Sullivan Client Prevails in Mass. Appellate Tax Board Case Involving Classification and Taxation of Technology Businesses and Products
Boston, MA - In an opinion issued December 10, 2021, the Massachusetts Appellate Tax Board ("ATB") ruled that Sullivan client Akamai Technologies, Inc. ("Akamai") was entitled to an abatement of corporate excise of nearly $7.5 million and should have been classified as a manufacturing corporation pursuant to G.L. c. 63, §§ 38 and 42B and G.L. c. 58, § 2. The full ATB opinion can be found here: Akamai Technologies, Inc. v. Commissioner of Revenue, ATB Dkt. no 332360 et al. Sullivan attorneys Richard Jones, Caroline Kupiec and Nicholas O’Donnell represented Akamai at trial.
Akamai is a leading provider of content delivery network ("CDN") product and services. In this case, Akamai argued that its sales of CDN products should be regarded as sales of standardized software, and thus the company should have been classified as a manufacturing corporation. The Commissioner of Revenue had denied granting Akamai such classification and contended that its offerings should be regarded as services.
Sales of software v. services or other – not always easy line to draw.
This question – whether a technology company should be considered a provider of software or services (or infrastructure, or other) – has long vexed taxpayers and state taxing authorities alike. Technology offerings are often complex and difficult to comprehend. In many instances, they are blended or mixed transactions involving both software and non-software elements (e.g., professional IT services or infrastructure). Without clear guidance, it may not be clear where to draw the line between software and non-software.
Sales of software v. services or other – potential for substantial state tax implications
Moreover, there may be significant state tax implications that hinge on this distinction. In Massachusetts, providers of standardized software may qualify as "manufacturing corporations" for tax purposes. Such entities are required to apportion income using a single sales factor methodology instead of a three-factor formula that takes the company's in-state property and payroll into account. Classified manufacturing corporations are also entitled to local personal property tax exemptions on machinery and investment tax credits. In addition, regardless of manufacturing corporation status, providers of standardized software are subject to the Massachusetts sales tax on such sales; the sales tax would not apply if those sales were determined to be for services.
The ATB opinion offers much needed guidance
In this case, the ATB focused on the substance of Akamai’s CDN product sales and determined that they constituted sales of standardized software, which Akamai’s customers accessed and used remotely. The ATB explained that analysis should not be driven by the form of the transaction, marketing terminology, or the vendor’s back-office expenses. The ATB’s 59-page opinion offers technology companies and their customers much needed guidance on how to characterize IT offerings, and thus greater predictability in determining the state tax implications of their sales and business activities.
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