The Massachusetts Supreme Judicial Court recently upheld a decision by the state’s Appellate Tax Board, upholding that Mass. G.L. c. 64H Section 1 provides taxpayers a statutory right to apportion via the abatement process sales tax on software transferred for use in multiple states, thereby allowing for the refund of sales tax paid on software used in multiple states.
Between 2009 and 2012, Hologic, Inc., a medical technology company with its headquarters in Massachusetts, purchased and/or licensed software from Oracle USA, Inc., Oracle America, Inc., and Microsoft Licensing, GP, according to the Court’s decision. The software was installed on servers located in Massachusetts, and each vendor collected Massachusetts sales tax from Hologic based on the total value of the transactions. Hologic subsequently notified each vendor that out-of-state employees were also using the software; only about 17% of the company’s Oracle USA and Oracle America users and 30% of its Microsoft users were in-state, the decision states. The vendors then timely applied for an abatement and refunds for the portion of the taxes remitted on the software that was used outside of Massachusetts.
“The commissioner did not dispute that the vendors’ abatement applications reflected the correct amount of sales tax that would have been due if the vendors had been permitted to apportion their remittances based on in-State use,” the decision recounts. “Nonetheless, the commissioner denied the applications for abatement because the vendors had not complied with the regulations requiring that, to be entitled to apportionment, a purchaser must submit to the seller a ‘multiple points of use’ certificate at the time of purchase or ‘no later than the time the transaction is reported for sales or use tax purposes.’ 830 Code Mass. Regs. Section 64H.1.3(15)(a)(1), (2) (2006).” In this instance, Hologic had not presented such a certificate to any of the vendors at the time of purchase or prior to the transactions being reported for sales and use tax purposes by the vendors.
Each of the three vendors appealed their right to apportionment by arguing that under G.L. c. 64H Section 1, “the requirement of an exemption certificate was relevant only to determining whether they had a duty to collect the tax in the first instance and to remit it at the time that the taxes were due but did not prohibit them from later seeking an abatement for the portion of taxes remitted to [Massachusetts] that were attributable to out-of-state software users,” the decision summarizes.
Initially, in May 2017, the Appellate Tax Board decided in the Commissioner’s favor, but in March 2019 it reconsidered (on its own motion) and came to the conclusion that each of the vendors could seek apportionment through the general abatement process, despite actually not having received an exemption certificate at the time of sale or when the tax was initially reported to the State by each vendor.
The Commissioner argued that no apportionment right exists under Mass. G.L. c. 64H Section 1, because the statute contains the word “may,” thereby granting the Commissioner the ultimate authority to allow apportionment of sales tax. The Massachusetts Supreme Judicial Court rejected this position and instead found that the State Constitution “vests the authority to tax exclusively in the Legislature.” The Court reasoned that 830 Code Mass. Regs. Section 64H.1.3 provides the means of apportionment but neither explicitly or implicitly prohibits seeking apportionment via the abatement process after a vendor collects, remits, and reports sales tax, just as the vendors did in this case.
What does this mean?
A vendor’s non-compliance with the regulation does not preclude apportionment altogether. A vendor can achieve apportionment through the abatement process.
What does CohnReznick think?It is critical for software vendors to keep a detailed record of where their customers are using software for sales tax to be apportioned to the correct jurisdiction.
Subject matter expertise
JD, Principal, Practice Leader, State and Local Tax (SALT) Services
Director, State & Local Tax
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