- Massachusetts: Guidance on Taxability of Software by Subscription
- April 29, 2013 | Authors: David M. Kall; Susan Millradt McGlone
- Law Firm: McDonald Hopkins LLC - Cleveland Office
On April 12, 2013, the Commissioner of the Massachusetts Department of Revenue (the “Commissioner”) issued a letter ruling (LR 13-2) providing guidance about the circumstances under which the provision of services bundled with the sale of prewritten software would be subject to Massachusetts sales and use tax.
The Commissioner stated that all facts and circumstances would be considered when determining whether a product is a personal or professional service exempt from sales and use tax or a sale of the right to use prewritten software subject to sales and use tax. If services and the right to use software are integrated or bundled into one transaction, then the Commissioner will apply an “object of the transaction” test to determine whether the primary purpose of the transaction is the provision of a service exempt from sales and use tax or the sale of a product subject to sales and use tax.
The company requesting the ruling offers proprietary prewritten software applications and related services to Massachusetts clients, which software and services may be bundled together as a service that the company’s clients pay for in the form of a subscription agreement. The company’s “Primary Offering” is an automated software tool which collects, organizes and displays customer ratings, questions, answers, and stories on the client’s website. The "Primary Offering" includes a “Moderation” service, in which the company’s employees filter the reviews captured on the website and provide active support to the client. The company’s “Customer Insights” is an application, sold separately from "Primary Offering," which allows the client to perform sophisticated analysis on the information collected from the customers. The company also offers a “Client Services Team,” in which the company’s employees act as social media advisors to its clients.
The Commissioner determined that when the company bundles its prewritten software offerings and service offerings under one subscription price, both the prewritten software and the services are subject to sales and use tax. However, if the "Moderation" component of the "Primary Offering" was optional and separately stated on the invoice provided to the client, then such "Moderation" service would not be subject to sales and use tax. Similarly, if the "Client Services Team" is sold as a separately stated option, then such service would not be subject to sales and use tax.