At a Glance...

The Massachusetts Appellate Tax Board ("ATB") has issued an order denying three sales tax refund claims involving multiple points of use ("MPU") sourcing. In each case, vendors had filed refund claims arguing that their customers were eligible for refunds of sales tax charged on the full sales price of software delivered to Massachusetts to the extent the software was actually used by the customer's employees outside of Massachusetts.

MPU apportionment, refund claim denials, and ATB decision:

Massachusetts has issued regulations that permit vendors to apportion the sales price for certain sales of software delivered to a customer in Massachusetts for sales and use tax purchases using multiple points of use ("MPU") apportionment.1 Under MPU apportionment, if a customer can provide documentation to the vendor that establishes that software delivered to Massachusetts is actually used in multiple states, then the vendor is relieved of its obligation to collect and remit Massachusetts sales tax on the software, and the customer is only required to remit Massachusetts use tax on the portion of the sales price for the software attributable to use of the software in Massachusetts.

There is no question that MPU apportionment is permitted in Massachusetts, when claimed at the time of sale. However, over the past few years, many taxpayers have been surprised when the Department of Revenue (the "Department") denies sales tax refund claims claiming MPU apportionment filed by vendors on their behalf.

According to petitions filed by the vendors with the ATB, the Department denied the refund claims based on a procedural technicality. Specifically, the vendors allege that the Department did not grant sales tax refunds applying MPU apportionment because the customers did not provide the vendor with an MPU certificate or other acceptable documentation of multiple points of use before the vendor remitted the tax to Massachusetts. The Department's position is that once the tax is remitted by the vendor, a customer loses its ability to claim MPU apportionment. While there is some support for the Department's position in its regulation, it is our view that the Department's position conflicts with statutory authority, as well as the Department's own policy regarding other types of sales tax exemption certificates. (Click here to view our prior alert on the issue and how that policy contrasts with the Department's treatment of similar exemption certificates).   

Several vendors have filed appeals with the ATB, challenging the Department's denial of MPU refund claims filed on behalf of their customers, and on May 22, 2017, the ATB issued its first order in an MPU apportionment appeal. That order upholds the Department's denial of the vendor's refund claims.2 

Anticipated next steps: Our understanding is that the ATB has received a request to publish a full opinion detailing its basis for denying the taxpayer's refund claims. This opinion will provide more detail regarding the ATB's thinking and whether it upheld the denial of the refund claim on the basis that the MPU documentation was not provided prior to the remittance of tax, or some alternative theory.

In addition, there are other claims on the issue pending at the ATB and the Department's Office of Appeals that we expect will continue working their way through the appeal process.

What you can do to protect your refund rights: We expect that litigation will continue on this issue, and that taxpayers have several strong arguments for challenging the Department's denials of MPU apportionment. As a consequence, businesses that have purchased software and paid Massachusetts sales tax on the full purchase price should review whether that software was actually concurrently available for use in other jurisdictions. If so, they should request that the software vendor file protective refund claims on their behalf, regardless of whether they provided the vendor with an MPU certificate at the time of purchase.

In addition, businesses that have paid Massachusetts sales tax on SaaS or software hosted outside Massachusetts, and accessed by employees inside Massachusetts, should be aware that they may have additional bases for having their vendors seek a refund of Massachusetts sales tax on their behalf. These businesses should also consider requesting that their software vendor file a protective refund claim preserving these issues.

About Reed Smith State Tax

Reed Smith's state and local tax practice is composed of more than 35 lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues.

Footnotes



1.830 CMR 64H.1.3(15)

2.See Oracle USA, Inc. et. al v. Commissioner of Revenue, Appellate Tax Board Dckt Nos. C318441, C318442, and C327798 (May 22, 2017).

This article is presented for informational purposes only and is not intended to constitute legal advice.