Detailed Massachusetts Development
The Massachusetts Supreme Judicial Court affirmed an Appellate Tax Board decision holding 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. Following an audit, the Department assessed sales tax on the taxpayer’s receipts. After the Appellate Tax Board upheld the assessment, the taxpayer appealed to the Commonwealth’s highest court.
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. In the taxpayer’s view, the regulation extending the sales tax to remotely accessed software was invalid as it went beyond the scope of the statute which specifically referred to “transfers” of software. In other words, the taxpayer argued there was no transfer of title or possession when the software was accessed remotely. The court, however, agreed with the Board’s determination that there was a taxable “transfer” when customers purchased the right to use the taxpayer’s software on a remote server. Next, the court 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 court concluded that the customers’ “true object” in purchasing the products was to obtain access and use of the online products, not to obtain a service. Please contact Joe Senier at 617-988- 1025 with questions on Citrix Systems, Inc. v. Commissioner of Revenue.
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