Oracle USA, Inc. v. Comm'r of Revenue

Citation168 N.E.3d 349,487 Mass. 518
Decision Date21 May 2021
Docket NumberSJC-13013
Parties ORACLE USA, INC. v. COMMISSIONER OF REVENUE (and two consolidated cases ).
CourtUnited States State Supreme Judicial Court of Massachusetts Supreme Court

Richard S. Weitzel, Assistant Attorney General, for Commissioner of Revenue.

Richard L. Jones, Boston, for the taxpayers.

Ben Robbins & Martin J. Newhouse, Boston, for New England Legal Foundation, amicus curiae, submitted a brief.

Karl A. Frieden & Michael E. Porter, Boston, for Council on State Taxation, amicus curiae, submitted a brief.

Present: Budd, C.J., Gaziano, Lowy, Cypher, Wendlandt, & Georges, JJ.

WENDLANDT, J.

At issue in these cases is whether G. L. c. 64H, § 1, provides taxpayers a statutory right to apportion sales tax on software transferred for use in more than one State, and, if so, whether the general abatement process, see G. L. c. 62C, § 37, is available to taxpayers seeking such an apportionment. The taxpayers -- Oracle USA, Inc. (Oracle USA); Oracle America, Inc. (Oracle America); and Microsoft Licensing, GP (Microsoft) -- are vendors who sold or licensed software to Hologic, Inc. (Hologic), a medical device company headquartered in the Commonwealth. The vendors and Hologic did not follow the regulations prescribed by the Commissioner of Revenue (commissioner) for collecting and remitting sales tax only on the portion of the value of the transferred software that was to be used in the Commonwealth; rather, at the time sales taxes were due (generally monthly), the vendors remitted tax payments to the Commonwealth based on the entire value of the transactions. Thereafter, when Hologic notified the vendors that only a portion of the software was to be used in the Commonwealth, the vendors applied for refunds through the general abatement process for the portion of the sales tax they had paid to the Commonwealth but which was attributable to out-of-State use of the software.

The commissioner denied the applications for abatement on the ground that the regulations for apportionment had not been followed; the vendors appealed from the decision to the Appellate Tax Board (board). The board granted the requested abatements. Concluding that G. L. c. 64H, § 1, creates a statutory right to apportionment for software transferred for use in more than one State, and that the general abatement process is available to the vendors who paid sales tax in excess of that properly apportioned to sales in the Commonwealth, we affirm the board's decision.2

1. Background.3 Between 2009 and 2012, Hologic purchased or licensed software from the vendors, Oracle USA, Oracle America, and Microsoft.4 Hologic installed the software on its servers in the Commonwealth, and the vendors collected sales tax from Hologic based on the total value of the transactions. The vendors timely remitted the sales tax to the Commonwealth on their monthly sales and use tax returns.

Subsequently, Hologic notified the vendors that its employees located outside the Commonwealth also were using the software. Only approximately seventeen percent of Hologic's employees using Oracle USA and Oracle America software were located within the Commonwealth, and only about thirty percent of Hologic's employees using Microsoft software in the United States were located in the Commonwealth.5

The sales tax statute, G. L. c. 64H, § 1, states that the commissioner "may, by regulation, provide rules for apportioning tax in those instances in which software is transferred for use in more than one [S]tate." The regulations the commissioner issued pursuant to this authority provide, in part, that a permissible method of apportionment may be "based on [the] number of computer terminals or licensed users in each jurisdiction where the software will be used." 830 Code Mass. Regs. § 64H.1.3(15)(a)(3) (2006). Having been furnished the information about the percentage of licensed users in the Commonwealth, the vendors timely filed applications for abatement and refunds for the portions of the taxes they had remitted on software that had been transferred for use outside the Commonwealth.6

The commissioner did not dispute that the vendors’ abatement applications reflected the correct amount of sales tax that would have been due if the vendors had been permitted to apportion their remittances based on in-State use. Nonetheless, the commissioner denied the applications for abatement because the vendors had not complied with the regulations requiring that, to be entitled to apportionment, a purchaser must submit to the seller a "multiple points of use" certificate at the time of purchase or "no later than the time the transaction is reported for sales or use tax purposes." 830 Code Mass. Regs. § 64H.1.3(15)(a)(1), (2) (2006). In the transactions at issue here, Hologic had not presented such certificates to the vendors.

The vendors appealed from the commissioner's decision to the board on the ground that they had a right to apportionment under G. L. c. 64H, § 1. The vendors argued that the requirement of an exemption certificate was relevant only to determining whether they had a duty to collect the tax in the first instance and to remit it at the time that the taxes were due but did not prohibit them from later seeking an abatement for the portion of taxes remitted to the Commonwealth that were attributable to out-of-State software uses.

In May 2017, the board decided in the commissioner's favor, and both sides requested findings of fact and a report from the board. See G. L. c. 58A, § 13. In March 2019, the board, on its own motion, reconsidered its decision and concluded that the vendors could seek apportionment by means of the general abatement process, despite not having received exemption certificates at the time of sale or when the tax initially had to be reported to the Commonwealth. The commissioner sought reconsideration. After a hearing and additional briefing, the board denied the commissioner's motion and granted the abatements in the amounts requested. The commissioner appealed, and we transferred the appeal to this court on our own motion.

2. Discussion. a. Statutory right to apportionment. General Laws c. 64H, § 1, provides that the commissioner "may, by regulation, provide rules for apportioning tax in those instances in which software is transferred for use in more than one [S]tate." The commissioner maintains that the provision does not create a statutory right to apportionment. Emphasizing the word "may" in the statutory language, the commissioner instead argues that the provision empowers him to determine whether to allow apportionment of sales tax in circumstances where software is transferred for use in multiple States. The vendors, by contrast, contend that the statute creates a right of apportionment in such circumstances and authorizes the commissioner to decide only how to apportion the relevant sales tax. Concluding that the statute "grants taxpayers the right to apportion sales tax on a sale of taxable software that is transferred for use in more than one [S]tate," and that the commissioner's role is "to prescribe rules for that apportionment by regulation," the board agreed with the vendors and, accordingly, denied the commissioner's motion.

i. Standard of review. We consider the question whether G. L. c. 64H, § 1, creates a statutory right of apportionment de novo. See Citrix Sys., Inc. v. Commissioner of Revenue, 484 Mass. 87, 91, 139 N.E.3d 293 (2020) ( Citrix ) ("We review [the board's] conclusions of law, including questions of statutory construction, de novo" [citation omitted]). "Tax statutes are strictly construed, with ambiguity resolved in favor of the taxpayer." Id. at 92, 139 N.E.3d 293. "[B]ecause the board is an agency charged with administering the tax law and has expertise in tax matters, we give weight to its interpretation of tax statutes" (citation omitted). Shaffer v. Commissioner of Revenue, 485 Mass. 198, 203, 148 N.E.3d 1197, cert. denied, ––– U.S. ––––, 141 S. Ct. 819, 208 L.Ed.2d 401 (2020). Where the board's construction of a tax statute is reasonable, we will defer to its interpretation. See AA Transp. Co. v. Commissioner of Revenue, 454 Mass. 114, 119, 907 N.E.2d 1090 (2009). At the same time, principles of deference are not principles of abdication; "[t]he proper interpretation of a statute is a question of law for us to resolve" (citation omitted). Commissioner of Revenue v. Gillette Co., 454 Mass. 72, 76, 907 N.E.2d 629 (2009). "In doing so, [t]he general and familiar rule is that a statute must be interpreted according to the intent of the Legislature ascertained from all its words construed by the ordinary and approved usage of the language, considered in connection with the cause of its enactment, the mischief or imperfection to be remedied and the main object to be accomplished, to the end that the purpose of its framers may be effectuated.’ " Id., quoting Commissioner of Revenue v. Dupee, 423 Mass. 617, 620, 670 N.E.2d 173 (1996).

ii. Statutory framework. General Laws c. 64H, § 2, provides that "[a]n excise is hereby imposed upon sales at retail in the [C]ommonwealth ... of tangible personal property." Software, however, is not "tangible" within the plain meaning of that term. See America Online, Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89, 94-95 (4th Cir. 2003), quoting Webster's Third New International Dictionary 2337 (1993) (tangible means "capable of being touched; able to be perceived as materially existent [especially] by the sense of touch; palpable, tactile"). Software instead consists of a set of instructions, directing a computer to perform specified functions or operations. See Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 447-448, 127 S.Ct. 1746, 167 L.Ed.2d 737 (2007).

Prior to 2005, whether the sale or license of software was subject to sales tax depended on its method of delivery; software sold or licensed electronically was not taxed, while software delivered in a physical form (e.g....

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