SaaS Taxpayer Qualifies as a Manufacturer: A Case Summary of Akamai Technologies, Inc. v. Commissioner of Revenue
A software as a service (SaaS) provider that develops standardized software and offers it remotely may be regarded as a manufacturing corporation. Recently, the Massachusetts Board of Appeals (Board) overturned the Commissioner of Revenue’s (Commissioner) decision, holding that Akamai Technologies, Inc., (Akamai) a Massachusetts SaaS provider, shall be classified as a manufacturing corporation for local property tax purposes. The Board found that a “sale” had been made regardless of the fact that no transfer of title or license to the software had been given.
Akamai provides software-based solutions for accelerating, managing, and improving the delivery of web and media content over the internet. The software is prewritten and standardized. Although the software is cloud-based, it is comparable to tangible software packages because customers are able to independently access and configure it to best suit their business needs; customers have little or no interaction with Akamai.
Akamai initially applied to the Commissioner as a “manufacturing corporation.” The Commissioner determined that Akamai was “exclusively an Internet service provider of cloud computing services.” Akamai appealed the Commissioner’s decision and the Board ruled in Akamai’s favor, concluding that it was a manufacturing corporation, thus allowing Akamai to use the single-sales factor method for apportionment, rather than a three-factor formula based on property, payroll, and sales, to determine its Massachusetts corporate excise tax. In addition, Akamai is able to claim a local property tax exemption on its machinery used in the software development process.
To qualify as a manufacturing company that is engaged in manufacturing, “the corporation must be engaged, in substantial part, in transforming raw or finished physical materials by hand or machinery, and through human skill and knowledge, into a new product possessing a new name, nature, and adapted a new use.”
Historically, manufacturing was limited to “traditional smokestack industries,” but the meaning of manufacturing has evolved to entice more manufacturing companies to settle in Massachusetts. For taxable years beginning on or after January 1, 2006, G.L. c. 63 Section 42B(c) provides that “the development and sale of standardized computer software shall be considered manufacturing activity, without regard to the manner of delivery of the software to the customer.” Further, manufacturing activities are “substantial” if they meet any one of the following five tests:
(1) Twenty-five percent or more of its gross receipts are derived from the sale of manufactured goods that it manufactures
(2) Twenty-five percent or more of its payroll is paid to employees working in its manufacturing operations and 15 percent or more of its gross receipts are derived from the sale of manufactured goods that it manufactures
(3) Twenty-five percent or more of its tangible property is used in its manufacturing operations and 15 percent or more of its gross receipts are derived from the sale of manufactured goods that it manufactures
(4) Thirty-five percent or more of its tangible property is used in its manufacturing operations
(5) The corporation’s manufacturing activities are deemed substantial under relevant regulations promulgated by the Commissioner
Akamai and the Commissioner agreed that if the Board found that revenues were derived from the sale of standardized, remotely accessed computer software, then Akamai would be deemed to be engaged in manufacturing activities that are substantial. The parties do not disagree that the software was standardized and customers were purchasing remote access. The question was whether the software was actually “sold.” Pursuant to G.L. c. 63 §42B(c), the state recognizes software sales without regard to the manner of delivery to a customer. Neither the transfer of title to software nor a license giving possession was required to meet this standard. As a result, the Board held that Akamai is a manufacturing company and therefore entitled to the single-factor sales apportionment and local property tax exemption.
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