The Massachusetts Appellate Tax Board found that software-as-a-service (SaaS) provider Akamai Technologies Inc. was a manufacturing corporation, rather than a service provider. Akamai, headquartered in Massachusetts, provided software-based cloud services allowing customers to manage the delivery of web and media content over the Internet. In Massachusetts, a manufacturing corporation must use single sales factor apportionment, instead of the standard three factor formula. Manufacturing corporations may also claim the Investment Tax Credit and a limited exemption from local property tax.

The Board ruled that because Akamai developed and sold standardized computer software, which its customers accessed remotely, Akamai qualified as a manufacturing corporation. The Board rejected the Commissioner’s arguments that Akamai provided a service instead of selling software.

In holding that Akamai was a manufacturer, the Board looked to how the Department had previously distinguished sales of prewritten software from sales of services for sales tax purposes.  In the Board’s view there was a transfer of property because Akamai’s software products operated almost automatically without its employees’ intervention, it charged separately for personalized professional services, and its software was not designed for any specific customer.  The Board rejected the Commissioner’s argument that the object of the transaction test dictates that Akamai provides a service because Akamai billed separately for its services.  The Board also disagreed with the Commissioner that Akamai provided services because it held itself out to be a “service” provider and because its large computer server network cost more than its software development. Rather, Akamai’s expenses to maintain its network hardware were part of its overhead for its standardized software products. Akamai’s use of the word “services” in describing its software products is not determinative, nor is the financial reporting description of its “internal-use software” costs. Ultimately, the Board looked to the substance of what Akamai sold to its customers – remotely-accessed computer software – to determine it was a manufacturing corporation.

Notably, this decision may result in an increased Massachusetts apportionment factor for out-of-state sellers of remotely accessed prewritten software, as they could be considered manufacturers subject to single sales factor apportionment.

Akamai Technologies Inc. v. Commissioner of Revenue and Board of Assessors of the City of Cambridge, Intervenor, Dkt. Nos. C332360, C334907 and C336909 (Mass. App. Tax Bd. Dec. 10, 2021).