The Supreme Judicial Court ("SJC") issued its highly-anticipated decision in Oracle USA, Inc. et al v. Commissioner of Revenue, dkt. no. SJC-13013, this past Friday, May 21, 2021, finding that Massachusetts taxpayers have a statutory right to apportion sales tax on software purchased for use in multiple states. The decision eliminates the Massachusetts Commissioner of Revenue’s ("Commissioner") longstanding policy that barred taxpayers from using the abatement process to establish the correct apportioned tax—a major win for Massachusetts-based purchasers of software. Richard Jones, Sullivan partner and leader of the firm’s Tax Group, presented oral argument on behalf of the taxpayers in the case on February 1, 2021.
The case, which the SJC transferred sua sponte from the Massachusetts Appeals Court, addresses the taxation of software, as well as the Commissioner’s authority to make fundamental tax policy decisions and to curtail taxpayers’ statutory abatement rights via regulation.
The dispute, which had been ongoing since June of 2015, stems from the interpretation of Mass. Gen. L. c. 64H, § 1, which was amended in 2005 to state 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." The Commissioner issued regulations affirming that the sales tax on software may be apportioned based on where it is used. 830 C.M.R. 64H1.3(15). The regulation also provides for two types of exemption certificates allowing apportionment. The first is a multiple points of use (MPU) certificate, Form ST-12. If the software purchaser provides an MPU certificate to the vendor by the time the sales tax return is due, the purchaser assumes the obligation to directly report and pay the apportioned use tax and the vendor is relieved of all obligation to collect and remit the tax. 830 C.M.R. 64H1.3(15)(a). Alternatively, the vendor may report and remit only the apportioned tax if the purchaser provides a certification identifying the appropriate apportionment based on Massachusetts use. 830 C.M.R. 64H1.3(15)(b).
In Oracle, the software vendors, Oracle and Microsoft, collected and remitted Massachusetts sales tax on 100% of the sales price of software sold to Hologic, Inc., a Massachusetts-headquartered company. Hologic subsequently notified the software vendors that most of its employee users of the purchased software were located outside Massachusetts. The software vendors subsequently filed abatement applications with the Commissioner to report the sales tax as apportioned based on Massachusetts use, and sought a refund of the sales tax attributable to out-of-state users.
The Commissioner did not dispute that the abatement applications reflected the correct amount of sales tax due as apportioned based on in-state use. Still, the Commissioner denied the abatement applications, contending that the regulation’s apportionment certifications are prerequisites that must be provided before the vendor’s sales tax return is due. This policy, which the Commissioner has enforced since 2006, prevented taxpayers from seeking abatements or refunds on the payment of unapportioned sales tax. In this appeal before the SJC, the Commissioner maintained that he had the authority to impose these abatement restrictions because taxpayers had no statutory right to apportion in the first place. Rather, the Commissioner claimed, Mass. Gen. L. c. 64H, § 1 conferred on him the discretion to decide whether to allow taxpayers to apportion.
In representing the taxpayers before the SJC, our team explained that the Massachusetts Constitution vests the Legislature with the exclusive authority to decide fundamental tax policy, and that the Commissioner’s authority is limited to implementing that policy; he is not authorized to decide fundamental tax policy himself. The SJC agreed, holding that while the Commissioner may make rules about how to apportion, he has no discretion to decide whether sales tax from software sales may be apportioned. The SJC affirmed that the statute, Mass. Gen. L. c. 64H, § 1, confers on taxpayers the right to apportion software sales.
The SJC also agreed that the Commissioner’s regulation did not abridge a taxpayer’s right to seek apportionment through the statutory abatement process. The court affirmed that taxpayers may establish apportionment of Massachusetts software sales via the statutory abatement process, and that the apportionment certificates referenced in the Commissioner’s regulation are not excusive prerequisites to apportion.
Taxpayers seeking to apportion may now breathe easier. The Commissioner’s now-invalidated policy had not only barred any refund claims on over-assessed sales tax, it also imposed unreasonable time constraints (effectively 20 to 50 days from the date of the transaction) for taxpayers seeking to utilize the certification process. As a practical matter, and as discussed in the amicus curie brief filed in Oracle by the Council on State Taxation, it can be difficult for companies to determine the extent of software use among the states. Per the SJC’s decision, taxpayers who need more than 20 to 50 days to give an accurate certification will not be deprived of the right to apportionment.
A Significant Refund Opportunity for Massachusetts-Based Software Purchasers
The Oracle decision at last confirms that Massachusetts taxpayers who had not apportioned sales tax on past software purchases may file refund claims to recover the tax attributable to software purchased for use outside of Massachusetts. This is an important and immediate opportunity for Massachusetts-based companies that have paid unapportioned sales tax on software used in part outside of Massachusetts.
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 Massachusetts-based users were about 17% for Oracle and 30% for Microsoft.
 Vendors are responsible for collecting and remitting the sales tax and therefore are the parties permitted to seek abatement on behalf of purchasers. See WorldWide TechServs., LLC v. Commissioner of Revenue, 479 Mass. 20, 29 (2018).