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By David Pope and Timothy Gustafson
Pursuant to a letter ruling request, the Massachusetts Department of Revenue determined that a taxpayer’s bundled sale of software and services related to Internet-based marketing and customer communications solutions was subject to Massachusetts sales tax. The taxpayer provided different types of software to its subscribers, which organized customer reviews, questions, answers, stories of the taxpayer’s subscribers, and extracted insights on customer preferences. The taxpayer provided the software either by embedding it on a subscriber’s website or as “software-as-a-service.” As part of the bundled transaction, the taxpayer also provided certain non-taxable services, including a monitoring service that filtered any obscene or illegal customer inputs and a social media marketing advisor service. The Department first determined that all of the taxpayer’s software was subject to sales tax regardless of the method of delivery pursuant to Computer Industry Services and Products Regulation, 830 CMR 64H.1.3(3). Then, applying Massachusetts’s “object of the transaction” test to determine whether the bundled sale was taxable, the Department stated that the non-taxable services were deemed inconsequential when bundled with the taxable software. Although the Department concluded that sales tax applied to the total bundled product, it stated that the non-taxable services would not be subject to sales tax if the taxpayer sold such services as a separate, unbundled option. Massachusetts Letter Ruling No. 13-2 (Mar. 11, 2013).