MA decision issued on software as a service and multiple points of use

7/1/2021
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On May 21, the Massachusetts Supreme Judicial Court issued its opinion in Oracle USA Inc. v. Commissioner of Revenue. The case addressed whether General Law (G.L.) Section 1 affords taxpayers the statutory right to apportion sales tax on purchases of software transferred for use in multiple states. The court further considered whether the general abatement process under G.L. Section 37 is available to taxpayers seeking apportionment on a retroactive basis.

The transactions at issue follow a familiar fact pattern in that the vendor and the taxpayer didn’t consider whether the entire value of the transaction was subject to tax in Massachusetts at the time the transaction was consummated. The taxpayer later notified the vendor that 83% of the value of the software was used outside Massachusetts, at which time the vendor applied for refund via the general abatement process.

The commissioner denied the application for refund on the grounds that the taxpayer failed to follow apportionment regulations that require taxpayers to provide a multiple points of use certificate at the time of purchase.1 The commissioner further contended that the permissive use of the word “may” in G.L. Section 1 allowed the commissioner to determine whether to allow apportionment.

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In rendering its decision, the court roundly rejected each of the commissioner’s arguments. The court first addressed whether taxpayers may retroactively apportion their use of software for purposes of determining taxability via the general abatement process. The court referenced the Appellate Tax Board’s interpretation of the commissioner’s apportionment regulation, which states that “while the provisions of the Regulation set out methodologies for apportionment and relief of vendor liabilities, they do not prohibit apportionment through…abatement.” More importantly, the court rejected the commissioner’s contention that the legislature afforded the commissioner the discretion “to decide not only how, but also whether, to apportion taxes on software transferred for use in more than one state.” In doing so, the court referenced the inherent state and federal constitutional separation of powers issue at play when an administrative agency, intentionally or otherwise, attempts to usurp the authority of a constitutional branch of government.

While the holding in this case is not binding on the courts or administrative agencies of any jurisdiction outside Massachusetts, it supports the contention that taxpayers should be broadly afforded the opportunity to apportion sales and use tax according to where actual use occurs.

Taxpayers should consult with their advisers to determine whether their software spend is properly apportioned to the appropriate jurisdictions, especially if a taxpayer is headquartered in a state that taxes software as a service (approximately 20 states) but has employees in states that do not tax software as a service (approximately 25 states).

  1See 830 Code Massachusetts Regulation Section 64H.1.3(15)(a)(1), (2) (2006).

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Daniel Megathlin
Principal, Indirect Tax Services Leader
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Matt Snell