On Feb. 5, 2020, the Massachusetts Supreme Judicial Court (SJC) affirmed a decision by the Massachusetts Appellate Tax Board (ATB) upholding a tax assessment issued against Citrix Systems, Inc., (Citrix) finding that three online software products allowing remote access to a host computer as well as screen sharing capabilities are subject to Massachusetts sales tax.
The issue in this case were taxes assessed on subscriptions that Citrix sold for three online software products (online products), consisting of ‘GoToMyPC,’ ‘GoToAssist,’ and ‘GoToMeeting.’ While each product’s functions vary, each product creates and maintains a screen sharing connection between a host computer and one or more remote computers allowing the user of the remote computer to see the screen of the host computer and share access to any input controls (e.g., keyboard or mouse). The users of Citrix’s products do not download any software, nor is any software transmitted to the users’ computers. The users of the products are required to download and install ‘Endpoint Software’ onto the host computer as well as the remote computers. Citrix operates under a master services agreement with its customers and uses a subscription model where customers pay a monthly or annual subscription fee for ‘access’ and ‘use’ of the products.
In February 2016, the ATB heard an appeal brought by Citrix based upon the Massachusetts Department of Revenue’s refusal to grant abatements stemming from an audit assessment reflecting tax and penalties in relation to the sales of Citrix’s products to customers in Massachusetts.
In April 2017, the ATB upheld the tax assessments, finding that the sales of the online products constituted the sale of prewritten software which is subject to sales tax as the sale of tangible personal property in Massachusetts. In ruling in favor of the department, the ATB rejected two arguments presented by Citrix including that the sales were not subject to sales tax as there was no ‘transfer’ of software and that Citrix’s sale of the online products constituted the sale of services and not the taxable sales of tangible personal property.
Massachusetts Supreme Judicial Court’s decision
The SJC granted a motion for direct appellate review from the decision of the ATB, hearing oral arguments on Oct. 4, 2019. On Feb. 5, 2020, the SJC affirmed the decision of the ATB finding Citrix’s online products are subject to Massachusetts sales tax.
In its opinion, the SJC indicated that the department’s reading of the applicable regulation and legislative history was reasonable despite the fact that no software was actually ‘transferred’ to the customer. The SJC indicated that in 2005, the legislature expanded the definition of tangible personal property to include “transfers of standardized computer software, including but not limited to electronic, telephonic or similar transfer” and the subsequent regulation promulgated by the department (see 830 CMR 64H.1.3), expressly provides that “generally, charges for the access or use of software on a remote server are subject to tax.” The SJC agreed with the department’s argument that Citrix is selling the right to access and use software installed on remote servers and transactions of these nature are “precisely what the text of the regulation covers.”
In addition, the SJC found that the ‘true object’ of the transaction was the use of the online products and not for the purpose of acquiring any nontaxable service. The SJC agreed with the ATB’s findings that Citrix’s customer’s primary purpose for entering into the transactions were for the use of the online products despite Citrix’s operations including “the many support functions necessary to develop, maintain, test, and troubleshoot” the online products. The SJC conveyed that “when considering the entire record, a ‘reasoning mind’ could find that Citrix’s customers were paying for the software rather than for unseen support operations.”
Vendors who offer remote access to software products or who offer similar products as Citrix (e.g., software that allows for screen sharing functionality) should be aware that transactions of this nature are subject to sales tax in Massachusetts despite the existence of ‘behind the scenes’ support and maintenance services. Furthermore, any taxpayers who purchase taxable software products for use in Massachusetts from vendors who do not charge sales tax on such transactions may have an obligation to accrue use tax.
However, it is important to note that the above decision does not render all products that utilize a software element subject to sales tax and that taxpayer needs to continue to review and assess whether the true object of the transaction is the acquisition or access to prewritten software or the acquisition of a non-taxable component (such as the access to information or software support services without updates or upgrades). In addition, Massachusetts allows for a Multiple Points of Use exemption which may be utilized to apportion the tax base of taxable software products used inside and outside of Massachusetts for sales tax purposes.
Please note that the SJC did not address the Endpoint software and how the use of this software may impact the taxability of the transactions.
Taxpayers offering software or software services to Massachusetts customers should consider reviewing those transactions for proper taxability and to reach out to their Massachusetts sales tax advisers with questions.