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Are Massachusetts business owners required to collect sales tax on subscription services?

On Behalf of | Dec 7, 2021 | Tax Controversies

In recent times, subscription services, in addition to products, have become the source of additional monthly or annual business income for entertainment and software services. However, recent litigation with the Massachusetts Commissioner of Revenue on whether sales tax should be collected on these services has been at the forefront.

Are online products or subscription services tangible property?

It used to be that whenever you needed access to prewritten software to perform tasks or for entertainment, the software came in the form of CDs or on a disk, which would be considered tangible personal property.  Now, software, to perform tasks or to entertain, can be accessed at a remote server, or “the cloud”.  This benefits users because they don’t have to take up storage on their machines.

The sale of tangible personal property, those of which are listed in the Massachusetts General Law code, is to have sales taxes collected by the vendor.

M.G.L. c. 64H, § 1 determines tangible personal property in general and as it applies to computer software as,

“Personal property of any nature consisting of any produce, goods, wares, merchandise and commodities whatsoever, brought into, produced, manufactured or being within the commonwealth.  A transfer of standardized computer software, including but not limited to electronic, telephonic or similar transfer, shall also be considered a transfer of tangible personal property”.

Are sales taxes to be collected on subscription services in Massachusetts?

In Massachusetts, according to 830 CMR 64H.1.3,

“Taxable transfers of prewritten software include sales effected in any of the following ways regardless of the method of delivery, including electronic delivery or load and leave: licenses and leases, transfers of rights to use software installed on a remote server, upgrades, and license upgrades. The vendor collects sales tax from the purchaser and pays the sales tax to the Commissioner”.

The general rule is that charges for customers to gain access or use the software on a remote server are subject to tax.  So, if the purpose of accessing the software remotely is to watch TV programs and movies, play games, or accomplish some sort of task, the subscriptions sold to be able to do those things are subject to sales tax.

Citrix Systems Inc. v. Commissioner of Revenue

In 2020, the Massachusetts Supreme Judicial Court upheld and affirmed a decision from the Appellate Tax Board that Citrix Systems’ fees for online software subscription services were subject to sales tax based on M.G.L. c. 64H, § 1  and  830 CMR 64H.1.3.

 

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