US Massachusetts Sales Tax on SaaS, Software and Digital Products

Background

Massachusetts applies sales and use tax differently depending on whether the product is prewritten software, custom software, SaaS or remotely accessed software, or a non-software digital product.

Massachusetts imposes sales and use tax at 6.25 percent. The state’s own sales and use tax guide states that the use tax applies to tangible personal property, including electronically transferred software, and certain telecommunications services. It also states that digital products other than software, such as music, video, and reading material, are not subject to tax when delivered electronically.

Legal Framework: Sales Tax and Use Tax

Massachusetts sales tax applies to retail sales of tangible personal property and certain taxable services. Massachusetts law defines “sale” broadly to include transfers, leases, rentals, licenses, and certain services. Marketplace-facilitated sales are also included in the statutory definition.

Use tax is the complementary tax. It applies when taxable property or services are bought for storage, use, or consumption in Massachusetts, and Massachusetts sales tax was not collected. Massachusetts General Laws Chapter 64I requires every vendor, including a remote retailer engaged in business in the Commonwealth, to collect tax from the purchaser on taxable sales for Massachusetts use.

In practice, this means:

A taxable Massachusetts sale by a registered or required vendor is collected by the seller.

A taxable purchase where the seller does not collect Massachusetts tax creates purchaser use tax liability.

The distinction is about who remits the tax, not whether the transaction is taxable.

Prewritten or Canned Software

Massachusetts treats prewritten computer software as tangible personal property for sales and use tax purposes. Regulation 830 CMR 64H.1.3 states that prewritten software includes software delivered or accessed electronically, regardless of the server location, and regardless of whether it is delivered in tangible form, by electronic download, load and leave, or remote access.

The Department’s regulation fact sheet confirms the same principle: prewritten software sold to a customer in Massachusetts or purchased for use in Massachusetts is deemed a transfer of tangible personal property subject to sales or use tax regardless of delivery method, including electronic delivery or load and leave.

Practical example to illustrate the reasoning: 

A remote software vendor licenses standard accounting software to a Massachusetts customer. The customer downloads the software or accesses the same prewritten software remotely. Unless an exemption applies, Massachusetts generally treats the transaction as taxable.

SaaS and Remote Access to Software

Massachusetts generally taxes SaaS where the transaction is treated as a sale, license, lease, or transfer of the right to use prewritten software.

A letter ruling on this subject underlines that the sale, license, lease, or other transfer of a right to use software on a server hosted by the taxpayer or a third party is generally taxable under Massachusetts sales and use tax law.

This is one of the central Massachusetts SaaS principles. The customer does not need to download software for tax to apply if the substance of the transaction is the right to use prewritten software.

Practical example to illustrate the reasoning: 

A foreign SaaS provider sells access to a project management platform to a Massachusetts company. The software is hosted outside Massachusetts and accessed through a browser. If the object of the transaction is access to and use of prewritten software, Massachusetts may treat the subscription as taxable.

Cloud Computing and Remote Cloud-Based Services

Cloud computing requires a more detailed factual analysis. Massachusetts Letter Ruling on this subject addressed cloud computing and, after revision, distinguished taxable access to software from certain cloud infrastructure arrangements where the customer uses its own application software or open source operating system software.

SALT commentary summarising the revised ruling notes that cloud computing products were found not taxable where used with the purchaser’s own application software or open source operating system software, because there was no taxable sale of prewritten software.

The practical distinction is:

If the provider is selling access to its own prewritten software functionality, Massachusetts often treats the transaction as taxable software.

If the provider is selling infrastructure, processing capacity, storage, or hosting where the customer uses its own software and does not receive a taxable software license, the transaction may be nontaxable depending on the facts.

Practical example to illustrate the reasoning: 

A customer rents cloud server capacity and installs its own proprietary software. If the vendor is not transferring or licensing prewritten software to the customer, the charge may be outside the taxable software rule. By contrast, if the customer subscribes to a hosted CRM or ERP platform operated by the vendor, the transaction is more likely to be taxable SaaS.

Customized Software and Software Development

Massachusetts generally distinguishes prewritten software from custom software. The regulatory framework treats prewritten software as taxable tangible personal property, while custom software designed and developed to meet a specific purchaser’s requirements may be outside the taxable prewritten software category.

Relevant differentiators could be found in the following:

Was the software created for a specific purchaser?

Is it sold, licensed, or marketed to multiple customers?

Did the vendor retain rights to reuse or license the software?

Are customization charges separately stated?

A bespoke development project is usually safer from sales tax than a configuration of an existing SaaS platform. If a vendor modifies standard software but continues to license its own platform, Massachusetts may still treat the main charge as taxable prewritten software.

Practical example to illustrate the reasoning: 

A Massachusetts business hires an EU developer to build a one-off internal logistics tool, with all rights transferred to the customer and no resale rights retained by the developer. This may be treated as custom software development rather than a taxable sale of prewritten software. 

If the same vendor provides access to its existing platform and merely configures workflows, the charge may be taxable.

Digital Products Other Than Software

Massachusetts is comparatively narrow on non-software digital goods. The Massachusetts sales and use tax guide states that digital products other than software, such as music, video, and reading material, are not subject to tax when delivered electronically.

This means Massachusetts does not automatically tax every digital item. Software is the main digital category that is expressly pulled into the tangible personal property framework.

Practical example to illustrate the reasoning: 

A business sells an electronically delivered e-book or downloadable video to a Massachusetts customer. If the product is not software and is delivered electronically, Massachusetts generally does not tax it under the state’s current published guidance.

Remote Seller Threshold and Registration Obligation

Massachusetts requires remote sellers to register, collect, and remit tax once their Massachusetts sales exceed USD 100,000 in either the current or prior calendar year. The Department’s remote seller FAQ states that if a remote seller’s Massachusetts sales in either the prior or current calendar year exceed USD 100,000, it should register as a vendor, collect tax on Massachusetts sales, and remit tax to DOR.

Remote retailers and remote marketplace facilitators are required to register, collect, and remit sales or use tax as vendors once the threshold is exceeded. It also states that a vendor subject to the registration requirement should register through MassTaxConnect.

For foreign, non US entities, the Massachusetts remote seller FAQ states that if the entity has been issued a Federal Tax Identification Number by the IRS, it should register online using MassTaxConnect.

Practical example to illustrate the reasoning: 

An Italian SaaS provider sells taxable remotely accessed software subscriptions to Massachusetts customers. If its Massachusetts sales exceed USD 100,000 in the current or prior calendar year, it should register as a vendor and collect Massachusetts tax on taxable sales.

Marketplace Facilitators

Massachusetts marketplace rules are important for digital providers selling through platforms. The Department explains that marketplaces should collect tax on behalf of third-party marketplace sellers when the marketplace’s total Massachusetts sales, including facilitated and direct sales, exceed USD 100,000 in a calendar year.

A remote marketplace facilitator exceeding the threshold should collect and remit sales or use tax on all facilitated Massachusetts sales and direct Massachusetts sales.

This can relieve the underlying seller from collection on marketplace transactions, but it does not necessarily cover:

1. Direct website sales
2. Sales outside the marketplace
3. B2B sales not processed by the platform
4. Prior period exposure
5. Transactions where the marketplace is not legally responsible

Who Is Responsible for Collection and Remittance?

Local Massachusetts Sellers

A Massachusetts-based seller making taxable sales should generally register as a vendor, collect sales tax, file a sales tax return via Form ST 9, and remit tax.

Remote Sellers

A remote seller with Massachusetts sales over USD 100,000 in the current or prior calendar year should register, collect, and remit tax on taxable Massachusetts sales.

Marketplace Facilitators

A marketplace facilitator over the threshold should collect and remit tax on marketplace sales it facilitates, and on its direct sales, where taxable.

Purchasers

If the vendor does not collect tax on a taxable purchase, the purchaser owes Massachusetts use tax. The sales and use tax guide(published by DOR) confirms that businesses and individuals incurring use tax liabilities who are not registered vendors may file and report the owed tax through the  Form ST 10 or Form ST 11.

There is no general threshold that allows a purchaser to avoid use tax because the purchase is below a certain amount. If the purchase is taxable and tax was not collected, use tax is due.

Does This Apply to B2C Only or Also B2B?

Massachusetts sales and use tax is not limited to B2C transactions. It applies to taxable sales to purchasers in Massachusetts unless an exemption applies.

For B2B transactions, tax may still apply to software or SaaS sold to a Massachusetts business. The fact that the purchaser is registered for sales tax does not automatically make the purchase exempt. A Massachusetts business purchasing taxable software for internal use generally pays sales or use tax.

B2B transactions may be exempt only where the purchaser provides valid exemption documentation, such as:

1. Resale certificate
2. Exempt organization certificate
3. Direct pay permit or other special certificate where applicable
4. Multiple points of use certificate for qualifying prewritten software used in more than one jurisdiction

Final Remarks

Massachusetts has a relatively clear but fact-sensitive framework for software and digital products. Prewritten software is taxable regardless of delivery method, and Massachusetts often treats SaaS or remotely accessed prewritten software as taxable.

True custom software and certain cloud infrastructure arrangements may be nontaxable, while non-software digital products such as music, video, and reading material are generally not taxable when delivered electronically.

Remote providers, including foreign providers, should register, collect, and remit Massachusetts tax once their Massachusetts sales exceed USD 100,000 in the current or prior calendar year. Marketplace facilitators have similar threshold-based collection obligations for facilitated and direct sales. Purchasers remain liable for use tax where tax was not collected on taxable transactions.

Frequently Asked Questions