Are Your Online Services / Software Taxable? | AccountingWEB

Are Your Online Services / Software Taxable?

In a recent Massachusetts Letter Ruling (11-2), Massachusetts held that the purchase of the taxpayer's core service offerings and updated data packages were not subject to tax, but were nontaxable database access services.  However, Massachusetts did hold that the workflow add-ons were subject to sales and use tax as sales of a right to use prewritten software.  These charges are optional and separately stated from the core service offering and database charges.


The Company is engaged in the business of providing commercial information about the financial condition of businesses to its customers located throughout the U.S. and abroad.  This information is provided through the Company’s Risk Management Solutions database.  This database enables customers to access select financial information to mitigate credit and supplier risk, increase cash flow and drive increased profitability.  Information gathering, analysis, formatting/explanation, and dissemination are conducted at the Company’s locations in either New Jersey or Pennsylvania.

The Company's service offerings included:  (1) a Core service offering, (2) Upgraded Data Packages, and (3) Workflow Add-ons.  For more details on the services, go to the RULING.Ruling

The Company provides information services to its customers based on data it gathers on the Web and other sources and then provides this information to its customers in various formats and levels of detail depending on which service options a customer chooses. The Company asserts that this is a nontaxable service. We agree that where the object of the transaction is simply to obtain information, the transaction is not subject to tax. The object of the customers’ use of the Company’s core service offering and updated data packages is to obtain database access including reports prepared by the Company, rather than the use of the software itself. Thus, the Company’s core service offering and updated data packages are nontaxable database access services that allow customers to access information that the Company has gathered.

However, the Company describes the workflow add-ons as services that customers can add to their core service offering by purchasing them for an additional fee which is separately invoiced from the basic or upgraded database packages. These optional add-ons are hosted on the Company’s server or on a 3rd party server. The sale of a license or right to use software on a server hosted by the taxpayer or a third party, as described in 830 CMR 64H.1.3(3)(a), are taxable under Massachusetts sales and use tax laws. See 830 CMR 64H.1.3(14)(a).

The workflow add-ons are customizable web-based tools that enable customers to establish rules and approval limits to automate credit decisions. Using this software, customers can also enter information concerning their existing accounts and rules to trigger labeling for such accounts (i.e., a credit indicator drops below a certain level the account gets flagged for review). They can manage overall risk exposure of businesses and create a customizable credit application to meet their personal business needs. The data entered into the application is fed into that customer’s database for the customer to use on an ongoing basis and without further direct involvement by the Company.

Since the workflow add-ons are optional and generally purchased at a later date and are separately invoiced, they are not included in the non-taxable core service offering and updated data packages. With regard to workflow add-ons, the customer itself is using the Company’s software to acquire and manipulate various types of information it chooses with respect to businesses and the customer’s accounts receivable. The object of the transaction is to access the Company’s software for the purpose of manipulating information that the customer inputs as well as information from the database to accommodate current business needs. Therefore, we rule that the workflow add-ons are subject to the Massachusetts sales and use tax.

So What?

More and more companies are providing online services or access to software via the web.  As this trend continues, it is not always clear how a state will tax those services or software access for sales and use tax purposes.  Therefore, it is very important that a company address this issue to mitigate any exposure. 

The above is just one example of how Massachusetts may treat your company's or client's online services.  Other states' treatment may vary.

This blog

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States.  He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect."  For more info, visit his website:

You can reach Brian at

Connect with Brian on LinkedIn. Follow Brian on Twitter. Join the Leverage | SALT LinkedIn Group, connect and contribute with your colleagues!  

Because state and local taxes are deceptively simple and endlessly complicated.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (, a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website:
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish share their ideas, insights, and perspectives from across the pond.