While Massachusetts’ expansion of its sales tax to include computer-related services was repealed within three months of its enactment, the Massachusetts Department of Revenue continues to take a close look at sales treated as non-taxable services by vendors, and characterize those sales as either sales of tangible personal property or telecommunications services, both of which remain subject to Massachusetts sales tax. This trend persists with a recent filing at the Appellate Tax Board by a provider of “eFax” services—challenging a Department of Revenue assessment that treats such services as a taxable telecommunications services.

The appeal involves a vendor that receives faxes destined for its customers. The vendor converts each fax into a computer file and sends an email to the intended recipient of the fax with a copy of the file. The intended recipient can then view the file wherever they can access their email. In its petition to the ATB, the vendor alleges that the Department auditor classified this service as a taxable telecommunications service, and estimated the portion of the vendor’s receipts from these services to be sourced to Massachusetts based on the percentage of population in Massachusetts to the population of the United States as a whole.

The vendor is challenging the assessment on a variety of grounds, including: (1) whether the eFax services are non-taxable data processing or information services; (2) whether the assessment of sales tax on the eFax services violates the Internet Tax Freedom Act; and (3) whether the assessment is contrary to the Department’s own published guidance.

The Department’s assessment is not without precedent. For example, a similar service was found to be subject to California sales tax in J2 Global Communications, Inc. v. City of Los Angeles, 218 Cal.App.4th 328 (2013) (a copy of the California Court of Appeals decision can be found here: J2 Communications v City of Los Angeles).  However, it is our view that the position the Department is taking in the Massachusetts case would represent a significant expansion of Massachusetts sales tax that could surprise many providers of similar services whereby a communication from a third-party—fax, voicemail, video, etc.—is received by the vendor and converted to a file format that the customer can access by email.

If you are interested in following developments in this appeal, please email Michael Jacobs at mjacobs@reedsmith.com.