Recently, the Massachusetts Supreme Judicial Court held that taxpayers have a statutory right to apportion sales and use tax on software used in more than one state. Additionally, the court stated that the general abatement process is available to taxpayers seeking refunds based on such apportionment. Oracle USA, Inc. v. Commissioner of Revenue, 487 Mass. 518 (2021).
Oracle, the taxpayer, collected and remitted sales tax to Massachusetts on the full sales price of the software at the time of the sale. The taxpayer installed their software on their customers servers located in the Commonwealth. However, following the sale and installation, the customer notified the taxpayer that the software was accessed and used by employees outside the Commonwealth as well as those within Massachusetts and as such requested a refund based on an apportionment methodology.
“... 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.”
Multiple Points of Use Exemption
The apportionment percentages reported were based on the number of employees that used the software in Massachusetts as a percentage of the total number of employees using the software.
The court acknowledged that Commonwealth statute creates a right to apportion sales and use tax on transfers of software for multi-state use and that the apportionment process set forth in the relevant regulation is appropriate.
Although other methods may be considered reasonable, the regulation provides that the Commissioner generally accepts an apportionment method that is based on the number of licensed users in a particular state. To this end, the Massachusetts DOR provides a form that specifically lists an exemption for multiple points of use.
As a result of this decision, provided the 3 year statute of limitations period is still open and the other requirements are met, taxpayers can apply to the MA DOR for abatements of sales and use tax on software transferred for multi-state use.