Massachusetts High Court Finds Statutory Right to Apportionment of Sales Tax for Software Used in Multiple States
The Massachusetts Supreme Judicial Court denied the Commissioner of Revenue’s attempted money grab and held that there is a statutory right to apportion sales tax on receipts from the sale or license of software that was purchased and used in Massachusetts, but also used in multiple other states. It also held that this statutory right could be exercised by vendors through the timely filing of refund claims (called applications for abatement in Massachusetts). Oracle USA, Inc. v. Comm’r of Revenue, 487 Mass. 518 (Mass. 2021). This case highlights the extent that some taxing agencies will go through to keep taxes to which they are not entitled. It is particularly noteworthy to see the court soundly reject the commissioner’s attempts here, ensuring that sales tax was only due on software actually used in the commonwealth.
Facts: A company purchased or licensed software from vendors, which it then installed on its servers in the commonwealth. The vendors collected and remitted Massachusetts sales tax on the total price they charged the purchaser. Id. at 519-520.
The purchaser subsequently informed the vendors that the software was also being used by its employees outside of the commonwealth (for one vendor, only 17 percent of the employees using the software were in Massachusetts). The vendors then timely filed for refunds. Id. at 520.
The commissioner did not dispute that the refund claims reflected the correct Massachusetts tax due had the vendors been allowed to apportion the sales tax. Nonetheless, the commissioner denied the claims on the basis that a regulation required the vendors to have obtained the apportionment information from the purchaser at the time of the sale. Id. at 520-521.
The Decision: The court rejected the commissioner’s assertions, first holding that the Massachusetts statutes contain a statutory right to apportion sales tax for software that is transferred for use in more than one state. It reviewed the 2005 amendments to the statute, which made software, regardless of whether transferred in physical or electronic form, subject to sales tax, and concluded that the legislature intended to allow taxpayers to apportion sales tax on software that was to be used in multiple states and that the method of apportionment would be based on the location of the software’s use. The court noted that the commissioner’s assertions that the statute afforded him not only the discretion to decide how, but also whether, to apportion sales tax on software raised separation of powers concerns since the legislature may not delegate its constitutionally vested authority to tax to the commissioner. Id. at 521-525.
The court then had little difficulty in finding that the vendors could exercise their statutory rights of apportionment by seeking refund through the general abatement process for the sales taxes paid to the commonwealth. Id. at 528. It held that the commissioner’s regulation regarding obtaining apportionment information from the purchaser at the time of the sale was only necessary if the vendors were not collecting and remitting tax on the entire sales price. The regulations did not, however, preclude vendors that subsequently learn that apportionment is necessary from later seeking timely abatement. Id. at 528-530.
This article is one in a series of articles written for the June 2021 edition of The BR State + Local Tax Spotlight.