News and Insights

Two Letter Rulings Outline Massachusetts’ Approach to Cloud Computing

Tax Development Jun 12, 2012

The Massachusetts Department of Revenue (“DOR”) recently issued two letter rulings finding that software accessed in the “cloud” is taxable depending on the level of access and control over the software application granted to a customer. These letter rulings are representative of the state’s approach to the taxation of cloud computing.

Publishing Software

In Letter Ruling 12-6 (May 21, 2012), the DOR determined that a charge for use of a hosted service to create newsletters and perform other tasks was subject to sales tax as a license to use prewritten computer software. Customers utilized the application to control and manipulate data to create a unique product. As a result of the level of control granted to the customer, the DOR determined that the object of the customer’s purchase was to obtain a license to use taxable software.

Physician Service Offerings

In Letter Ruling 12-5 (May 7, 2012), the DOR determined that Internet-based physician service offerings, such as medical records management and access to medical databases, were nontaxable services. The DOR determined that each service offering, whether sold alone or in conjunction with another, was exempt from sales and use tax as either nontaxable personal and professional services, information services, and/or database access and management services. Although the company’s customers were able to use the software to perform certain tasks, the DOR determined that the true object of the transaction was the provision of nontaxable personal and professional services, as well as information management services, database access, and data processing.

Taken together, these letter rulings demonstrate the approach Massachusetts is taking with regards to cloud computing. Specifically, the key factor in determining whether a cloud service is a taxable license to use software or a nontaxable service is the level of control over the application granted to the customer.


Jeremiah T. Lynch