By Jessica Kerner and Charlie Kearns
The Massachusetts Department of Revenue determined that the sale of access to an online database was not subject to sales and use tax because the “object of the transaction” was nontaxable data processing services rather than taxable prewritten software. The taxpayer sells subscriptions to a website that allows purchasers and suppliers of various goods to access a database containing shipping information. The taxpayer populates the database with information it gathers from several sources, including customer-supplied data and third-party data. In addition to obtaining information about businesses and shipments, the taxpayer’s customers may e-mail suppliers or purchasers through the taxpayer’s website and obtain a customized, analytical report utilizing the database information on the website. To provide these services, the taxpayer must use software that organizes, extracts and manipulates all relevant data elements. While the taxpayer’s customers execute an agreement to access the website, the customers never download any software. Under Massachusetts law, the sale or other transfer of a right to use software on a server hosted by the taxpayer or a third party is subject to sales or use tax. However, where there is no separate charge for the software, and the object of the transaction is acquiring a good or service other than the software, Massachusetts sales or use tax generally does not apply. In this ruling, the Department determined that regardless of whether the charge for the subscription is bundled with a charge for the additional services, the “object of the transaction” is access to the database, not the use of the software that makes that information available. Therefore, the Department concluded that the taxpayer is selling nontaxable database services. Mass. Ltr. Rul. No. 14-1 (February 10, 2014).