Massachusetts has revised a letter ruling addressing the sales and use tax treatment of cloud computing products. The revised ruling states that sales of cloud computing products are not subject to tax when the products are used with the purchaser’s own application software or open-source operating system software because there is no sale of prewritten software. Additionally, cloud computing products that include operating system software licensed by the taxpayer from a third party are not subject to tax. The cost of the operating system software license is included in the charge to the customer, but there is no contractual sublicensing of the software and no separately stated charge for the software. The inclusion of the operating system software is incidental, and the object of the transaction remains the access to the seller’s computing resources and storage capacity. The seller is liable for use tax on the cost of prewritten operating system software that it consumes in the provision of nontaxable services to Massachusetts customers. Charges for remote storage service are not subject to tax because the object of the transaction is the use of capacity in the seller’s hardware to store or back up the customer’s data. In those instances where both services and the right to use software are integrated or bundled in one transaction, an “object of the transaction test” will be applied to determine whether the transaction is for the purchase or use of software which is taxable regardless of method of delivery or whether the transaction is for a non-taxable service with incidental use of software. Service providers and purchasers of Cloud computing should carefully review their transactions to determine the object of the transaction.
(Letter Ruling 12-8, Massachusetts Department of Revenue, November 8, 2013)