The Massachusetts Supreme Judicial Court recently held that software vendors have a statutory right to apportion tax on the sale of prewritten computer software purchased for use in multiple states and that they may do so through the Commonwealth’s general tax abatement process. The court’s decision in Oracle USA, Inc. v. Commissioner of Revenue, 487 Mass. 518 (2021) confirms that the ability to apportion tax on software is not contingent on strict compliance with the administrative procedures set forth in the Massachusetts Commissioner of Revenue’s apportionment regulation. The tax abatement process is an acceptable mechanism for taxpayers to seek tax apportionment with respect to software purchased for use in multiple jurisdictions.
In Massachusetts, retail sales of tangible personal property, including transfers of prewritten computer software, are subject to sales tax unless an exception or exemption applies. Section 1 of chapter 64H of the Massachusetts General Laws provides that “the commissioner may, by regulation, provide rules for apportioning tax in those instances in which software is transferred for use in more than one state.” (Emphasis added.) The Commissioner of Revenue’s regulation, 830 Code Mass. Regs. § 64H.1.3(15), provides three different methods for apportioning tax on software that will be concurrently available for use in multiple jurisdictions. First, the purchaser can deliver a “multiple points of use” (MPU) exemption certificate to the vendor before or by the time the transaction is reported for sales or use tax purposes, in which case the purchaser must remit the apportioned tax. Second, when the vendor knows the software will be available for use in more than one jurisdiction but the purchaser does not deliver an MPU exemption certificate, the vendor can work with the purchaser to arrive at the proper apportionment. Once the purchaser certifies the accuracy of the apportionment, the vendor must remit the apportioned tax. Third, a purchaser that holds a direct pay permit must remit the apportioned tax directly, without having to deliver an MPU exemption certificate to the vendor.
Oracle concerned transfers of prewritten computer software to Hologic, Inc., a Massachusetts-based company. The vendors, Oracle and Microsoft, charged Massachusetts sales tax on the full value of the transactions. Hologic later notified the vendors that its employees located in and outside Massachusetts were using the software. The vendors filed applications for abatement and refunds, through the general tax abatement process, for the portion of the taxes they remitted on software transferred for use outside the Commonwealth. The Commissioner denied the vendors’ applications on the grounds that, having failed to comply with the procedures set forth in the regulation, the vendors were precluded from apportioning tax. The Massachusetts Appellate Tax Board (ATB) sided with the vendors, finding that they had a statutory right to apportionment notwithstanding their failure to comply with the Commissioner’s regulation.
On appeal, the Massachusetts Supreme Judicial Court confirmed that the vendors had a statutory right to apportion sales tax because the software in question was transferred for use in multiple jurisdictions. The court rejected the Commissioner’s argument that, in using the term “may” in G. L. c. 64H, § 1, the Massachusetts Legislature delegated to the Commissioner the authority to decide whether to allow apportionment of sales tax on software. The court observed that the Commissioner’s argument raised separation of powers concerns because the decision whether to allow apportionment of sales tax on software “represents a fundamental policy decision that cannot be delegated,” and the Massachusetts Legislature had intended to permit sales tax apportionment when software is transferred for use in multiple jurisdictions.
The court also held that the vendors were entitled to use the general abatement process to seek apportionment. The court analogized a purchaser that fails to provide an MPU exemption certificate to a purchaser that fails to provide a resale certificate in respect of a nontaxable sale. In the latter case, the vendor may seek a refund of excessive taxes paid through the general abatement process. The court saw no reason to deny similar treatment to a vendor when the purchaser fails to provide an MPU exemption certificate.
Oracle stands for the proposition that the administrative procedures set forth in the 830 Code Mass. Regs. § 64H.1.3(15) are not the exclusive means of seeking apportionment of sales tax on software purchased for use in multiple jurisdictions. If a taxpayer wishes to pay only the apportioned tax when the tax is due, it must comply with the regulation. Otherwise, the vendor may pay tax on the entire transaction and apply for an abatement and refund through the general abatement process.