United States

Massachusetts court allows sales tax on software to be apportioned

INSIGHT ARTICLE  | 

On May 21, 2021 the Massachusetts Supreme Judicial Court (SJC) affirmed a decision by the Massachusetts Appellate Tax Board (ATB) allowing two software vendors to seek refunds on the portion of sales tax paid on sales of software used by the purchaser in multiple jurisdictions.

Background

The issue in this case stems from sales tax collected and remitted by Oracle and Microsoft (Sellers) on sales of software products to a customer located in Massachusetts. The Commonwealth of Massachusetts allows a purchaser to provide the seller with an exemption certificate asserting that the software will be used in multiple jurisdictions (i.e. Form ST-12, Multiple Points of Use Certificate), therefore removing the sales tax collection obligation from the seller and placing the burden on the purchaser to report use tax on the percentage of use in Massachusetts. The regulation pertaining to Multiple Points of Use Certificates (830 CMR 64H1.3(15)) requires that the purchaser provide the seller with the exemption certificate “no later than the time the transaction is reported for sales or use tax purposes.” In this case, the customer did not provide the Sellers with Multiple Points of Use Certificates at the time of the purchase, therefore, the sales tax on the entire sales price was collected and remitted to the Massachusetts Department of Revenue. Subsequently, the customer notified the Sellers that only a percentage of users of the purchased software were located in Massachusetts, which resulted in the Sellers filing requests for abatement and a refund of sales tax remitted for the portion of software used at locations outside of Massachusetts.

In May 2017, the ATB heard an appeal brought by the Sellers based upon the department’s refusal to grant abatements and refunds stemming from the aforementioned software purchases. While the department did not dispute the Seller’s abatement requests reflecting the appropriate sales tax corresponding to the percentage of use in Massachusetts, the department denied the requests based upon the Multiple Points of Use Certificate not being provided to the Sellers during the timeframe required by the regulation (i.e. “no later than the time the transaction is reported for sales or use tax purposes”).

While the ATB originally ruled in favor of the department, the decision was reconsidered on the ATB’s own motion, and in March 2019, the ATB determined that the Sellers would be permitted to seek refunds of sales tax paid despite the customer not providing the Multiple Points of Use Certificate during the timeframe required by the regulation.

Massachusetts Supreme Judicial Court’s decision

An appeal from the ATB’s decision brought by the department was transferred to the SJC on its own motion, hearing oral arguments on Feb. 1, 2021.  On May 21, 2021 the SJC affirmed the decision of the ATB’s finding that the Sellers would be permitted to seek refunds through the general abatement process on the portion of sales tax remitted on software used outside of Massachusetts.

The department’s argument to the SJC centered around language in the statutory definition of tangible personal property, which reads “the commissioner may, by regulation, provide rules for apportioning tax in those instances in which software is transferred for use in more than one state” (64H M.G.L. § 1).  The department argued that the use of the word “may” grants the department the power to determine whether the apportionment of sales tax can occur pursuant to the requirements in 830 CMR 64H.1.3. The Sellers disagreed and took the position that taxpayers who purchase software for use in multiple jurisdictions have a statutory right to apportionment, and the department may only determine how to apportion the applicable tax.

In affirming the decision of the ATB and ruling in favor of the Sellers, the SJC determined that the department’s view that the Commissioner of Revenue can determine how and whether to apportion the applicable tax creates separation of powers concerns, and the Massachusetts Constitution vests the authority to tax exclusively in the legislature. The SJC indicates that while some delegations are proper, the determination to apportion the tax on software purchased for use in multiple jurisdictions is a fundamental policy decision that cannot be delegated.  The SJC goes on to convey that it agrees with the ATB’s interpretation of 64H M.G.L. § 1 and that the legislature “has determined the policy question whether to allow apportionment of the sales tax on software transferred for use in more than one state and delegated only the manner of implementation of the legislatively determined policy.”

In addition, the SJC found that a refund of sales tax remitted on the sale of software to be used in multiple jurisdictions can be sought through the general abatement process despite a Multiple Points of Use Certificate not being provided during the requisite regulatory timeframe. The SJC notes that nowhere in the regulation does it indicate that the applicable tax cannot be apportioned through abatement and only reflects that the seller is required “to pay the tax, when due, if there were no apportionment.” The requirement that the seller pay the applicable tax, when due does not bar such seller “from later seeking a timely abatement…once the apportionment between software users in various States has been determined.”

Takeaways

Any Massachusetts-based purchasers of software that will be used in multiple jurisdictions should be aware that a refund of sales tax paid is possible despite not providing a Multiple Points of Use Certificate at the time of purchase. This may also present an opportunity during reverse audits to identify potential refunds despite the purchaser not adhering to the existing regulatory framework to claim a Multiple Points of Use exemption. 

Taxpayers purchasing software in Massachusetts should consider reviewing those transactions for proper taxability and to reach out to their Massachusetts sales tax advisers with questions. 

RSM CONTRIBUTORS


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