Unless a specific exemption exists, Massachusetts imposes a sales tax on transfers of tangible personal property to purchasers in the state. In 2005, the Massachusetts legislature expanded the definition of tangible personal property to include standardized computer software (“canned software”), including electronic transfers of such software. Determining whether vendors have transferred canned software “in the state” added complexity to the taxability determination. 

Apportioning Software Sales Used in Multiple Jurisdictions

Sales of tangible personal property generally are “in the state” if the purchaser takes possession of or title to the property in Massachusetts. This paradigm does not easily apply to software because, even though software has been deemed "tangible personal property," the place of transfer or possession often is not readily identifiable. Transfers of canned software may not involve the actual transfer of title; rather, purchasers often will acquire a license or a right to use the software. Moreover, canned software often is used by multiple employees within a business. Such software may be accessed remotely from a server in one jurisdiction and made available concurrently to users in multiple jurisdictions. To address the determination of whether canned software has transferred to a purchaser “in the state,” the legislature granted apportionment authority to the Department of Revenue. Using its authority, the Department of Revenue has issued regulations apportioning canned software sales to the location of users of the software. In other words, if a purchaser has four employees and three use the software in Massachusetts, then the vendor should impose a tax on 75% of the sales price.

Claiming the Exemption

Taxpayers have several methods of requesting that vendors charge them an apportioned tax. The two most common methods:

1. The purchaser gives a Form ST-12 (checks box 9) to the vendor and self-assesses use tax; or
2. The purchaser works with the vendor to produce the correct apportionment amount and the vendor charges the apportioned amount relieving the purchaser of its responsibility to self-assess use tax.

A Third Option Emerges

A recent decision by the Massachusetts Supreme Judicial Court has created a third option for many taxpayers. With this decision, taxpayers may now seek a refund of excess taxes paid on software used in multiple jurisdictions. The vendors can file these claims on behalf of your business or you may request a power of attorney that would allow your business to seek the refunds directly.

If you have questions about this topic, please reach out to a member of your DGC client service team or Scott Thomas, JD, LLM at 781-937-5172 / sthomas@dgccpa.com. You can also visit DGC's coronavirus web page at dgccpa.com/coronavirus which is frequently updated with new resources to help you deal with the financial impact of the coronavirus on you and your business.

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