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A Virtual Twist: Massachusetts Taxes Online Services as Sales of Software

By Kathryn Pittman and Timothy Gustafson

The Massachusetts Commissioner of Revenue concluded in a letter ruling that a taxpayer’s sale

June 25, 2013

By Kathryn Pittman and Timothy Gustafson

The Massachusetts Commissioner of Revenue concluded in a letter ruling that a taxpayer’s sales of subscriptions to use its virtual event platform and planning software were subject to sales tax where the use of the software was the object of the transactions. For a flat fee based on length of access or a defined event period, the taxpayer provided its customers a virtual event platform and licensed software that allowed its customers to create and customize virtual events via the Internet. Customers also could elect custom design or professional services for an added fee. In ruling that the taxpayer’s provision of the service was subject to sales tax, the Commissioner first noted that sales of prewritten computer software, including software hosted by a third party, are taxable regardless of the method of delivery. The Commissioner further noted, however, that where there is no separate charge for the use of software, and the true object of the transaction is acquiring a good or service other than the use of software, such software is generally not taxable. Under this framework, the Commissioner determined that the taxpayer’s sales were subject to tax because the use of the software to create customized virtual events by the customers was the true object of the transactions. Finally, the ruling stated that any personal or professional services (e.g., design services) offered in conjunction with the event planning software would be subject to sales tax if sold in a bundled transaction for one subscription price, but may be exempt from tax if the charges for such services were separately stated. Mass. Ltr. Rul. No. 13-5 (Jun. 4, 2013).

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