Types of Taxable Software Transactions. Sales and use tax apply to the retail transfer of all forms of standardized software, including, but not limited to application software, system software, database software, driver software, firmware, and compiler software. The taxability of a software transaction does not depend on the manner in which the software is transferred to, or otherwise made available for the use of, a customer. Thus, taxable sales include, but are not limited to, transactions effectuated by electronic delivery; a license to use software installed on a remote server; a lease or physical transfer; a transfer effectuated by a load and leave transaction; software upgrades and license updates. The taxability of a sales transaction is determined by whether software is transferred or otherwise made available for customer use, rather than by the labeling of the transaction by the parties. For example, characterization of a vendor’s product as a “solution” rather than as software does not determine the taxability of a transaction. Also, while many software transactions involve license agreements, a transaction with no express license may nevertheless be taxable as a sale of software where a customer receives access to or use of the software.
(c) Indicia that a Transaction is a Taxable Software Transaction. Some of the characteristics indicating that a transaction is a taxable sale of standardized software are described below. While these indicia may suggest that a particular transaction is a taxable software transaction, a transaction may constitute a taxable software transaction even in the absence of any or all of these indicia.
1. A contract or written agreement between the vendor and purchaser provides for a transfer of standardized computer software by license, sale, subscription, lease, or other means for a consideration. This is so in the case of a license whether the license is exclusive, non-exclusive and/or restricted or limited in some way.
2. A purchaser can access, use or control a vendor’s standardized computer software, whether it is installed on the purchaser’s own server or exists on the vendor’s server or a third-party server, and can enter its own information, manipulate that information, and/or produce reports.
3. The vendor provides the purchaser with software that functions automatically with little or no personal intervention by the vendor or the vendor’s employees other than as provided by the “help desk” or through similar technical support.
4. The vendor refers to itself as an Application Service Provider (ASP) or to its product as Software-as-a Service (SaaS) or uses similar references that typically indicate a taxable transaction, although the vendor’s characterization of itself or of its product is not ultimately determinative of the treatment of a transaction for tax purposes.
5. The software provides an organizational tool or function that is used by the purchaser.
(d) Particular Taxable Software Transactions.
1. Software-as-a-Service (SaaS) Transactions. SaaS transactions are taxable sales of standardized computer software. SaaS transactions include the transfer of the right to access and use such software whether the transfer is for a one-time payment, or by means of a monthly or annual subscription. SaaS transactions include sales, leases or licenses of online software that operates on an automated basis with little or no human intervention, and which can be said to provide a service to purchasers that might otherwise be performed by an individual.
2. Standardized Computer Software Upgrades and License Updates. Taxable sales of software include purchases of standardized computer software upgrades, updates, and fixes, including application software updates and license upgrades.
3. “In-app” Purchases. Purchases of enhancements to a software program are taxable sales of standardized software. Such enhancements include in-app purchases relating to software that can otherwise be accessed without charge, or software that can be accessed for a fixed charge without enhancements. For example, in-app purchases may enable a purchaser to operate a computer game with additional characters, scenery, or images, or with characters that possess enhanced abilities. Or in-app purchases may enable a purchaser to pay to use a version of an otherwise free software program that, because of the payment, does not contain advertising or that is available for use for longer time periods. A taxable in-app purchase may also take the form of a purchase of tokens, credits, virtual currency, or scrip that may be used to enable various software enhancements of the purchaser’s choice. This taxable purchase may occur online or at a retail location in the form of a card with a stated dollar or virtual currency value that can be subsequently used to make in-app purchases.
(e) Custom Software Distinguished. The sale of custom software is generally exempt from sales or use tax as a personal service transaction. However, standardized software that is modified or customized to some degree for a particular customer nevertheless retains its character as taxable standardized software. Also, if custom software sold to a single purchaser is later sold to others by the purchaser or the developer, the later sales are taxable sales of standardized computer software.
(f) Data Access Distinguished. While computer software generally creates or manipulates data in some way, data itself is not software and the sale of data access alone is not the sale of software.
(g) Telecommunications Services Distinguished. Telecommunications services are taxable as the sale of a “service” and not as the sale or use of computer software. See M.G.L. c. 64H, § 1. The electronic transmission of data for a consideration is generally taxable as the sale of a telecommunications service.
(h) Software Maintenance Contracts. Where a purchaser can access hosted software on the vendor’s server for a fee, and the vendor separately charges the purchaser for required server maintenance and/or desktop maintenance, both charges are taxable components of the sales price as they represent the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise as defined by M.G.L. c. 64H, § 1. If a purchaser has the option to buy a software maintenance contract, the taxability of the charge for optional contract is governed by the rules set forth at 830 CMR 64H.1.3(4)(g).
(i) Tax Exemptions. A transfer of software that would otherwise be taxable may be entitled to a sales tax exemption. See M.G.L. c. 64H, § 6; M.G.L. c. 64I, § 7. For example, a transfer may be an exempt transaction when the sale is of materials that become an ingredient or component part of tangible personal property to be sold or that are consumed and used directly in in the actual manufacture, processing or conversion of tangible personal property to be sold within the meaning of M.G.L. c. 64H, §§ 6(r) and (s). Further, only retail transactions are subject to tax, and so a transfer of software will be exempt from tax if it constitutes a sale for resale. See M.G.L. c. 64H, § 8, M.G.L. c. 64I, § 8. A vendor bears the burden of proving that a transaction is an exempt sale or a sale for resale unless it takes an exempt use certificate or a resale certificate at the time of the transaction in good faith from its purchaser. See M.G.L. c. 64H, § 8(f); M.G.L. c. 64I, § 8(f); 830 CMR 64H.8.1(5), Resale and Exempt Use Certificates.
(a) General Rule. Software transferred as part of or in connection with a service transaction for a single charge is subject to tax unless the software is part of a professional, insurance or personal service transaction and the software is an inconsequential element of that transaction. Where the transaction is a taxable sale of software, the taxable sales price includes the value of all services that are a part of such sale, including any additional services that may be separately stated. See 830 CMR 64H.1.3(4)(d). A vendor that claims the transfer of software is not taxable has the burden of demonstrating both that the software is part of a professional, insurance or personal service transaction and that the software is an inconsequential element of the transaction. In general, a transfer of software is not an inconsequential element of a transaction if the value of the software exceeds ten percent of the total transaction charge. The software component of a transaction is presumptively not an inconsequential element of a transaction if the software is an essential component of the transaction. The transfer of software, however, may be subject to tax even if the software is not an essential component of the transaction.
(b) Circumstances where Software is Considered an Inconsequential Element of a Service Transaction. In general, the transfer of software for a consideration is subject to tax unless the software is part of a professional, insurance or personal service transaction and the software is an inconsequential element of that transaction. See 830 CMR 64H.1.3(4)(a). However, where software is transferred as part of a professional, insurance, or personal service transaction to a customer for no separate charge and the software is used by the customer merely to access a distinct service not performed by the software, the software will be considered an inconsequential element of the transaction. For example, software will be considered an inconsequential element of a service transaction where it is used to book a ride-share, to access online periodicals or other digital information, or to stream movies or other digital content. See 830 CMR 64H.1.3(4)(f)2, Examples.
(c) Telecommunications Services Sold with Software. In general, electronic data transmission services are taxable telecommunications services. See 830 CMR 64H.1.3(3)(g). Standardized computer software may be sold to a purchaser with the ability to use electronic data transmission services provided by the vendor. Transactions that consist of only the transfer of standardized computer software and telecommunications services are taxable transactions even where the transaction consists of a single charge. Standardized computer software and telecommunications services that are sold together may also be transferred with a nontaxable service that is not a telecommunications service for a single charge. In such cases, the value of the taxable software and the value of the taxable telecommunications services must be considered together in determining whether these taxable components are an inconsequential element of a professional, insurance, or personal service transaction.
(d) Other Separately Stated Services. A charge by a vendor to a purchaser for the sale of a service that is billed or itemized separately from a charge for the sale of standardized software or other taxable tangible personal property or telecommunications services is generally not subject to tax, provided that the purchase of the service is optional to the purchaser, and provided that the separate charge is reasonable and stated in good faith. However, a separately stated charge for a service that relates to the functionality of purchased software or to the right to use such software is a charge that is part of the software sale and therefore this charge is included in the taxable sales price. In general, any mandatory charge that a purchaser must pay to acquire software or to use software is included in the sales price of such software, without regard to whether the charge is separately stated on the customer invoice.
(e) Vendor as Consumer of Software. A vendor may purchase standardized software from a third party that it subsequently sells to a consumer. In these cases, where the subsequent vendor sale of the software is an inconsequential element of a professional, insurance, or personal service transaction, such that the transaction is not subject to tax, the vendor rather than the final purchaser is treated as the consumer of the software. As the consumer of the software, the vendor is responsible for the payment of tax on its purchase.
(f) Software Transactions Billed as a Single Charge.
1. General Rule.
a. Evaluating a Single Charge Stated on an Invoice. Where a purchaser is billed a single charge for a transaction that includes the transfer of standardized software as part of or in connection with a service transaction, that stated sales price is subject to tax, unless the software is provided as part of a professional, insurance or personal service transaction in which the software is an inconsequential element. See 830 CMR 64H.1.3(4)(a). To determine whether the transfer of software is inconsequential, the transaction must be evaluated under the rules stated in 830 CMR 64H.1.3(4).
b. Evaluating a Single Charge Where There are Two or More Charges Stated on an Invoice. The taxation of a standardized software transaction where more than one charge is stated on an invoice is generally addressed in 830 CMR 64H.1.3(4)(g). However, when two or more charges are billed to a purchaser on the same invoice, it may be necessary to determine upfront whether a single stated charge on the invoice is subject to tax as the sale of software. In those cases, the individual charge is evaluated under the rules stated in 830 CMR 64H.1.3(4), as if it were the only charge, to determine whether the charge is subject to tax.
c. Consideration of Charges Not Included in a Single Charge. In determining whether a single charge stated on an invoice is taxable, it may be necessary to adjust that stated sales price pursuant to 830 CMR 64H.1.3(4)(d) to consider, for example, mandatory charges that may have been separately stated.
2. Examples. The following examples evaluate whether standardized software is an inconsequential element of a service transaction where there is a single charge billed to the customer for both software and services.
Example 1. Ride sharing. A vendor provides automobile ride-sharing services. A customer downloads an app for no separate charge that allows the customer to summon a car and driver for a specified trip. The customer is charged based on various factors, including the duration and distance of the trip. The vendor software is being used by a customer merely to access a distinct transportation service that is not performed by the software. Although vendor software is transferred to the customer and is part of the transaction, the software is considered inconsequential to the transaction in sum, which is non-taxable. See 830 CMR 64H.1.3(4)(b).
Example 2. Information service. A news service charges subscribers a monthly fee to access articles of general interest. The articles may be written by news service staff or may be acquired by the news service from third parties. Subscribers download a software app for no separate charge to access the articles. The app enables the customer to search the vendor’s database of articles to find particular articles of interest. The customer is using the vendor’s software to access information provided by the vendor. The use of the software to access the news articles is considered inconsequential to the transaction, and the monthly charges are not taxable sales of software.See 830 CMR 64H.1.3(4)(b).
Example 3. Music streaming. A streaming service charges a monthly fee to customers enabling these customers to download music or to stream music of their choosing on their devices. Customers download an app for no separate charge to access the service. The music files are data files, not software, although the vendor’s software enables the customers to access the data files. The customer is using the vendor’s software to access a type of information, i.e., music, provided by the vendor. The use of software to access the music files is considered inconsequential to the transaction, which is non-taxable. See 830 CMR 64H.1.3(4)(b).
Example 4. Banking transaction. A retail customer of a bank wishes to withdraw cash from an ATM owned by a second bank that does not hold the customer’s account. The second bank’s ATM accepts the customer’s bank card, automatically checks the customer’s credentials and bank balance with the issuing bank through a secure, automated network, then provides the cash to the customer. The issuing bank debits the customer’s account for the withdrawal. The second bank imposes a $3 fee on the transaction, which is charged the customer’s account. Although the customer is accessing software of the vendor, the second bank, the software is being used to facilitate a withdrawal transaction between the customer and the issuing bank. The use of the vendor software is considered inconsequential to the second bank’s service of dispensing cash to the customer. The $3 fee is not subject to tax.
Example 5. “Platform-as-a-service.” A vendor provides paying customers with a “platform-as-a-service.” A purchaser is able to deploy its application software on the vendor platform with limited configuration options. The vendor provides the networks, servers, data storage, operating system, middleware (e.g., Java runtime, .NET runtime, integration, etc.), database and other services to host the purchaser's applications. The transaction includes both software (e.g., the operating system and middleware) and a service (e.g., the data storage) provided for a single charge. The software components of the transaction are essential to enable a purchaser to deploy and otherwise run its application software and are not used merely to access data. The transaction is a taxable sale of standardized software, notwithstanding the vendor’s description of the transaction “as a service.”
Example 6. Computer game. A vendor provides customers with access to on-line computer games for a fee. A game may involve only an individual customer operating the computer game or it may involve multiple users who can interact with one another through the Internet in the process of participating in the game. In either case, software is used to enable the operation of the computerized game. The transactions are taxable software sales.
Example 7. Content delivery network. A vendor contracts with purchasers that are retailers to (1) host their consumer websites on the vendor’s servers, (2) operate the website software, (3) monitor traffic on the websites, and (4) “mirror” the websites on the vendor’s various servers to manage consumer demand efficiently. Purchasers are charged a fee based on their consumer website traffic volume or some other measure. Purchasers have some limited configuration options. For example, purchasers can control how their web content will be delivered to their consumers based on geographical location or other factors. The vendor transaction potentially includes various elements, including software, telecommunications services, and other services (e.g., data storage). However, use of the software is not inconsequential to the transaction; the software is an essential component of the transaction and does not merely confer access to a separate, distinct service. The transaction is subject to tax as the sale of software.
(g) Software Transactions Billed as Two or More Charges.
1. General Rule. Some transactions where there is a transfer of standardized software, including the right to use such software, may include more than one charge. Charges for optional services, not required for the purchase or operation of the software are, in general, not subject to tax if the charges are reasonable in amount and separately stated in good faith on the customer invoice at the time of the transaction. However, where the charges are not for optional services, the separate charges must be evaluated to determine the taxability of the charge as part of the software sale. To determine whether an individual charge stated on an invoice is the taxable sale of software, see 830 CMR 64H.1.3(4)(f).
2. Examples. The following examples evaluate whether separately stated charges billed to a customer as part of or in connection with a transaction where software is transferred are subject to tax.
Example 1. Market data service; separate software charges. A vendor provides purchasers with access to financial market information, including real-time price quotations and trading statistics related to various markets, for an initial fee. Purchasers who subscribe for this information may download vendor software for no additional charge that provides basic search and sorting functionality related to the data. For an additional itemized fee, purchasers may also subscribe to a separate product that is described as an “advanced software analytic service” that enables them to perform complex data manipulations, and to prepare reports and presentations using the data. Purchase of the advanced analytic service is optional to the purchaser and its price is reasonable and set in good faith. The initial fee is a charge for an information service, and the use of software to access the information is considered inconsequential relative to that charge. See 830 CMR 64H.1.3(3)(f) (distinguishing non-taxable purchases of data from the taxable sale of software); 830 CMR 64H.1.3(4)(b) (describing when the purchase of software will be treated as an inconsequential element of a non-taxable service transaction). The initial fee therefore is not subject to tax. However, the sale of the advanced analytical service is a taxable sale of standardized computer software, even though the charge is described as a separate vendor service.
Example 2. Mandatory charges for IT infrastructure. A vendor enters into a SaaS transaction with a Massachusetts purchaser. Under the terms of the transaction, the purchaser can access hosted software on the vendor’s server for a basic access fee. In addition to this fee, the vendor separately charges the purchaser for server maintenance and desktop maintenance. The purchaser is required to pay these server and desktop maintenance charges in addition to the basic access fee to enter into the SaaS transaction. The contract states that server maintenance includes: (i) investigating server errors; (ii) regularly applying critical patches and updates and then testing servers regressively; (iii) regularly updating anti-virus software and ensuring the anti-virus protection is running properly; and (iv) regularly checking and maintaining disk space and other functions to ensure optimum server performance. The contract also states that the desktop maintenance includes: (i) monitoring the software to ensure all critical patches are applied; (ii) regularly updating and monitoring anti-virus protection; and (iii) auditing desktops for compliance with IT policies, e.g., approved/unapproved software, Internet usage, approved websites and disk space. Charges for the mandatory services sold in connection with the sale of software are included in the taxable sales price of the software even if separately stated. See 830 CMR 64H.1.3(4(d)). Therefore, the server maintenance and desktop maintenance charges are included in the taxable sales price of the transaction with the basic access fee, even though the two charges are stated separately on the vendor invoice.
Example 3. Custom modifications to standardized computer software. A purchaser contracts with a software provider to acquire standardized enterprise resource planning (ERP) software and professional services that will customize the software to the purchaser’s needs. The purchaser chooses to purchase the optional customization services. Under the contract, the vendor licenses the ERP software from a third party, then sublicenses it to the purchaser for a set annual fee. The vendor separately states charges for the customization services based on the hourly rates of the vendor’s employees who provide the services. The hourly rates are consistent with industry practice, are reasonable and set in good faith. The sublicense fee paid by the purchaser to the vendor is for the taxable sale of software. The separately stated charges for the customization services are exempt from tax as separately stated fees for optional professional services. The licensing fee paid by the vendor to the third-party ERP software provider is exempt from tax as a sale for resale. See 830 CMR 64H.1.3(3)(i).
Example 4. Professional services with separate software charge. A travel company arranges travel itineraries and books reservations for business customers. Pursuant to the contract, a purchaser downloads a computer application that tracks its employees’ travel needs, which the travel company then uses to provide its services. The purchaser’s employees use the downloaded software to input their travel dates and itineraries. The travel company’s base fee is a percentage of the cost of the travel and accommodation services booked for the purchaser, but the company also separately states a charge on the purchaser’s invoice for the use of the downloaded software application. The separately stated charge for the software is subject to tax. It is not relevant that if the software charge were not separately stated it would be considered an inconsequential element of a professional service transaction. See 830 CMR 64H.1.3(4)(b).
Example 5. News service. A vendor publishes a newspaper, which is available to subscribers either in daily hard copy or in digital form. Digital subscribers receive access to the basic news service, which is updated regularly. For additional optional charges, subscribers may also receive access to other services: e.g., a database that includes recipes and articles on cooking; a database that includes product reviews; and a games feature that includes electronic access to various interactive word games, crossword puzzles, etc. The vendor provides a free app through which the various additional features may be accessed by authorized subscribers. All of the charges are reasonable and set in good faith. The subscription charges for the news service, either in hard copy or digital form, are exempt from tax. M.G.L. c. 64H, §6(m). The charges for access to the cooking database and the product review database are not taxable because they are charges for professional or personal services where the software transferred is considered to be an inconsequential element for which no separate charge is stated. See 830 CMR 64H.1.3(4)(b). The charges for the games’ subscription are taxable because the various interactive games and puzzles are standardized software for which a separate price is stated.
(a) General Rule. A business purchaser may apportion the sales or use tax due on its purchase of software for use in more than one state, provided that the purchaser has received a Software Apportionment Certificate from the Commissioner and otherwise meets the requirements set forth in 830 CMR 64H.1.3(5). 830 CMR 64H.1.3(5) provides the sole process by which a business purchaser of software may apportion the sales or use tax due at either the time of the transaction based on its anticipated use of the software, see 830 CMR 64H.1.3(5)(c), or after the time of the transaction based on actual use of the software, see 830 CMR 64H.1.3(5)(e). A business purchaser must obtain a Software Apportionment Certificate and follow the requirements of 830 CMR 64H.1.3(5) whether said purchaser is apportioning tax paid to a vendor, or apportioning tax that is paid directly to the Commissioner, that is, when no tax was paid to the vendor. Apportionment shall not be permitted for the purchase of software for personal use. As used in this section, 830 CMR 64H.1.3(5), the term “purchaser” refers to a business purchaser.
(b) Claim of Apportionment. Apportionment of sales and use tax due on the purchase of software shall not be permitted unless the purchaser obtains a Software Apportionment Certificate from the Commissioner. Apportionment may be claimed by a purchaser either at the time of sale or subsequently through the process set forth at 830 CMR 64H.1.3(5)(e). A purchaser, including a purchaser holding a direct pay permit pursuant to 830 CMR 64H.3.1, Direct Payment Program, must obtain a Certificate in order to claim an apportionment of use tax on a use tax return, in situations where the tax is not collected by the vendor at the time of the sale.
(c) Registration; Claims for Apportionment at the Time of Sale.
1. Method of Registration. A purchaser seeking to apportion the sales or use tax due on its purchase of software must pre-register with the Commissioner on MassTaxConnect. The purchaser must provide information concerning its sales and use tax registration, its general business operations, the location of its employees, the details of its Massachusetts operations, and such other information as the Commissioner may require. A purchaser must renew its registration with the Commissioner every three years, provided however, a purchaser must renew its certificate within ninety days if the purchaser undergoes an extraordinary event such as a merger or reorganization that significantly alters its business operations, the location of its employees, or the details of its Massachusetts operations. The Commissioner may require the purchaser to renew its registration in some such circumstances. A purchaser must also apply for a new certificate from the Commissioner within ninety days of a change to its tax registration number.
2. Use of Software Apportionment Certificate. Upon registration with the Commissioner, a purchaser will receive a Software Apportionment Certificate. A Certificate authorizes the purchaser to apportion its software purchases when the software is to be used in Massachusetts and one or more states. However, the Certificate does not by itself establish the appropriate apportionment percentage applicable to particular transactions, as such percentage may vary from purchase to purchase. A purchaser that seeks to apportion Massachusetts sales or use tax payable to a vendor on its purchase of software for use in one or more other states must present a copy of its Software Apportionment Certificate to the vendor at the time of the purchase.
3. Apportionment Statement. In addition to the Software Apportionment Certificate, a purchaser seeking to apportion the sales and use tax due on a particular purchase of software must provide a written statement to its vendor that certifies a reasonable apportionment percentage to apply to such transaction, describes the anticipated use of such software in Massachusetts, and provides other information deemed necessary or helpful by the Commissioner. This written Apportionment Statement is to be provided on a form prescribed by the Commissioner. A purchaser that seeks to apportion Massachusetts sales or use tax payable to a vendor on its purchase of software for use in one or more other states, must present its Apportionment Statement with its Software Apportionment Certificate to the vendor at the time of the purchase.
4. Vendor Responsibility. A vendor is responsible for collecting and remitting sales and use tax using an apportionment percentage as follows:
a. If a vendor accepts a purchaser’s Apportionment Statement and Software Apportionment Certificate in good faith, sales and use tax on the transaction is required to be collected in accordance with the apportionment percentage as set forth in the Apportionment Statement. In these cases, the vendor is relieved of any further obligation to collect sales or use tax on the transaction or to otherwise be held liable for any deficiency in tax in connection with the software sale, assuming that the vendor retains a copy of both the Certificate and the Statement.
b. If a vendor does not receive a Software Apportionment Certificate and an Apportionment Statement from a purchaser at the time of a software sale, the vendor is required to collect sales and use tax on the full sales price of the transaction. However, subsequent to the vendor’s collection and remittance of sales and use tax on the full sales price, a purchaser may provide the vendor with documentation to support a claim for apportionment of the sales and use tax collected and remitted. See 830 CMR 64H.1.3(5)(e).
(d) Method of Apportionment.
1. In General. A purchaser must calculate the apportionment of sales or use tax due on its purchase of software for use in more than one state using a reasonable and consistent method of apportionment, supported by the purchaser’s books and records as they exist, or existed, at the time of the purchase, as well as any other appropriate records. If a purchaser claims apportionment of the tax due at the time of the software transaction, the apportionment percentage must reasonably reflect the proportion of the anticipated use of the software by the purchaser in Massachusetts in relation to the anticipated use of the software by the purchaser in other states, consistent with the principles set forth in 830 CMR 64H.1.3(5). If a purchaser claims apportionment of the tax due with a later claim as provided in 830 CMR 64H.1.3(5)(e), the apportionment percentage must reasonably reflect the proportion of the purchaser’s actual use of the software in Massachusetts in relation to the purchaser’s actual use in other states. For the purposes of the apportionment, use of the software by the purchaser and any agents or affiliates of the purchaser that use the software must be considered.
2. Specific Apportionment Methods. When calculating its apportionment percentage, the purchaser must, if it is making its claim at the time of the transaction, consider its anticipated use of the software subsequent to the time of purchase. Alternatively, if the purchaser is making its claim after the time of the transaction, as provided under 830 CMR 64H.1.3(5)(e), the purchaser must consider its actual software use. Where the software use is to be determined on an anticipated basis, the rules in 830 CMR 64H.1.3(5)(d)(2) should be applied prospectively to determine that anticipated use.
a. Software Licensed for Use by Purchaser’s Employees. Where software is purchased for use by employees within an organization, including those of the purchaser and its affiliates, the apportionment must be based on the primary location of the employees accessing and using the software.
i. Where software is purchased for use by all of the purchaser’s employees, the purchaser must apportion the Massachusetts sales and use tax due based on the number of its employees located in Massachusetts during the license period in relation to the total number of its employees using the software in other states during the license period.
Example 1: Corp A licenses word processing software that is purchased for use by all employees that are employed by Corp A. Corp A has 2,000 total employees worldwide, 500 of whom are in Massachusetts. The appropriate apportionment percentage of Massachusetts sales and use tax is 25% (500/2000 = .25) for the licensing period.
ii. Where software is purchased for use by only a portion of the purchaser’s employees, based on geographical region, business unit, or some similar criterion, the purchaser must apportion the sales and use tax due based on the number of its employees who use the software that are in Massachusetts in relation to the total number of its employees that use the software in other states.
Example 2: Corp D licenses sales tracking software that is used by its employees that are salespeople. Corp D has 2,000 total employees, 200 of whom are assigned to its sales unit and that therefore use the software. Of those 200 employee users, 10 are in Massachusetts. The appropriate apportionment percentage of Massachusetts sales and use tax is 5% (10/200 = .05) for the licensing period.
b. Software Licensed to Run Purchaser’s Computer Hardware or Other Systems. In some cases, software may be purchased to run a purchaser’s hardware or other automated systems without direct interaction or use by the purchaser’s employees. In such cases, the purchaser must apportion the use of the software based upon the locations where the hardware runs the software.
Example 3: Corp E licenses security protection software that runs on hardware it issues to employees, including laptop computers, desktop computers and tablets. The security software monitors security threats without any interaction by these employees. Corp E will use the security protection software on 2000 pieces of hardware. Five hundred of these pieces of hardware are assigned to the location of employees in Massachusetts. The appropriate apportionment percentage of Massachusetts sales and use tax is 25% (500/2000 = .25) for the licensing period because 25% of the hardware running the software is in Massachusetts.
Example 4: Corp F runs a national grocery store chain. It licenses point of sale software from a vendor for use in each of its stores where the software will run on the store’s cash registers. Corp F uses the software in 300 stores nationwide, and 30 of its stores are in Massachusetts. Each store has a similar number of cash registers. The appropriate apportionment percentage of Massachusetts sales and use tax is 10% (30/300 = .10) for the licensing period.
c. Software Licensed for Primary Use by Customers. Where software is licensed by a purchaser for use primarily by that purchaser’s customers or prospective customers, the apportionment must be based on a reasonable estimate of the location of these customers.
Example 5: Corp G manufactures and sells clothing. It has retail stores located throughout the United States and it also sells clothing on its website and through an app that can be downloaded to customers’ devices free of charge. Corp G licenses the app from a vendor; its customers download and use the app for shopping and for purposes of making purchases. Corp G maintains shipment destination data regarding online customer purchases. The appropriate apportionment percentage of Massachusetts sales and use tax to be applied to the license of the vendor software must be based on a reasonable estimate of the location of Corp G’s customers in Massachusetts in relation to the location of Corp G’s customers in other states. Corp G may reasonably approximate its customer locations by using shipment destination data.
3. Application of Apportionment to Purchase Price. After a purchaser has calculated the appropriate apportionment percentage to be used to calculate its Massachusetts sales and use tax liability from a purchase of software, it must apply the apportionment percentage to the software sales price or license fees in a reasonable and consistent manner.
a. Uniform Fee Per User. When software is sold on a per-user basis for a license term, Massachusetts sales and use tax should be paid on the charges for Massachusetts users. Where the charges are the same for all users, the purchaser’s apportionment percentage should be applied to the total charge. Similarly, where software is sold for a lump sum charge, the tax should be determined by applying the purchaser’s apportionment percentage to the total charge.
Example 6: Corp H licenses word processing software from a vendor that is used by all of Corp H’s employees. After applying the apportionment rules set forth in 830 CMR 64H.1.3(5)(d), Corp H determines that the appropriate apportionment percentage to be applied to Massachusetts sales and use tax is 25% for the licensing period. The vendor’s license fees are calculated on a per user basis with a flat charge of $750.00 per user for the license period based on 2000 users, thus the vendor’s total charge for the license period is $1,500,000. Corp H must pay Massachusetts sales and use tax on $375,000 of the purchase price ($1,500,000 x 25% = $375,000).
b. Varying Fees Per User. Where software is sold on a per-user basis for a license term and more than one price is charged to a purchaser for the software, based on software functionality, geographical location, volume pricing, or otherwise, the purchaser must apply the appropriate apportionment percentage as determined pursuant to 830 CMR 64H.1.3(5)(d) based on Massachusetts use to each of the different fees. This could result in two or more different apportionment methods being applied to a single type of software obtained in the same transaction. For example, a software license may allow certain users administrative rights and software functionality that is not available to other uses, requiring a higher price for those rights and functionality than that paid for the right to use the software more generally. In those cases, the purchaser must apportion the charges for the two types of users separately, applying a user-specific apportionment methodology.
Example 7: As in 830 CMR 64H.1.3(5)(d)2.b, Example 3, Corp I licenses security protection software that runs on all of its employee hardware without interaction by those employees. Corp I will use the security protection software on 2000 pieces of hardware, 500 of which are assigned to the location of employees in Massachusetts. The vendor’s license fees are calculated on a per device basis with a flat charge of $750.00 per device for the license period based on 2000 employee devices, thus the vendor’s total charge for the license period is $1,500.000. Corp I must pay Massachusetts sales and use tax on $375,000 of the purchase price ($1,500,000 x 25% = $375,000).
Corp I also pays an additional, separately stated license fee for 5 employees, 3 of whom are located in Massachusetts, which allows these employees administrative rights to view summary reports concerning security threats. The charge for these additional 5 licenses is $1,000.00 per user, for a total charge of $5,000.00. Corp I must pay Massachusetts sales and use tax on $3,000 of this separately stated license fee ($5,000 x 60% = $3,000) for the additional five licenses.
c. Purchase Price Not Based on Actual Number of Users. Where a purchaser buys a software license from a vendor based on a pricing scale for an undefined number of users, the apportionment should be based on the expected use for the license period. For example, if the purchaser will offer the optional use of the licensed software to all of its employees, the software should be apportioned based on the purchaser’s percentage of employees in Massachusetts in relation to its employees in other states.
4. Commissioner’s Ability to Require Alternative Apportionment Method. If the Commissioner determines that a purchaser’s reported apportionment percentage of Massachusetts sales and use tax as determined pursuant to 830 CMR 64H.1.3(5)(d) does not reasonably represent its use of the software within Massachusetts, the Commissioner may require the use of an alternative method that does reasonably reflect such use.
5. Amendment of Apportionment Method. Where a purchaser has used an apportionment method that reasonably estimates the location of its use of purchased software, consistent with the provisions of 830 CMR 64H.1.3(5)(d), the purchaser may not subsequently claim a revised apportionment based on the use of an alternative method that apportions a lower amount of use to Massachusetts, even if the alternative method also provides a reasonable estimate. Use of an alternative method can only be used if the applicant seeking a claim for apportionment demonstrates by clear and convincing evidence that the original apportionment method was not a reasonable estimation as determined under the provisions of 830 CMR 64H.1.3(5)(d).
(e) Claim for Apportionment After the Time of Sale.
1. Vendor Claim on Behalf of Purchaser Through the Amended Return Process. If a vendor does not receive a Software Apportionment Certificate and an Apportionment Statement from the purchaser at the time of a software sale and therefore collects tax on the entire sales price, the purchaser may request the vendor to file a claim for apportionment of the tax previously collected and remitted after the sale. To file such claim, the vendor must file an amended return as required by 830 CMR 62C.26.2, Amended Returns. The amended return must be filed within the time prescribed by M.G.L. c. 62C, § 37 and must include a copy of the purchaser’s Software Apportionment Certificate, see 830 CMR 64H.1.3(5)(c)1-2. A purchaser may obtain the Certificate after the date of the transaction for which a claim for apportionment is made, but the Certificate must be included by the vendor when it files the amended return. In addition, the purchaser must present the vendor with an Apportionment Statement. See 830 CMR 64H.1.3(5)(c)3. The apportionment percentage used in the Apportionment Statement must be calculated using the rules in 830 CMR 64H.1.3(5)(d)2., and must be determined based upon the purchaser’s actual use of the software. The vendor must also include the purchaser’s Apportionment Statement with its amended return. The Commissioner may deem an amended return filed under 830 CMR 64H.1.3(5)(e)1 to be an application for abatement under the provisions of 830 62C.26.2(5), Amended Returns. In such cases, the provisions of 830 CMR 62C.37.1, Abatements, shall also apply.
2. Purchaser Claim Through the Abatement Process. If a vendor that has previously collected tax on a software sale does not file a claim for apportionment on behalf of the purchaser under 830 CMR 64H.1.3(5)(e)1., such purchaser may directly seek an abatement of tax from the Commissioner, provided that the purchaser obtains a Power of Attorney signed by the vendor. To file such claim, the purchaser must file an application for abatement online using MassTaxConnect. The application for abatement must be filed within the time prescribed by M.G.L. c. 62C, § 37 and is subject to the requirements of 830 CMR 62C.37.1, Abatements. The purchaser must include the vendor’s signed Power of Attorney Form with its application. The application for abatement must also include a copy of the purchaser’s Software Apportionment Certificate. See 830 CMR 64H.1.3(5)(c)1-2. A purchaser may obtain the Certificate after the date of the transaction for which the abatement is sought, but the Certificate must be included with the purchaser’s abatement application. For each transaction included in the application for abatement, the purchaser must also include an Apportionment Statement. See 830 CMR 64H.1.3(5)(c)3. The apportionment percentage used in the Apportionment Statement must be calculated using the rules in 830 CMR 64H.1.3(5)(d)(2) and must be determined based upon the purchaser’s actual use of the software.
(f) Apportionment Unavailable if Exemption for Other State or Territory Taxes Claimed. A person who purchases tangible personal property in another U.S. state or territory for use in Massachusetts may be entitled to an exemption from Massachusetts use tax if the purchaser has paid tax on the transaction to such other U.S. state or territory. See M.G.L. c. 64I, § 7(c). This exemption has the general effect of avoiding multiple taxation of the same transaction by the two jurisdictions. Similarly, a person who purchases standardized software in another U.S. state or territory for use in whole or part in Massachusetts may be entitled to a full or partial exemption from Massachusetts use tax if the purchaser has paid tax on the transaction to such other U.S. state or territory. See id. However, a software purchaser claiming the exemption under M.G.L. c. 64I, § (7)(c) may not also seek to apportion the tax due on the price of the software purchased for use in Massachusetts under the rules in 830 CMR 64H.1.3(5). The purchaser may claim the exemption under M.G.L. c. 64I, § (7)(c) or may apportion the sales or use tax in the manner provided in 830 CMR 64H.1.3(5), but such purchaser may not claim a sales tax exemption and apportionment for the same transaction.
830 CMR 64H.1.3 supersedes all prior public written statements, including letter rulings, to the extent it is inconsistent with any such prior statements or portions thereof.
WORKING DRAFT FOR PRACTITIONER COMMENT - 11/15/24
