Massachusetts Issues Sales Tax Guidance on Process for Apportioning Software Sales

By: Betsy Goldstein, SALT Manager

At a glance

• The main takeaway: Recent guidance in Massachusetts tackles the application of sales tax refund opportunities on the purchase of prewritten software used within and outside of the state.
• Assess the impact: If your business paid Massachusetts sales tax on the full price of prewritten software, you may be entitled to a refund.
• Take the next step: Aprio’s State and Local Tax (SALT) team has extensive experience with complicated sales tax rules involving software licenses and can help your business in obtaining potential refunds for overpaid tax.

Schedule a free consultation today to learn more!

The full story:

Massachusetts, unlike many other states, provides guidance on how taxpayers purchasing prewritten computer software that will be concurrently available for use both within and outside of Massachusetts can apportion the purchase price amongst the jurisdictions where the software will actually be used.[1]

Recently, the Massachusetts Department of Revenue published Technical Information Release (TIR) 22-8 to explain the application of the decision of the Massachusetts Supreme Judicial Court in Oracle USA, Inc. v. Commissioner of Revenue.[2]  

Taking a closer look at the case

Oracle charged its customer, Hologic, sales tax on the full price of software that Oracle installed on Hologic’s servers in Massachusetts. At the time of the sale, Hologic did not provide a sales tax exemption certificate or any other certification that the software would be used concurrently within and without the Commonwealth. Hologic later reached out to Oracle requesting a refund of the sales tax paid for the portion of the software used outside of Massachusetts based on the number of employees using the software outside of Massachusetts. Oracle properly filed a tax abatement under the applicable statutory provisions.[3] The Commissioner denied the abatement since Hologic had not properly followed the apportionment provisions in the regulations.

Oracle appealed the case, and ultimately, the Massachusetts Supreme Judicial Court (SJC) ruled in favor of the taxpayer and held that the taxpayers are entitled to apportion their use of software either by following the process in the regulation (which they did not do) or by applying for an abatement.[4] The SJC disagreed with the Commissioner’s position that Hologic was limited to the apportionment provisions in the regulations.

Understanding the apportionment process

The TIR reminds taxpayers that while the Oracle case addresses the general procedure for claiming a tax abatement with respect to software transferred for multi-state use, it does not address the specific methods of apportioning the sales or use tax on such transfers. Taxpayers should follow the apportionment process set forth in the regulation. 

Pursuant to the regulation, purchasers can apportion their sales and use tax to provide the seller with a multiple points of use (MPU) sales tax exemption certificate (Form ST-12) to claim a sales tax exemption from the seller at the time of purchase of the prewritten computer software. Prewritten software includes, but is not limited to, software delivered in a tangible form, by load and leave, and delivered or accessed electronically regardless of the location of the server where the software is installed. The seller, upon receipt of the exemption certificate, is not obligated to charge the purchaser sales tax. The purchaser is then obligated to self-remit the tax to Massachusetts for the amount apportioned to Massachusetts following the regulatory guidelines.

The regulation explains that the purchaser may use “any reasonable, but consistent and uniform, method of apportionment that is supported by the purchaser’s books and records as they exist at the time the transaction is reported for sales or use tax purposes.” A reasonable method may be based on the number of licensed users or number of computers in each jurisdiction where the software will be used, but there may be other reasonable methods. However, the regulation does make it clear that a reasonable method would not be based on using the location of servers where the software is installed.

The Form ST-12 cannot be used for software purchased in-person at a retail store or for software loaded on computer hardware prior to the sale. Delivery of a copy of the software is not necessary for the software to be concurrently available for use.

The regulation provides six examples which illustrate different scenarios of when a MPU certificate may be used and when the sales prices of software may be apportioned. For example:

• Prewritten software is installed on a server located in Massachusetts but concurrently available for use by the purchaser’s employees in other states as well as Massachusetts. The purchaser gives the seller a properly completed MPU form.  Part of the sales price will be apportioned to those other states for sales/use tax purposes.
• A business in Massachusetts purchases an enterprise license that allows the purchaser to make copies of software (either from a master disk or downloaded copy) and those copies will be concurrently available for use at the purchaser’s business locations in various jurisdictions. The purchaser gives the seller a properly completed MPU form. For sales/use tax purposes, part of the sales price will be apportioned to the other states when the purchaser is using copies of the software.

The bottom line

If your business paid Massachusetts sales tax on the full purchase price for prewritten software that was used concurrently both inside and outside of Massachusetts, you may be entitled to a refund of some of that sales tax.[5] Aprio’s SALT team has experience with the complicated sales tax rules regarding software licenses and can assist your business in obtaining potential refunds of overpaid tax. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Betsy Goldstein at betsy.goldstein@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the July 2022 SALT newsletter.

---

[1] Mass. Reg. 830 CMR 64H.1.3(15).

[2] Massachusetts TIR 22-8: Decision of the Massachusetts Supreme Judicial Court in Oracle USA, Inc. v. Commissioner of Revenue (May 19, 2022).

[3] Mass. G.L. c. 62C, § 37

[4] See Oracle USA, Inc. v. Commissioner of Revenue, 487 Mass. 518 (Mass. 2021).

[5] Similar opportunities may be available in other states, such as New York and Texas.

Disclosure

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.