Tax ARTICLE - Transfers of Prewritten Computer Software

Effective April 1, 2006, prewritten software sold to a customer in Massachusetts or purchased for use in Massachusetts shall be deemed a transfer of tangible personal property subject to the sales or use tax regardless of the method of delivery, including transfers by electronic means such as the Internet or “load and leave.” 

The legislation also provides that the development and sale of prewritten software shall be considered a manufacturing activity for purposes of certain corporate excise provisions, regardless of the method of the delivery of the software. This may result in the applicability of single sales factor apportionment and to eligibility for potential local property tax benefits, investment tax credits, and certain sales tax exemptions. These changes are effective for taxable years beginning on or after January 1, 2006.

Statutory Changes

The recent legislation amends the definition of “tangible personal property” in the sales tax statute, to add the following: “A transfer of standardized computer software, including but not limited to electronic, telephonic, or similar transfer, shall also be considered a transfer of tangible personal property. 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 legislation also amends provisions in the corporate excise statute to provide that for purposes that “the development and sale of standardized computer software shall be considered a manufacturing activity, without regard to the manner of delivery of the software to the customer.”

New Sales/Use Tax Treatment

All transfers of prewritten software on and after April 1, 2006, including but not limited to electronic, telephonic, or similar transfers, downloaded software from the Internet or transfers by “load and leave” are considered transfers of tangible personal property. Sales or use tax will apply when such software is transferred for a consideration to a retail purchaser in Massachusetts or for use in Massachusetts. 

On and after April 1, 2006, taxable transfers of software include, but are not limited to, the following:

1. Licenses and leases of prewritten software.
2. Granting the right to use prewritten software installed on a remote server.
3. Upgrades to prewritten software, including upgrades delivered pursuant to maintenance contracts, regardless of whether the software was taxable when initially transferred to the retail customer.
4. License upgrades for prewritten software. 

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Transfers of custom software will generally continue to be treated as nontaxable personal service transactions. There is no change in the treatment of database or similar electronic information services available to multiple subscribers or data processing, which remain non-taxable services. 

Generally, business taxpayers that download or otherwise acquire prewritten software for use in Massachusetts from an unregistered out-of-state retailer for a consideration are required to file and pay the use tax due on Form ST-9, Sales/Use Tax Return or ST-10, Business Use Tax Return. Under some circumstances, a business purchaser may give a Multiple Points of Use Certificate to the vendor. 

Individuals acquiring prewritten software for non-business use from an unregistered out-of-state retailer for a consideration must pay applicable use tax due by filing Form ST-11, Individual Use Tax Return. An individual’s use tax may also be paid with the Form 1 Massachusetts Resident Income Tax return. 

Manufacturers of prewritten software that is delivered electronically may also now qualify for sales tax exemptions for machinery, materials, tools and fuel, provided that the other requirements of those provisions are met. 

Multiple Points of Use – Exemption Certificate

Business and commercial purchasers of prewritten computer software that will be concurrently available for use in multiple tax jurisdictions must present to the vendor an exemption certificate, Form ST-12, to elect Multiple Points of Use (MPU) treatment. Upon receipt of the MPU Exemption Certificate, the vendor is relieved of all obligation to collect, pay, or remit the applicable tax and the purchaser shall be obligated to report and remit the applicable sales or use tax on its sales/use tax return. 

A purchaser delivering the MPU Exemption Certificate may use any reasonable, but consistent and uniform, method of apportionment that is supported by the purchaser's business records, as they exist at the time a return is filed. Generally, a “reasonable” method must reflect the location of use of the software by the purchaser and not the location of the servers where the software is installed. The purchaser must maintain records and documentation for review by the Department of Revenue’s Audit Division.

Examples of situations where use of an MPU is appropriate include, but are not limited to the following:

• Software is installed on a server located in another state but concurrently available for use by purchaser’s employees in Massachusetts as well as other states. The purchaser gives the seller a properly completed MPU form. Part of the sales price of the software will be apportioned to Massachusetts for sales/use tax purposes. 
• Software is installed on a server located in Massachusetts but concurrently available for use by purchaser’s employees in other states as well as Massachusetts. The purchaser gives the seller a properly completed MPU form. Part of the sales price will be apportioned to those other states for sales/use tax purposes. 
• A business in Massachusetts purchases an enterprise license that allows the purchaser to make copies of software (either from a master disk or downloaded copy) and those copies will be concurrently available for use at the purchaser’s business locations in various jurisdictions. The purchaser gives the seller a properly completed MPU form. For sales/use tax purposes, part of the sales price will be apportioned to the other states where the purchaser is using copies of the software. 
• A Multiple Points of Use Certificate may not be used for computer software received in person by a business purchaser at a business location of the seller, such as a retail store. A Multiple Points of Use Certificate also may not be used for software that is loaded on computer hardware prior to sale; in that situation the sales tax sourcing rules for computer hardware determine the taxability of the transaction, regardless of whether the price for the hardware and software are separately stated.

Treatment of Corporations as Engaged in Manufacturing Activity

The development and sale of standardized computer software shall be considered a manufacturing activity, without regard to the manner of delivery of the software to the customer. These changes are effective for taxable years beginning on or after January 1, 2006.

A corporation classified as a manufacturing corporation may use certain tax benefits, in addition, a corporation engaged in manufacturing but not having been so classified may qualify for certain tax benefits, a corporation engaged in manufacturing activity may also be subject to single sales factor income apportionment for the corporate excise. Previously, corporations engaged in the development and sales of prewritten software could only be treated as engaged in manufacturing to the extent that software was delivered in a tangible medium.

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