Massachusetts: Cloud is taxed when there's a software license

20.08.2012
When are services taxed and when are they not? It's a question that many states across the country are tackling, and Massachusetts is the latest to rule on the issue.

The Bay State -- which some call "Taxachusetts" -- issued a ruling this month that falls in line with what a handful of other states have found: Cloud-based software as a service (SaaS) is taxable in certain circumstances when a license is needed to run the program and a Massachusetts resident consumes the service. If the software is or available for free, then it is not taxable, .

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Kelley Miller of the law firm Reed Smith, who specializes in technology law and specifically tracks how states have been enforcing cloud taxes, says it's been a tough issue for states. The DOR says in its ruling that the market is evolving "at a rapid pace." Traditionally tax laws just don't work for this new era of cloud computing, she says, because there is not a tangible transaction of a disc or piece of hardware. Massachusetts seems to have echoed findings from other states though, she says. "The essence of the question is, are you buying software that people bought in a box at the store 10 or 15 years ago," she says. If so, then Massachusetts, and other states, have claimed a right to tax it.

What is not taxable, Massachusetts has ruled, is if the service is available for free, without a license. Miller says this means that a broad range of cloud services, for example Google Docs or DropBox, would not be taxable. Massachusetts has left some services as taxable in that scenario though. The DOR states that if there are data transfer fees that are separately charged by the provider, then those are taxable under the telecommunications services law.