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Massachusetts: the Taxation of Cloud Computing Services


 Massachusetts, Cloud Computing, and Sales Tax

Back in March, 2012, the Boston Globe reported that cloud computing services were "expected to create 20,000 jobs in the Boston area by 2015." New jobs arise because "[s]hifting to the cloud could cut costs for companies" -- the assumption being that money saved translates to money spent in other areas, including expansion and new jobs.

Cloud computing also creates new potential for tax revenue.

The Massachusetts Department of Revenue has developed a Working Draft Directive that establishes "criteria for determining whether a transaction is a taxable sale of pre-written software or a non-taxable service." Personal and professional services are not subject to sales and use tax in Massachusetts.

The DOR is seeking public comments on this issue. It references numerous recent rulings "pertaining to the Computer Industry Services and Products regulation… particularly involving sales of 'Software as a Service,' 'Cloud Computing,' and so-called 'Business Solutions.' all of which involve software, sometimes bundled with other non-taxable services."

Massachusetts applies sales and use tax to "software sales involving a tangible medium transferred to the customer." Once upon a time, that's the way software sales took place. Now, however, there is this amorphous cloud, where information resides and services take place. Massachusetts, along with many other states, is trying to determine how to tax it.

The working draft notes that in 2005, "the Massachusetts sales/use tax definition of taxable tangible property was expanded to include software sales that do not involve transfers of or in a tangible medium." But technology is rapidly changing, and tax laws must change, too.

The Massachusetts Tax Commissioner considers numerous criteria to determine whether or not a transaction is taxable. They are "considered cumulatively," not individually.

Taxable Sale

Criteria used to indicate that "a transaction is a taxable transfer of pre-written software" include, but are not limited to:

  • "A contract or written agreement provides for a transfer by license, sale, subscription, lease, or other means, of prewritten software for consideration;"
  • "A customer can access a seller’s prewritten software on its own or the seller’s or a third party server, and can enter its own information, manipulate that information, and/or run reports.  (Mere search queries in a seller’s database are not considered “entering information.”)"
  • "The software provides an organizational tool or function that is used by customer, e.g., screen sharing;" and
  • "Pre-written software is bundled with a non-taxable service and sold for a single price, but only where the software constitutes the predominant value of the sale."

Non-Taxable Service

Criteria used to indicate that "a transaction is a non-taxable service" include, but are not limited to:

  • "The seller’s employees are providing data processing, creating and running reports for customer and providing them in any form (assuming that they are unique to the customer);"
  • "The transaction is for an optional maintenance contract that does not include software updates or upgrades;"
  • "The seller is providing custom software;"
  • "The seller is providing data storage and back-up;" and
  • "The customer is running its own software, which was not obtained from the seller, on seller’s hardware in a “cloud computing” environment."

Both Taxable and Non-Taxable?

Sylvia Dion in The State and Local Tax "Buzz" notes that "[t]he issue of taxability becomes even 'cloudier' when access to software is bundled with the provision of services."

When a transaction contains both a taxable purchase and a non-taxable service, "the Commissioner applies an 'object of the transaction test." Is the object of the transaction the purchase or use of software (taxable), or the purchase or use of a service (non-taxable)?

The Massachusetts Department of Revenue is accepting comments at RulesandRegs@dor.state.ma.us through this Friday, February 22, 2013.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.