Massachusetts Rules Software Apportionment Rules Can Be Used for Abatement and Refunds

On May 21, 2021, the Supreme Judicial Court of Massachusetts upheld an appeals court ruling that the Commonwealth’s rules allowing for apportionment of software for sales tax can be used for abatement after the tax has already been paid.

The original case was filed by three software companies, who, upon being informed by their customer their licensed software was being used mostly outside of Massachusetts, applied for a refund of sales tax paid to the state. The three companies were denied a refund by the Commissioner on the basis that they did not collect a direct pay permit or multiple points of use certificate or apportion the tax at the time of sale, and that these were the only three methods for apportioning sales tax specified in the Code of Regulations. The taxpayers successfully appealed the ruling, and the appellate tax board’s ruling was appealed by the Commissioner of Revenue, who protested the board’s conclusion that, as the apportionment of the tax was a statutory right, he could not create administrative rules that kept overpaid tax from being abated.  The Supreme Judicial Court ultimately also sided with the taxpayers, ruling that the apportionment was a statutory right and the companies had otherwise used the correct administrative process for claiming a refund of overpaid tax. The court also noted that, given the nature of software sales, it may be impossible for taxpayers to apportion the use of the software at time of purchase.

The ruling also directly addressed the issue of the separation of powers as outlined in the state’s constitution, and where the limits of the Commissioner’s power to create regulations to enforce the laws outlined in the statute end. The Commissioner argued that the phrasing in the statute, “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,” allowed him discretion on whether to allow for apportionment of sales taxes in the case of abatements and refunds. The court ruled that his powers in the statute applied only to the ability to put rules in place for how to apportion the tax, not in which situations the tax could be apportioned. The court further argued that the dispute over whether taxpayers could apportion the tax was a policy question answered by the legislature in the statute itself, and that regulations limiting that ability overstepped the Commissioner’s powers.

In addition to settling the matter of whether sales of software may be apportioned after time of purchase for refunds and abatements, the court’s ruling also highlights interesting conflicts that can come to light when state regulations don’t fall in line with state law. Though the Commissioner or Department of Revenue may be an authority when it comes to administering the law, the rights and responsibilities of taxpayers are ultimately laid out by the legislature. When the two do not match up exactly, taxpayers may find new opportunities to reduce or recoup tax that was incorrectly paid. Massachusetts taxpayers who failed to apportion sales of software at the time of sale may now be able to seek refunds if they are in a similar situation going forward. (Oracle USA, Inc. v. Commissioner of Revenue)

Posted on July 15, 2021