Massachusetts Appellate Tax Board Grants Refund and Allows Apportionment of Sales Tax on Software Sales

04/09/2019
Client Alert

The Massachusetts Appellate Tax Board recently vacated, on its own motion, a previous decision in favor of the Commissioner of Revenue and ruled that a Massachusetts-based company (the “Company”) was entitled to a refund of sales tax paid on software purchases.

The Company was headquartered in Massachusetts and had employees and offices both within and outside of Massachusetts. During the tax periods at issue, the Company purchased and/or licensed software from Oracle and Microsoft (the “Vendors”). The software that was purchased or licensed from the Vendors was installed on servers located in Massachusetts, and the Company’s employees accessed the software from their work locations both within and outside of Massachusetts. The Vendors collected sales tax from the Company at the time of purchase on the entire amount paid for the software and remitted the sales tax to the Department of Revenue.

The Company thereafter informed the Vendors that the software was used in multiple locations and provided data showing the percentage of use outside of Massachusetts. The Vendors filed refund claims on behalf of the Company, claiming that the sales tax should have been apportioned based on the Company’s use of the software in more than one state.

The Commissioner of Revenue denied the refund request on the ground that his regulation, 830 CMR 64H.1.3(15)(a), allows for apportionment only where the purchaser provides an exemption certificate to the seller “no later than the time the transaction is reported for sales or use tax purposes.”

In its initial decision, the Appellate Tax Board agreed with the Commissioner of Revenue and ruled that an exemption certificate must be provided to the seller on or before the date the seller reports the sales for sales tax purposes in order to obtain the right to apportion sales tax charged on prewritten computer software. Upon reconsideration, the Appellate Tax Board rejected the Commissioner’s argument and ruled that the Vendors may seek apportionment by timely filing an abatement application, even in the absence of receiving an exemption certificate from the purchaser.

In its reconsidered decision, the Board ruled that there is nothing in the Commissioner’s regulation or in the Massachusetts sales tax statutes stating that the sole or exclusive method for obtaining the right to apportion sales tax is to receive an exemption certificate from the purchaser on or before the date the sale is reported for sales tax purposes. Although the Board noted that the Commissioner’s regulation does contain such a requirement, the Board relied on a different provision of the Commissioner’s regulation, which states that if the purchaser “does not provide an exemption certificate claiming multiple points of use, the seller may work with the purchaser to produce the correct apportionment,” provided the purchaser and the seller use a “reasonable, but consistent and uniform,” method of apportionment.

The Appellate Tax Board’s decision confirms that even if the purchaser does not provide an exemption certificate before the seller files sales tax returns, a taxpayer may still apportion sales tax among the states in which the purchaser uses the software as “long as the contemporaneous business records of the [seller and purchaser] demonstrate the place of use.” 

We are closely monitoring this case for developments. Please contact Philip S. Olsen or Matthew F. Cammarata with questions regarding this case.

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