Massachusetts allows multi-site software use refund


Michael Cronin
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Gabe Garcia
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Jamie C. Yesnowitz
Washington D.C. 
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Chuck Jones
T +1 312 602 8517

Lori Stolly
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Patrick Skeehan
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On Nov. 27, 2019, the Massachusetts Appellate Tax Board issued an opinion granting an abatement of tax to software vendor taxpayers who had originally collected and remitted sales tax based on the total cost of the software purchased by a customer.1 Subsequently, the customer informed the vendors of its intended and actual use of the software in multiple locations, resulting in a refund request for the tax on software used outside the state.

Background  During the tax periods at issue,2 the taxpayers’ customer, Hologic, purchased or licensed software from the taxpayers and installed it on Massachusetts servers for use by its employees located both within and outside Massachusetts. Hologic’s employees ultimately accessed the software from these specified work locations. At the time of purchase, Hologic remitted sales tax to the vendors based on the total amounts that it paid for the software. The software vendors timely remitted the sales tax to Massachusetts and reported it on their corresponding sales and use tax returns.

Subsequently, Hologic informed the vendors of its intended and actual use of the software in multiple locations and provided supporting data showing the percentage of use outside Massachusetts. The vendors each filed abatement applications with the Massachusetts Commissioner of Revenue requesting abatement and refunds of sales tax based on the usage data and apportionment percentages received.3 Following denial by the Commissioner, the taxpayers filed petitions with the Appellate Tax Board, which granted a hearing.4

Notably, the Commissioner and the taxpayers stipulated that they agreed to the stated amounts of tax originally collected and remitted, as well as the claimed apportionment percentages.5

Appellate Tax Board decision  Massachusetts law and regulations Generally, sales of tangible personal property are taxable in Massachusetts.6 Prior to 2005, whether standardized software was considered tangible personal property and subject to sales or use tax depended on its method of delivery.7 If standardized software was delivered in tangible form, such as a CD-ROM or a floppy disk, it was subject to tax. If, however, standardized software was delivered electronically or by load and leave, it was not.8 Massachusetts addressed this disparity between delivery methods through legislation in 2005 by creating uniform sales tax treatment for sales of standardized software. Specifically, the legislation expanded the definition of tangible personal property to incorporate transfers of standardized computer software “including but not limited to electronic, telephonic, or similar transfer[s].”9

Further, the amendment authorized the Commissioner to promulgate regulations to “provide rules for apportioning tax in those instances in which software is transferred for use in more than one state.”10 The Commissioner ultimately promulgated a regulation that included provisions for how to apportion sales of standardized software.11 This provision became effective Oct. 20, 2006, and applied retroactively to transactions on and after April 1, 2006.

The regulation includes two apportionment provisions which relieve vendors of specific liabilities by: (a) transferring reporting liability from a vendor to a purchaser;12 and (b) relieving vendors of “any further obligation” after collecting and remitting tax.13 Under option (a), a purchaser of prewritten computer software with knowledge at the time of purchase that the software will be used in more than one jurisdiction must provide Form ST-12, Exempt Use Certificate, to the vendor no later than the time the transaction is reported for sales or use tax purposes. Option (b) is intended for a seller with knowledge that the prewritten software will be concurrently available for use in more than one jurisdiction, but has not been provided an exempt use certificate by the purchaser. Under the terms of option (b), a seller “may work with the purchaser to produce the correct apportionment,” to which the purchaser must certify, and the seller must accept. No specific time frame is stated regarding when the related apportionment determination and certification must take place. Regulatory language in both options (a) and (b) includes substantive guidance concerning how to apportion tax, generally allowing the use of any reasonable, consistent method of apportionment based on records existing at the time of reporting for sales and use tax purposes.

Decision In this matter, the Appellate Tax Board examined whether and if so, how the applicable regulation affects the right of the taxpayers to request apportionment via the statutory abatement process.14 The abatement statute allows any person aggrieved by the assessment of a tax to apply in writing to the Commissioner for abatement on a prescribed form within specified time limitations. In this instance, the taxpayers filed Forms CA-6, Application for Abatement, claiming to be aggrieved by the self-assessment of unapportioned sales tax on the sales of computer software to Hologic in a timely manner.

The Commissioner based his denial of the abatement on the belief that the statute itself does not afford the right to apportion sales of standardized software. Instead, the sole method by which apportionment could be achieved is as directed under the terms of the related regulation. Further, the Commissioner argued that the timing of the filing requirement included in option (a) of the regulation (that the relevant information be provided no later than the time the transaction is reported for sales and use tax purposes) also applied to option (b). As Hologic did not provide the taxpayer with either Form ST-12 (as required under the terms of option (a)) or the apportionment certification (pursuant to the terms of option (b)) meeting the required timing, the Commissioner argued that apportionment was foreclosed.

In evaluating the Commissioner’s position, the Board first found the proposition that the statute itself did not grant the right to apportion to be “illogical and inconsistent with the plain language of the statute.” While the related regulatory provisions include methodologies for apportionment and relief of vendor liabilities, they do not specifically prohibit apportionment through the abatement process. In fact, no language in the regulation seeking to limit the abatement process in the context of apportionment exists.15 Further, the Board noted that the timing constraints central to the Commissioner’s interpretation of the regulation run afoul of its original construction. As a result of the difference between the initial enactment date and effective date of the rule, taxpayers were previously able to seek apportionment of sales tax through the abatement process due to its retroactive application by several months.

In its assessment, the Board found the relevant regulation’s treatment of direct pay permit holders to be instructive. Holders need not submit Form ST-12 in order to apportion the tax due, but instead may simply follow the provisions relating to apportionment methodologies found in option (a) “in apportioning the tax due on prewritten computer software that will be concurrently available for use in more than one jurisdiction.”16 These provisions do not specify any specific time frame during which apportionment may be sought. Instead, there are no temporal constraints that prevent direct pay permit holders from seeking apportionment under the abatement process. The Board found no legal basis allowing direct pay permit holders to utilize this process but preventing vendors such as the taxpayers from doing so.

Finally, the Board explored whether the method by which Hologic communicated the apportionment information to each taxpayer was suitable. Generally, purchasers may provide Form ST-12 to inform vendors that purchases are exempt from tax. In the absence of a certificate, the burden of proving that a transaction is not taxable is placed on the vendor. However, neither the statute nor the regulations indicate that delivery of a certificate is the only means by which an exemption may be obtained.17 In fact, the abatement process is fully available to taxpayers for that purpose.18 Therefore, the Board concluded that the taxpayers properly sought apportionment of the sales tax at issue using the abatement process and ordered that the requested abatements be granted.

Commentary  In an era of continuously evolving technology, the Massachusetts Appellate Tax Board’s ruling clarifies the ability of software vendors to pursue refunds of sales tax related to Massachusetts-based software that is ultimately accessed remotely by customers located outside the state. While apportionment concepts are normally central to ensuring that states receive a portion of income from multistate corporations or individuals with sources from multiple jurisdictions, the apportionment concept also has some application in the sales tax context, typically when a taxable item is simultaneously used in multiple jurisdictions by end-users. The ability to apportion sales tax in a situation in which software is used in multiple jurisdictions ensures that each state imposing sales tax on software receives an appropriate share of tax based on the location of use.

The Board wholeheartedly rejected the attempt by the Commissioner to limit a taxpayer’s ability to seek relief from a potential double imposition of tax in the location of storage as well as location of use through the normal abatement process. In the instant case, the taxpayers’ customer presumably paid tax in the states where the software was being used in addition to Massachusetts. Thus, double tax apparently was being paid on the software. Both software vendors selling products to Massachusetts-based customers with multiple locations and entities with Massachusetts-based servers accessed from outside the state should be aware of this ruling’s potential implications. It will be interesting to see whether the Commissioner appeals the ruling or makes any effort to modify the regulation central to the decision.

1 Oracle USA, Inc., Oracle America, Inc. and Microsoft Licensing, GP v. Commissioner of Revenue, Massachusetts Appellate Tax Board, Docket Nos. C318441, C318442, C327798, Nov. 27, 2019.
2 The tax periods at issue for the taxpayers involved in this matter ranged from mid-2009 to early 2012.
3 The software vendors also provided the Commissioner with sales tax claim waivers and refund assignments, which provided that any refunds received would be refunded to Hologic.
4 The Board initially issued a decision for the Commissioner, but subsequently issued an Order (Rule 33 Order) vacating the initial decision. At that time, the Commissioner filed a Motion for Reconsideration, which the Board denied. However, it renewed the Rule 33 Order allowing the parties 30 days to provide additional written arguments in support of their positions. In response, both parties submitted a Rule 33 calculation consistent with the amounts at issue.
5 The taxpayers sought abatement and refund of tax in the following amounts: Oracle USA, Inc. - $59,098, Oracle America, Inc. - $185,323, and Microsoft Licensing, GP - $119,307.
6 MASS. GEN. LAWS ch. 64H, §§ 1, 2.
7 Also, a distinction had been drawn between standardized and custom software, with only the former being subject to sales and use tax. See, e.g., Letter Ruling 88-14: Computer Software Sales, Massachusetts Dept. of Rev., Nov. 21, 1988.
8 See Directive 01-3: Sales Tax Consequences of Computer Software “Load and Leave” Transactions, Massachusetts Dept. of Rev., May 8, 2001. In a load and leave transaction, a vendor installs software directly onto a customer’s computer using tangible storage media, but does not transfer the tangible medium used to load the software as part of the sale.
9 MASS. GEN. LAWS ch. 64H, § 1. As modified by Ch. 163 (H.B. 4169), § 34 (Laws 2005), eff. Apr. 1, 2006.
10 Id. (emphasis added).
11 MASS. REGS. CODE tit. 830, § 64H.1.3(15).
12 MASS. REGS. CODE tit. 830, § 64H.1.3(15)(a).
13 MASS. REGS. CODE tit. 830, § 64H.1.3(15)(b).
14 MASS. GEN. LAWS ch. 62C, § 37.
15 In contrast, the Board referenced numerous other regulations which incorporate specific limitations. See, for example, MASS. REGS. CODE tit. 830, § 63.38M.1(5)(d)(3)(c), which includes limitations on modifying elections to change research credit computation methods.
16 MASS. REGS. CODE tit. 830, § 64H.1.3(15)(d).
17 MASS. REGS. CODE tit. 830, § 64H.8.
18 Citing D&H Distributing Co. v. Commissioner of Revenue, 79 N.E.3d 409 (Mass. 2017).


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