On November 8th, the Massachusetts Department of Revenue revised and reissued Letter Ruling No. 12-8, originally released July 16, 2012. The original ruling addressed the taxability of a cloud computing product comprised of remote storage and computing capacity where users elect to use software licensed from a third-party rather than their own software or open-source software. The original ruling determined taxability based on the Department’s regulations providing licenses to use software on remote servers are taxable transfers. The Department ruled the entire purchase price was subject to tax because the costs for cloud services were part of the purchase price for the software.
Following the release of the original ruling, the Department was provided additional facts and now has reversed course, determining that the cloud computing product is not taxable because the licensed software is incidental to the nontaxable services provided.
The Department focused on the “object of the transaction test” in the revised ruling. Under this test, when nontaxable services and the right to use software are bundled in one transaction, the Department will apply “object of the transaction” test to determine taxability. While the test was mentioned briefly and dismissed in the first ruling, the new ruling found that the object of the transaction was the nontaxable computing capacity and remote storage services, and that the software provided was incidental to the services sought.