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Massachusetts Supreme Judicial Court affirms right to software tax apportionment

June 2021

In brief

The Massachusetts Supreme Judicial Court recently affirmed the right to apportion sales tax on software transferred for use in more than one state, allowing the sellers’ application for abatement of tax on out-of-state software use. [Oracle USA, Inc. v. Commissioner of Revenue, Mass., May 21, 2021]

Action item: There may be a sales tax refund opportunity for Massachusetts-based purchasers of software for use outside of Massachusetts if the purchaser failed to timely tender a multiple points of use certificate to the vendor.

In detail

Hologic, Inc. (‘the purchaser’) purchased or licensed software from the appellants, Oracle and Microsoft, and installed the software on servers located in Massachusetts for use by employees in the state and at its offices around the country and internationally. The appellants each collected Massachusetts sales tax from the purchaser on the sales price of the software and timely remitted the sales tax to Massachusetts.

Subsequently, the purchaser informed the appellants of its intended and actual use of the software in multiple locations and provided data supporting apportionment of the sales price based on the percentage of its software use outside the state. The appellants then filed applications for abatement for the tax periods at issue seeking abatements and refunds of sales tax consistent with the apportionment information provided by the purchaser. The appellants agreed to credit the purchaser any refunds they received from their applications for abatement, as required by law.

The Department denied the abatement applications, arguing that its regulation (830 CMR 64H.1.3(15)(a)) requires a purchaser “who knows at the time of its purchase of prewritten computer software that the software will be concurrently available for use in more than one jurisdiction” to provide an exemption certificate claiming multiple points of use to the vendor “no later than the time the transaction is reported for sales or use tax purposes.”

The Massachusetts Appellate Tax Board on November 27, 2019, ruled that the appellants were entitled to an abatement of sales tax based on the purchaser’s post-sale provision of data showing the percentage of its intended and actual use of the software in multiple locations. The Massachusetts Supreme Judicial Court on its own initiative took the case on direct appeal.

Post-sale apportionment allowed

The Court noted that in 2005 the legislature enacted provisions providing, “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.” The Department argued that this language does not create a statutory right to apportionment, but rather affords the Department the discretion to decide “not only how, but also whether, to apportion taxes on software transferred for use in more than one State.”

The Court found that the legislature may not delegate its constitutionally vested authority to tax to the Department. Further, where the statute does not plainly confer an authority to tax, the Court must not read in one that the legislature chose not to include. Therefore, the Court concluded that there is a statutory right to apportion tax on software transferred for use in multiple states.

The Court noted that the Department’s regulation prescribes three methods for reporting an apportioned tax amount: (1) the seller accepting a multiple points of use exemption certificate from the purchaser, (2) the seller working with the purchaser to report an apportioned tax amount, or (3) the purchaser using a direct pay permit.

The Court concluded: “The regulations provide simple, efficient processes for taxpayers to use in seeking apportionment at the time the sales tax is due. If a taxpayer wanted to avail itself of the benefits of paying only the apportioned tax when the tax is due, then the procedures set forth in the regulations must be followed. Otherwise, the presumption that the full amount is taxable applies, and the seller must pay tax on the entirety of the sale when the tax becomes due.”

“Allowing a vendor later to seek an abatement of the apportioned amount does not render the regulations meaningless. We conclude, as did the board, that the regulations do not preclude taxpayers from achieving apportionment through the abatement process.”

The takeaway

The Supreme Judicial Court agreed with the taxpayers that the Massachusetts legislature conferred a statutory right to apportion software sales. The Massachusetts Department of Revenue’s regulation that required tendering a multiple points of use certificate prior to the vendor’s filing of a sales tax return did not abridge this right to apportionment. As a result, taxpayers that are unable to determine the proper apportionment of their software purchases within the regulatory time requirements may pursue sales tax refund claims through the abatement process.

Massachusetts purchasers of enterprise software, which might be used by employees across an entire organization in multiple jurisdictions, may want to determine whether the use of such software outside of Massachusetts had been subjected to the Massachusetts sales tax. If it had, there is a specific process for purchasers seeking a refund of sales tax under a power of attorney from a vendor that should be followed if the vendor is unwilling to file the refund claim itself.

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Peter Michalowski

National SALT Practice Leader, PwC US

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