The Massachusetts Supreme Judicial Court found that a taxpayer’s subscription fees for online software products are subject to sales tax as sales of tangible personal property. The taxpayer sold subscriptions for three online software products that enabled users to have some level of access to a remote computer. The taxpayer’s online products create and maintain a screen-sharing connection between a host computer and one or more remote computers. The taxpayer uses a subscription-based model for its online products, with customers paying monthly or annual subscription fees for “access and use” of the products. The taxpayer is responsible for the maintenance, configuration, updating, and control of the network hardware and the proprietary software running on its own servers. In addition, the taxpayer provides customer service support to users.
Under Massachusetts tax law, a taxable transfer of tangible personal property includes a transfer of standardized computer software, including, but not limited to, electronic, telephonic or similar transfer. The Court agreed with Board below and held the statutory language provided a uniform sales tax treatment for sales of standardized software that does not depend on method of delivery. Massachusetts regulations specifically identify transfers of rights to use software installed on a remote server as taxable sales. The Court agreed that Citrix’s subscription fees involve transfers of rights to use software installed on a remote server and so are taxable.
The taxpayer argued that even if the subscription sales of remote access rights are treated as transfers of tangible personal property, the “true object” of its offerings was the provision of a remote connection service, and therefore the subscription fees should be treated as nontaxable sales of service. The Court agreed with the Board below that even though Citrix described its product as a service in its own written materials, the basic purpose of the transaction was to acquire access to and use of the online products, which the Board had already identified as taxable transfers of software. The Court affirmed the Board’s decision that the sales of subscriptions for the online products constitute sales of tangible personal property, not nontaxable services, and as such are subject to Massachusetts sales tax. (Citrix Systems vs. Commissioner of Revenue, Massachusetts Supreme Judicial Court, No. SJC-12741, February 5, 2020)