Massachusetts: Appellate Tax Board Reverses Course on Refunds for Multiple Points of Use

Recently, on its own motion, the Appellate Tax Board vacated a previous decision upholding the denial of a refund claim based on a “multiple points of use” or MPU exemption. The taxpayer at issue was a software provider that sold software to a company headquartered in Massachusetts. The purchaser had offices and employees located both within and outside the Commonwealth. The purchaser installed the software on servers located in Massachusetts, and the software was used by employees located both within and outside the state. The software provider collected and remitted Massachusetts sales tax from the purchaser based on the full purchase price. Subsequently, the purchaser informed the software provider that it used the software in multiple locations and provided data demonstrating the percentage of use occurring outside Massachusetts. The software provider filed a refund claim for the portion of the tax related to software use outside Massachusetts.  The Department denied the refund on the grounds that, by regulation, a MPU exemption may only be claimed by providing an exemption certificate to the seller before sales tax is remitted.

On reconsideration of the issue (nearly two years later), the Board rejected the Department’s grounds for denial. Massachusetts law grants the Department authority to promulgate a rule for apportioning sales tax on software that is used in more than one state. The Department’s rule on the issue states―in part―that a software seller is relieved from collecting tax if the purchaser provides an MPU exemption certificate to the seller before the transaction is reported for sales tax purposes. In such a case, the purchaser would then remit tax based on the relative use of the software in Massachusetts. In denying the refund at issue, the Department reasoned that the purchaser had not provided an MPU exemption certificate before sales tax was remitted.  In its new decision, the Board rejected this rationale, finding that the Department’s regulation also allows for apportioning tax if no exemption certificate is provided to the seller. By regulation, if no exemption certificate is received, the seller may work with the purchaser to correctly apportion the tax based on the purchaser’s business records. The Board reasoned that while the software provider was required to remit the full amount of tax without an exemption certificate, there was nothing in the statute or the Department’s regulation prohibiting a software provider from filing refund claims using generally applicable refund procedures after working with the purchaser to determine the correct apportionment of tax to Massachusetts. Accordingly, the Board ruled that the software provider’s refund request could proceed. It is not yet known if the Department will appeal this ruling. For more information, please contact Joe Senier at 617-988-1025 or Tom Gangi at 617-988-1360.