Massachusetts: Taxpayer’s products were prewritten computer software

The Massachusetts Appellate Tax Board recently ruled that a taxpayer’s software products were taxable sales of prewritten computer software transferred electronically. The products at issue were three types of online software accessed over the Internet that each helped create and maintain a screen-sharing connection between a host computer and one or more remote computers. The products, which all parties agreed were software, were sold by subscription and were not customized for individual purchasers. However, customers could purchase certain upgrades (available to all customers and not individualized for any particular customer) to enhance their user experience.

Under Massachusetts law, a transfer of standardized computer software, including but not limited to, an electronic, telephonic or a similar transfer, is considered a taxable transfer of tangible personal property. A departmental regulation extends the sales and use tax to transfers of rights to use software installed on a remote server. The Board first determined that the taxpayer’s products were not customized software exempt from sales and use tax. Although the software was complex and required continuous development, monitoring, and maintenance, it was not prepared to the specifications of any individual purchaser. The Board next addressed the taxpayer’s argument that there was no taxable sale of software because there was no “transfer,” as required under the statute, when customers accessed the taxpayer’s software on its remotely located server. In the taxpayer’s view, the regulation and a corresponding Technical Information Release extending the sales tax to remotely accessed software were invalid as they were beyond the scope of the statute which specifically referred to transfers of software. The Board disagreed, noting that the statute was intended to create a uniform sales tax treatment of standardized software regardless of delivery method. Furthermore, the types of software transfers to which sales tax applied included, but were not limited to, the specific types listed in the statute. The Board concluded extending this language to include the “transfer of rights to use software installed on a remote server” was reasonable. Next, the Board rejected the taxpayer’s argument that it was selling services, rather than tangible personal property. Although many services went into developing and maintaining the taxpayer’s products, the Board concluded that customers’ “true object” in purchasing the products was to obtain access and use of the online products, not to obtain any unseen support services. Please contact Joe Senier at 617-988- 1025 with questions on Citrix Systems, Inc. v. Commissioner of Revenue.