The Supreme Judicial Court ruled today that remote-access products such as GoToMyPC are more than just a service and so their use can be taxed by the Department of Revenue.
The ruling comes in a case involving software company Citrix, which sells subscriptions to GoToMyPC, GoToAssist and GoToMeeting, and which appealed a state order that it pay back taxes on subscriptions from Massachusetts customers.
The state's highest court said it agreed with the Massachusetts Appellate Tax Board, which ruled in 2018 that users who connect to Citrix servers are essentially buying software - even if it is run and maintained on Citrix servers - which is taxable and that Citrix was not providing a "service," which is not taxable, because the company did not customize the software for individual users:
The board found that the online products "constituted standardized software and, in turn, tangible personal property within the meaning of G. L. c. 64H, § 1," and that "the sales of the [o]nline [p]roducts . . . were sales of tangible personal property subject to the sales tax pursuant to G. L. c. 64H, §§ 1 and 2."
Even if end users do not actually download software on each connection, they are agreeing to an end-user license each time and "transfers of rights to use software installed on a remote server" are "[t]axable transfers of prewritten software" that are "generally subject to the Massachusetts sales tax," the tax board ruled.
Citrix argued that the right to use its software on its servers did not actually give end users any ownership of the software and so nothing tangible was trading hands.
The SJC, however, disagreed. It began its discussion by noting that, in 2005, the legislature amended the tax code to eliminate the distinction between software in a box and software delivered electronically, and that the Department of Revenue then codified that with a regulation that included software running remotely as something that could be taxed.
The court applied this to Citrix:
When a Citrix customer purchases a subscription for access to an online product, the customer gains access to a remote network of Citrix's servers running proprietary software, which is necessary for Citrix's products to function. Therefore, it is apparent that Citrix's subscription fees involved "transfers of rights to use software installed on a remote server." 830 Code Mass. Regs. § 64H.1.3(3)(a)..
The court continued:
Citrix argues in the alternative that even if we treat the subscription sales of remote access rights as transfers of tangible personal property, the "true object" of its offerings was the provision of a remote connection service, and therefore Citrix's subscription fees should be treated as nontaxable sales of service. The commissioner counters that the regulation's two-part test for transactions involving sales of both tangible property and services precludes Citrix's argument that its products are nontaxable services. We agree with the board that Citrix's sales of subscriptions for the online products constituted sales of tangible personal property.