The Massachusetts Appellate Tax Board (“ATB”) has - on its own motion - reconsidered and reversed a 2017 decision that denied refund claims for sales tax paid on software downloaded onto servers located in Massachusetts, but used outside of Massachusetts. Taxpayers that paid Massachusetts sales tax on software used outside the Commonwealth may have a refund opportunity and should consider protective refund claims.
Almost two years ago, we reported on a decision by the Massachusetts Appellate Tax Board (“ATB”) in several appeals involving the sourcing of software purchases under Massachusetts multiple points of use sourcing rules (for more information read our 2017 client alert).That determination upheld the Department’s denial of several refund claims for Massachusetts sales tax paid on software that was used outside of Massachusetts. The taxpayers (vendors filing claims on behalf of their customers) sold software that was downloaded onto servers located in Massachusetts, but alleged that a significant percentage of the software’s users were located outside of Massachusetts. The taxpayers claimed refunds based on the percentage of the users located outside of Massachusetts. Citing regulation 830 CMR 64H.1.3(15)(a), the Department denied the refund claims based on a procedural trap for the unwary - while Massachusetts has a multiple points of use sourcing rule, the Department argued that any purchaser that did not provide an exemption certificate prior to the date the vendor remitted the sales tax to the Commonwealth could not claim a refund. While this rule was contrary to typical Massachusetts policy regarding exemption certificates, the ATB initially issued an order finding for the Department.
But in surprising and unusual twist, the ATB has now - on its own motion - reconsidered and reversed that determination. The ATB’s new order vacates its original order in favor of the Department and now finds for the taxpayer. The ATB reasons that the Department is correct, there is a regulation requiring that a purchaser provide a multiple points of use exemption certificate prior to the date the vendor remits sales tax on the purchase to the Commonwealth. But the ATB correctly notes that the regulation contains additional provisions that permit multiple points of use apportionment, even if the purchaser does not provide an exemption certificate at the time of purchase or before the vendor remits sales tax on the sale. The ATB goes on to reason that there is no statutory or regulatory provision specifically barring a refund claim if multiple points of use information is provided at a later date. As a result, the ATB issued an order stating that the software purchasers are eligible to apportion the purchase price based on user location and claim a refund - even though no exemption certificate was provided.
This represents a significant victory for taxpayers, but the case is not over. The Commonwealth quickly filed an application requesting that the ATB reconsider its new decision and the taxpayer has filed an opposition to the request for reconsideration. Even if the ATB rejects the request for reconsideration, the parties will still be required to make additional filings with the ATB to establish the actual amount of the refund due to the taxpayers and the Commonwealth would still have the right to appeal any decision.
In the meantime, the determination confirms that taxpayers that have paid Massachusetts sales tax on the full purchase price for software used, in part, outside of Massachusetts may have a refund opportunity. Taxpayers should consider protective refund claims. When preparing those claims, taxpayers should review the ATB’s decision closely to ensure that their claim meets the requirements outlined by the ATB. In particular, the ATB emphasizes language in the regulation requiring that the taxpayer and vendor to have documentation contemporaneous with the reporting of the transaction for sales and use tax purposes in order to qualify for the claim.