Current through Register 1531, September 27, 2024
(1)
Purpose, General Rule, Sham Transactions, and Outline.
(a)
Purpose. The
purpose of 830 CMR 63.38.1 is to explain the allocation and apportionment of
income of business corporations, as provided in M.G.L. c. 63, § 38. 830
CMR 63.38.1 also governs the calculation of an apportionment percentage by
other taxable entities when such entities are permitted or required to use the
income apportionment method set out in M.G.L. c. 63, § 38. For example,
830 CMR 63.38.1 applies to manufacturing corporations; to S corporations and
their shareholders, as described under M.G.L. c. 63, § 32D and M.G.L. c.
62, § 17A; and to nonresident individuals when permitted or required by
830 CMR
62.5A.1. However, except as expressly stated,
830 CMR 63.38.1 does not apply to income derived from mutual fund sales
received by mutual fund service corporations within the meaning of M.G.L. c.
63, § 38(m). See
830 CMR
63.38.7. 830 CMR 63.38.1 also applies to
corporations that are subject to combined reporting within the meaning of
M.G.L. c. 63, § 32B, provided, however, that additional apportionment
rules that apply in that context are set forth in
830 CMR
63.32B.2. Also, 830 CMR 63.38.1 applies to
determine the apportionment percentage to be used to calculate, on a separate
company basis, a corporation's non-income measure excise.
(b)
General Rule.
All of a taxpayer's taxable net income is allocated to Massachusetts if the
taxpayer does not have income from business activity which is taxable in
another state. If a taxpayer has income from business activity which is taxable
both in Massachusetts and in another state, then the part of its net income
derived from business carried on in Massachusetts is determined by multiplying
all of its taxable net income by the three factor apportionment percentage as
provided in M.G.L. c. 63, § 38(c) through (g) and 830 CMR 63.38.1. If a
taxpayer with a Massachusetts commercial domicile has income from business
activity which is taxable both in Massachusetts and in another state but also
has an income stream that is prohibited from being taxed in another
non-domiciliary state by reason of the U.S. Constitution, that income stream
shall be allocated in full to Massachusetts.
(c)
Exceptions to the General
Rule. Notwithstanding the general rule set forth in 830 CMR
63.38.1(1)(b), the following taxpayers shall determine the part of their net
income derived from business carried on in Massachusetts in the following
manner:
1.
Section 38
Manufacturers. If a section 38 manufacturer has income from
business activity which is taxable both in Massachusetts and in another state,
then the part of its net income derived from business carried on in
Massachusetts is determined by multiplying all of its taxable net income, other
than taxable net income derived from mutual fund sales received by a mutual
fund service corporation, by the apportionment percentage provided in M.G.L. c.
63, § 38(l) and 830 CMR 63.38.1(10).
2.
Mutual Fund Service
Corporations. Regardless of whether it has income from business
activity which is taxable both in Massachusetts and in another jurisdiction, a
mutual fund service corporation shall apportion its taxable net income derived
from mutual fund sales as provided in M.G.L. c. 63, § 38(m). Where a
mutual fund service corporation has both taxable net income derived from mutual
fund sales and other taxable net income, then the mutual fund service
corporation shall allocate or apportion such other taxable net income as
provided in 830 CMR 63.38.1 provided that the mutual fund service corporation
shall determine such other taxable net income by taking into account only those
deductions that are attributable to income from sources other than mutual fund
sales.
(d)
Sham Transactions. All transactions that determine a
taxpayer's ability to apportion or determine the composition of a taxpayer's
apportionment percentage are subject to the sham transaction doctrine and the
related tax doctrines as set forth in M.G.L. c. 62C, § 3A.
(e)
Outline. 830 CMR
63.38.1, is organized as follows:
1. Purpose,
General Rule, Sham Transactions, and Outline
2. Definitions
3. Income Subject to Apportionment
4. Related Business Activities
5. Taxpayer and Taxpayer's Income Taxable in
Another State
6. Consistent
Accounting Method
7. Property
Factor
8. Payroll Factor
9. Sales Factor
10. Section 38 Manufacturers
11. One or More Factors
Inapplicable
12. Corporate
Partners
13. Alternative
Apportionment Methods
14. Effective
Date
(2)
Definitions. For the purposes of 830 CMR 63.38.1 the
following terms have the following meanings unless the context requires
otherwise:
Agent, any person whose actions would
be imputed to a taxpayer under the standards of
830 CMR 63.39.1
for purposes of determining whether the taxpayer is doing business in
Massachusetts (or another state). In general, any taxpayer employee or other
representative acting under the direction and control of the taxpayer is an
agent, provided that bona fide independent contractors
retained by a taxpayer are not agents of the taxpayer.
Allocable Item of Income, in the
instance of a taxpayer with income from business activity taxable in more than
one state, income from a transaction or activity that, consistent with the U.S.
Constitution, can only be taxed in the state of the taxpayer's commercial
domicile, because the item of income was not derived from a unitary business or
from transactions that serve an operational function.
Base of Operations, the taxpayer's
place of business from which an employee customarily begins work or to which
the employee customarily returns at some other time to receive instructions,
direction, and supervision from the taxpayer or communications from customers
or other persons, to replenish stock or other materials, to repair equipment,
or to perform any other function necessary to the exercise of the employee's
trade or profession.
Business Activity, all of a taxpayer's
transactions and activities, regardless of classification or labels, occurring
in the course of a taxpayer's trade or business, including, but not limited to
"incidents" as described in M.G.L. c. 63, § 39(1) through (3). Business
activities of an agent conducted on behalf of a principal are deemed to be the
business activities of the principal.
Capital Asset, an asset as defined in
26 U.S. Code § 1221, as modified by M.G.L. c. 62, § 1(m) and 830 CMR
63.38.1(2). For purposes of 830 CMR 63.38.1, Capital
Asset includes property used in a trade or business within the
meaning of U.S. Code § 1231(b) without regard to the holding period
requirement in U.S. Code § 1231(b), and property held in connection with a
trade or business entered into for profit within the meaning of U.S. Code
§ 1231(a)(3)(A)(ii)(II) without regard to the holding period requirement
in U.S. Code § 1231(a)(3)(A)(ii)(II).
Code, the Federal Internal Revenue
Code in effect for the taxable year.
Commissioner, the Commissioner of
Revenue or the Commissioner's duly authorized representative.
Corporate Partner, any corporation
that is a partner in a partnership.
Corporation, a business corporation as
defined in M.G.L. c. 63, § 30.1.
Documentary Evidence, journals, books
of account, invoices, expense reports, or other records that are maintained by
the taxpayer in the regular course of its business. Generally, an affidavit or
other document prepared in anticipation of, or in connection with, a tax audit,
examination, or litigation is not documentary evidence.
Domicile (or commercial domicile), the
principal place from which the business activities of a taxpayer are directed
or managed, or, in the case of a shareholder of a RIC, the domicile as
described in
830 CMR
63.38.7(4)(c). If it is not
possible to determine the principal place from which the business activities of
a taxpayer are directed or managed, the state of the taxpayer's incorporation
shall be considered to be its state of domicile.
Employee, in general, any officer of a
corporation, or any person who, under the usual common-law rules applicable in
determining the employer-employee relationship, has the status of an employee.
Generally, a person will be presumed to be an employee if such person is
included by the taxpayer as an employee for purposes of the payroll taxes
imposed by the Federal Insurance Contributions Act. However, for purposes of
830 CMR 63.38.1, a leased employee is an employee of the client (lessee)
organization, and not an employee of the employee leasing company.
Employee Leasing Company, a business
that contracts with a client company to supply workers to perform services for
the client company; provided that, Employee Leasing
Company does not include private employment agencies that provide
workers to employers on a temporary help basis or entities such as
driver-leasing companies which lease employees to another business to perform a
specific service. See
430 CMR 5.07 through
5.13.
Income, taxable net income as defined
in M.G.L. c. 63, § 38(a). Income encompasses both
positive income and losses.
Independent Contractor, any person who
performs services for a taxpayer but who is not an employee of the taxpayer,
and who is not otherwise subject to the supervision or control of the taxpayer
in the performance of the services. In general, a person is treated as an
independent contractor with respect to a taxpayer if that person's actions
would not be imputed to the taxpayer under the standards of
830 CMR 63.39.1
for purposes of determining whether the taxpayer is doing business in
Massachusetts (or another state).
Leased Employee, a person who performs
services for a client company pursuant to a contract between the client company
and an employee leasing company.
Manufacture, Manufacturing or Manufacturing
Activity, the process of 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 to a new use. In
determining whether a process constitutes manufacture, manufacturing or
manufacturing activity, the Commissioner will examine the facts and
circumstances of each case in the manner set forth in the Manufacturing
Corporation Regulation,
830 CMR 58.2.1(6)(b)
and (c).
Mobile Property, motor vehicles,
construction equipment, or other tangible personal property that an owner or
lessee regularly moves from place to place in the course of its business.
Property normally used in a fixed location is not mobile property merely
because it happens to be moved into or out of Massachusetts or another state
during the taxable year.
Mutual Fund Sales, mutual fund sales
within the meaning of M.G.L. c. 63, § 38 and § 38(m)(1).
Mutual Fund Service Corporation, a
mutual fund service corporation within the meaning of M.G.L. c. 63, §
38(m)(1).
Partnership and Partner, as a general
rule, Partnership and Partner
have the same meaning as in 26 U.S. Code § 7701, provided that
Partnership and Partner shall
also apply to other entities and their members treated as partnerships and
partners for purposes of M.G.L. c. 62, § 17.
Partnership does not include any trust or estate
subject to taxation under M.G.L. c. 62 or any entity taxed as a corporation
under M.G.L. c. 63.
Person, a natural or legal person,
including, but not limited to, an individual, corporation, corporate trust,
limited liability company, partnership, or S corporation.
Presumption, a conclusion of law or
fact that is assumed to apply to a taxpayer unless the Commissioner or the
taxpayer affirmatively rebuts the presumption by presenting contrary evidence
of the actual facts and circumstances applicable to the taxpayer.
Receipts, consideration or value of
any kind received from a taxpayer's business activity, including but not
limited to cash, cash equivalents, payments in kind, and boot, that the
taxpayer obtains from selling or providing property or services to another
party. In the case of a sale, exchange or other disposition of a capital asset,
including a transaction with respect to a capital asset that is deemed to be a
sale or exchange under 26 U.S. Code, Receipts as used
in 830 CMR 63.38.1 refers to the amount of the gain from the transaction.
Receipts are subject to the Commissioner's adjustments under M.G.L. c. 63,
§ 39A.
Regulated Investment Company (RIC), a
regulated investment company within the meaning of M.G.L. c. 63, §
38(m)(1).
Section 38 Manufacturer, a corporation
that is engaged in manufacturing during the taxable year, and whose
manufacturing activities during the taxable year are substantial within the
meaning of 830 CMR 63.38.1(10)(b)2. and 3., regardless of whether the
corporation is a manufacturing corporation under M.G.L. c. 63, § 42B, and
regardless of whether the corporation is classified as a manufacturing
corporation under M.G.L c. 58, § 2 and
830 CMR
58.2.1: Manufacturing
Corporations. As used in 830 CMR 63.38.1, Section 38
Manufacturer refers to a corporation that is a manufacturing
corporation within the meaning of M.G.L. c. 63, § 38(l)1.
Security, any interest or instrument
commonly treated as a "security," as well as other instruments which are
customarily sold in a public or secondary market or on a recognized exchange,
including, but not limited to, transferable shares of beneficial interest in
any corporation or other entity, bonds, debentures, notes, and other evidences
of indebtedness, accounts receivable and notes receivable, cash and cash
equivalents including foreign currencies, and futures contracts. A partnership
interest will be treated as a security for purposes of 830 CMR 63.38.1 only in
the case of a limited partnership whose activity is not attributed to its
corporate limited partners under the provisions of
830 CMR 63.39.1(8)
(Corporate Nexus).
Security shall not be applied to the determination of
security corporation classification under M.G.L. c. 63, § 38B.
State, any state of the United States,
the District of Columbia, the Commonwealth of Puerto Rico, any territory or
possession of the United States, and any foreign country or a political
subdivision of any of the foregoing. M.G.L. c. 63, § 30.13.
State of the Purchaser, the state to
which tangible personal property sold by a taxpayer is ultimately shipped or
delivered. In the case of a third party recipient who receives the tangible
personal property by direct shipment from the taxpayer at the direction of the
purchaser, the "state of the purchaser" is the state of the third party
recipient.
Tax or Taxes, with regard to
Massachusetts, any tax or excise, including the corporate excise imposed under
M.G.L. c. 63, § 39 or the personal income tax imposed under M.G.L. c. 62,
§ 4 as it applies under M.G.L. c. 62, § 5A for nonresidents, M.G.L.
c. 62, § 17 for partners of partnerships, and M.G.L. c. 62, § 17A for
shareholders of S corporations.
Taxable Net Income, the part of the
net income of a taxpayer derived from the taxpayer's business activities
carried on in Massachusetts and which is adjusted as required by the applicable
provisions of M.G.L. c. 63, § 38(a) or M.G.L. c. 62, §§ 5A, 17,
or 17A, or by regulation, in order to determine the base amount of income to be
multiplied by the apportionment percentage.
Taxpayer, any person as defined in 830
CMR 63.38.1(2) who is entitled or required to allocate or apportion income
under M.G.L. c. 63, § 38 and 830 CMR 63.38.1. In the case of a combined
group within the meaning of M.G.L. c. 63 § 32B and
830 CMR
63.32B.2, any member of the group who is
entitled or required to allocate or apportion income under M.G.L. c. 63, §
38 and 830 CMR 63.38.1 is a taxpayer.
Three Factor Apportionment Percentage
, a fraction, the numerator of which consists of the property factor, payroll
factor, and sales factor, and the denominator of which is the total number of
factors utilized in the numerator. In the case of a taxpayer subject to tax
under M.G.L. c. 63, § 38(c), or M.G.L. c. 62, §§ 5A, 17 or 17A,
the numerator of the fraction is the property factor plus the payroll factor
plus twice the sales factor, and the denominator of the fraction is four. The
factors are computed in accordance with the provisions of 830 CMR
63.38.1.
Unrelated Business Activities, (or
Unrelated Activities), two or more of a taxpayer's
business activities that are not related business activities as defined in 830
CMR 63.38.1(4).
(3)
Income Subject to Apportionment.
(a)
General Rule. A
taxpayer with income from business activity which is taxable both within and
outside of Massachusetts must apportion its taxable net income to Massachusetts
by multiplying its taxable net income, determined under M.G.L. c. 63, §
38(a), by the apportionment percentage determined under M.G.L. c. 63, § 38
and 830 CMR 63.38.1. For Massachusetts tax purposes, a taxpayer's income
subject to apportionment is its entire income derived from its related business
activities within and outside of Massachusetts not including any allocable
items of income that either are or are not subject to the tax jurisdiction of
Massachusetts.
(b)
Corporations Subject to Combined Reporting.
Corporations subject to combined reporting are subject to the apportionment
rules in
830 CMR
63.31.1 and the apportionment provisions of
830 CMR
63.32B.2.
(c)
Treatment of an Allocable
Item of Income. An allocable item of income is allocated to
Massachusetts and therefore not subject to apportionment if the taxpayer's
commercial domicile is in the Commonwealth. Consequently, in such cases, any
property or payroll utilized in, or sales that derive from, activity or
transactions that generate an allocable item of income are excluded from the
taxpayer's apportionment factors, in the case of property or payroll, to the
extent that the property or payroll generated the item of income and, in the
case of sales, to the extent that the sales derived from the item of income. An
allocable item of income is not allocated to Massachusetts if the taxpayer's
commercial domicile is outside the Commonwealth.
(d)
Treatment of Income Derived
from Unrelated Activities. If a taxpayer has one or more items of
income derived from unrelated business activities, as determined under 830 CMR
63.38.1(4), the items of income will be excluded from the taxpayers taxable net
income and will not be apportioned to Massachusetts if Massachusetts does not
have jurisdiction to tax the items of income under the constitution of the
United States. A taxpayer must disclose on its return the nature and amount of
any item of income that is derived from unrelated business activities and is
excluded from (or is excludable from) taxable net income. The taxpayer must
also disclose and exclude expenses allocable in whole or part to such unrelated
business activities. M.G.L. c. 63, § 30.4. Any property or payroll
utilized in, or sales that derive from, unrelated business activity are
excluded from the taxpayer's apportionment factors if the income from the
unrelated activity is not subject to tax in Massachusetts, in the case of
property or payroll, to the extent that the property or payroll generated the
item of income and, in the case of sales, to the extent that the sales derived
from the item of income.
Example 1. Famous Corporation is a
corporation doing business in Massachusetts but domiciled in another state.
Famous acquires a minority interest in the shares of Unknown Corporation as a
long-term investment. The operations of Famous and Unknown are not related
business activities. Any gain or loss on the sale of the Unknown stock is
excluded from Famous' taxable net income and is not apportioned to
Massachusetts. Famous must disclose the nature and amount of the excluded gain
or loss on its Massachusetts return.
Example 2. Local Corporation is a
corporation doing business and domiciled in Massachusetts. Local acquires a
minority interest in the shares of Distant Corporation as a long-term
investment. The operations of Local and Distant are not related business
activities. Any gain or loss on the sale of Distant stock is included in
Local's taxable net income and is allocated to Massachusetts.
(4)
Related Business
Activities.
(a)
Definition.
1.
General Rule. Related business activities are
activities where there is a sharing or exchange of value between the segments
of a single entity or multiple entities such that the activities are mutually
beneficial, interdependent, integrated, or such that they otherwise contribute
to one another. In general, any two segments or activities of a single
corporation (or other taxpayer) are related business activities unless the two
segments or activities are not unitary under U.S. constitutional principles. In
addition, some activities are related business activities notwithstanding the
absence of a unitary relationship, e.g., the short term
investment of capital in a non-unitary business segment or activity.
2.
Income from Cash, Cash
Equivalents, and Short-term Securities. Interest or other income
from cash deposits, cash equivalents, and short-term securities is considered
related business income if such capital serves or performs an operational
function. Without limitation, examples of operational functions include: the
use or holding of funds as working capital or reserves; the use or holding of
funds to maintain a favorable credit rating (e.g. by
maintaining a strong current or quick asset ratio); the use or holding of funds
to self-insure against business risks; and the interim investment of funds
pending their future use in the taxpayer's business.
(b)
Determination of Related
Business Activities. The determination of whether business
activities are related will turn on the facts and circumstances of each case.
The presence of related business activities between two business entities may
be demonstrated by the vertical or horizontal integration of the two entities,
or by other indicia of related business activity including, but not limited to:
sales, exchanges, or transfers between the entities; common marketing; transfer
or pooling of technical information; common purchasing; other common operations
or systems; or centralized management. In determining the presence of related
business activities, a taxpayer's business activities, both within and outside
of Massachusetts, its organizational structure, and the underlying economic
realities applicable to its business, must be considered as a whole.
(c)
Burden of Proof.
Except as provided in 830 CMR 63.38.1(4)(d) (relating to corporate limited
partners), all income of a single taxpayer (whether derived directly or through
agents, partnerships, or other entities whose activities are attributed to the
taxpayer) is presumed to be income from related business activities until the
contrary is established. Either the taxpayer or the Commissioner may assert
that an item of a taxpayer's income is derived from unrelated business
activities. The party making such an assertion must prove by clear and cogent
evidence that, in the aggregate, the related business factors at 830 CMR
63.38.1(4)(b), do not reasonably warrant a finding that the business activities
are related. To demonstrate that income from cash, cash equivalents, or
short-term securities is derived from unrelated business activities, a taxpayer
must prove by clear and cogent evidence that the underlying assets and their
acquisition, maintenance, and management were, in fact, unrelated to the
taxpayer's business activities in the Commonwealth.
(d)
Presumption of Unrelated
Business Activity of Corporate Limited Partners. In cases where a
corporate limited partner owns, either directly or indirectly (including all
interests of any party whose direct or indirect stock ownership would be
attributed to the corporate limited partner under the provisions of 26 U.S.
Code § 318), less than 50% of either the capital or profit interests of a
partnership and the business activity of the limited partnership is attributed
to the corporate limited partner under
830 CMR
63.39.1(8), the business
activity of the limited partnership is presumed to be unrelated to the
corporation's other business activities unless the Commissioner or the taxpayer
rebuts this presumption. If the business activities of the partnership and the
corporate limited partner are unrelated, then the corporate limited partner
must separately account for its income from the holding or disposition of its
limited partnership interest and its other business income and must separately
apportion to Massachusetts income from each unrelated activity (to the extent
that Massachusetts has jurisdiction to tax income from each such activity),
using only the apportionment factors applicable to that activity. The separate
accounting shall apply both to the determination of income subject to
apportionment under M.G.L. c. 63, § 2A, 38 or 42, and to the determination
of the non-income measure under M.G.L. c. 63, § 39(a)(1).
Either the Commissioner or a taxpayer may rebut the presumption
of unrelated business activity by demonstrating that the corporate limited
partner and the partnership are engaged in a unitary business. If a corporate
limited partner has engaged in a unitary business with the partnership in one
or more taxable years, the corporate limited partner may not separately account
in any such taxable year for the income it derives from the partnership.
Instead, the corporate limited partner shall apportion to Massachusetts all
income derived from business activity carried on within the commonwealth,
including income derived from its partnership interest, in accordance with the
rules of M.G.L. c. 63, § 2A, 38 or 42 using the corporate limited
partner's own property, payroll, and sales plus its pro rata
portion of the partnership's property, payroll, and sales to determine an
apportionment percentage.
Example 1. Corporation A, which is
domiciled outside of Massachusetts, owns a minority limited partnership
interest in Partnership A. Partnership A conducts business in Massachusetts.
Apart from this partnership holding, Corporation A does not conduct business in
Massachusetts. Neither Corporation A nor the Commissioner rebuts the
presumption that the business activities of Corporation A and Partnership A are
unrelated. Corporation A must separately apportion to Massachusetts income from
the holding or disposition of its interest in Partnership A, using the
apportionment factors derived from the partnership's activity. Income from
Corporation A's other activities is not subject to Massachusetts tax
jurisdiction and is excluded from the Corporation's taxable net income.
Example 2. Corporation B, which is
domiciled outside of Massachusetts, conducts business in Massachusetts and, in
addition, owns a minority limited partnership interest in Partnership B.
Partnership B does not conduct business in Massachusetts. Neither Corporation B
nor the Commissioner rebuts the presumption that the business activities of
Corporation B and Partnership B are unrelated. Income from Corporation B's
holding or disposition of its interest in Partnership B is not subject to
Massachusetts tax jurisdiction and is excluded from the Corporation's taxable
net income. Corporation B must apportion the balance of its income to
Massachusetts using the apportionment factors derived from its other
activities.
Example 3. Corporation C is domiciled
in Massachusetts and holds a minority limited partnership interest in
Partnership C. Partnership C may or may not be engaged in business in
Massachusetts. Neither Corporation C nor the Commissioner rebuts the
presumption that the activities of Corporation C and Partnership C are
unrelated. Corporation C must separately apportion to Massachusetts income
derived from its interest in Partnership C, using the apportionment factors
derived from the partnership's activity. Corporation C must apportion the
balance of its income to Massachusetts using the apportionment factors derived
from its other activities. The taxable net income of Corporation C is the sum
of these separately apportioned amounts.
(e)
Evidentiary
Matters. In determining whether two business activities conducted
by a taxpayer are related, the Commissioner will apply the following
evidentiary rules.
1.
Production
of Evidence. Failure by the taxpayer to produce evidence that is
in the control of either the taxpayer or an entity controlled by the taxpayer
gives rise to an inference that the evidence is unfavorable.
2.
Reporting
Consistency. A taxpayer must assert claims of unrelated business
activity consistently from year to year on its Massachusetts returns. A
taxpayer must also consistently treat items of income as constitutionally
apportionable or non-apportionable on returns filed in various states where the
taxpayer is subject to tax unless such consistency is precluded by differences
in the statutory allocation and apportionment rules of the various states in
which the taxpayer is subject to tax. The provisions of 830 CMR 63.38.1(4)(b)
notwithstanding, if a taxpayer claims on a return filed with Massachusetts or
another state in any taxable year that income from a particular activity is
apportionable income, such claims may be considered as evidence that the income
is from a related business activity and is subject to apportionment in
Massachusetts in the current taxable year.
3.
Disallowance of
Expenses. In each taxable year in which expenses are allocable to
two or more business activities, the taxpayer must disclose and distinguish
expenses allocable in whole or part to each business activity. If the business
activity to which an expense is allocable is not subject to tax in
Massachusetts, the expense must be excluded. M.G.L. c. 63, § 30.4. The
Commissioner may consider a taxpayer's failure, in any taxable year, to
disclose and distinguish the expenses associated with specific business
activities as evidence that those activities are not, in fact, unrelated to the
taxpayer's business activities in Massachusetts.
(5)
Taxpayer or Taxpayer's Income
Taxable in Another State. A taxpayer is required to apportion its
income when it is has income from business activity that is taxable both in
Massachusetts and at least one other state. For purposes of 830 CMR 63.38.1(5),
taxable has the meaning set forth in 830 CMR 63.38.1(5) (b. This standard is
not satisfied as to such other state merely because the taxpayer is
incorporated in such state or files a return in that state that relates to a
capital stock tax or a franchise tax for the privilege of doing business.
For purposes of determining a taxpayer's apportionment
percentage under 830 CMR 63.38.1(9)(c)2., pertaining to throwback sales, a
taxpayer is taxable in another state if it meets either test set forth in 830
CMR 63.38.1(5)(a) or (b) for all or part of the taxable year.
The provisions in 830 CMR 63.38.1(5) also applies to corporate
partners as set forth in 830 CMR 63.38.1(12).
(a)
Subject to Tax.
A taxpayer is considered taxable in another state if the taxpayer is "subject
to" a net income tax, a franchise tax measured by net income, a franchise tax
for the privilege of doing business, or a corporate stock tax imposed by that
state. Whether or not a taxpayer is subject to any such tax depends upon the
nature and substance of the tax and not upon its form or title.
1.
Evidence That Corporation is
Subject to Tax. Any taxpayer that claims it is subject to one of
the taxes described in M.G.L. c. 63, § 38(b)(1) and 830 CMR 63.38.1(5)(a)
in another state must furnish to the Commissioner upon request documentary
evidence to support the claim. The documentary evidence should include proof
that the taxpayer has filed the requisite tax return and has paid the tax due.
A taxpayer that does not establish that it has filed a return and paid the tax
due in a particular state is presumed not to be subject to tax in that
state.
2.
Voluntary
Filing Insufficient. A voluntary filing in another state not
required by the law of such other state does not cause the taxpayer to be
subject to tax in that state.
3.
Abatements. A taxpayer that has filed a return in
another state and paid tax to that state nevertheless is presumed not to be
subject to tax in that state if the taxpayer has filed an abatement application
or similar claim in that state alleging that it is not subject to tax in such
state.
(b)
Jurisdiction to Tax. A taxpayer is considered taxable
in another state if that other state has jurisdiction to subject the taxpayer
to a net income tax, regardless of whether, in fact, the state does or does not
impose such a tax on the taxpayer.
1.
Standard Used. Another state has jurisdiction to
subject the taxpayer to a tax with respect to a business activity if, under the
Constitution and laws of the United States, the taxpayer's business activity
could be taxed in Massachusetts under the same facts and circumstances that
exist in the other state. A state does not have such jurisdiction where, inter
alia, the state is prohibited from imposing the tax by reason of the provisions
of P.L. 86-272,
15 U.S.C. §§
381 through
384.
2.
Evidence of Jurisdiction to
Tax. The Commissioner will presume that any activities of a
corporation in another state are protected from the other state's tax
jurisdiction by federal law, including P.L. 86-272, if the corporation does not
file returns in that jurisdiction. Any taxpayer that claims to be subject to
the tax jurisdiction of another state must furnish evidence to the Commissioner
upon request to substantiate the claim. Documentary evidence contemporaneous
with the events in question will be given greater weight than affidavits or
other evidence not contemporaneous with those events in determining whether the
taxpayer's activities subject it to another state's jurisdiction.
In addition to documentary evidence, the Commissioner will
generally recognize that another state has jurisdiction to subject a particular
taxpayer to a net income tax if the state has issued a written opinion to the
taxpayer to that effect, provided that:
a. the opinion is issued by a competent
governmental authority in the other state;
b. the opinion identifies the particular
taxpayer and tax period to which it applies; and
c. the opinion is based on an evaluation of
the activities of the taxpayer viewed as a separate entity, rather than upon
activities that may be conducted by unitary affiliates of the taxpayer in the
other state.
The following examples illustrate the application of 830 CMR
63.38.1(5)(a) and (b).
Example 1. In Year 1, a corporation
that is incorporated in Massachusetts ("Corporation") and has business
activities in Massachusetts is also engaged in the solicitation of sales of
tangible personal property in Nevada, which does not impose a corporate income
tax. In addition, if Nevada imposed a corporate income tax, the imposition of
that tax would be proscribed by the provisions of the Federal law, Public Law
86-272. Although Corporation is engaged in business activity in both
Massachusetts and one other state, it does not have income from business
activity in a state other than Massachusetts that is taxable in such state.
Therefore, all of Corporation's income from its business activities is
allocated to Massachusetts. (Note that if Corporation were entitled to
apportion its income by reason of its activities in an additional state, it
would not be taxable in Nevada for purposes of determining its throwback sales
under 830 CMR 63.38.1(9)(c)2. See830 CMR 63.38.1(5)(a) and
(b).)
Example 2. Same facts as in Example 1,
except that in Year 2, Corporation undergoes an F reorganization under the Code
and, as a result of this reorganization, is re-incorporated in Delaware. Merely
as a result of this re-incorporation, Corporation is required to file a
franchise tax return for the privilege of doing business in Delaware. Although
Corporation is required to make a franchise tax filing in Delaware, Corporation
is not engaged in business activity in that state. It continues to be the case
that Corporation does not have income from business activity in a state other
than Massachusetts that is taxable in such state. Therefore, all of
Corporation's income from its business activities is allocated to
Massachusetts. (Note that if Corporation were entitled to apportion its income
by reason of its activities in an additional state, it would not be taxable in
Nevada but would be taxable in Delaware for purposes of determining its
throwback sales under 830 CMR 63.38.1(9)(c)2. See830 CMR
63.38.1(5)(a) and (b).)
Example 3. Same facts as in Example 2,
except that in Year 3, apart from its Massachusetts business activities,
Corporation is also engaged in the solicitation of sales of tangible personal
property in both Nevada and Pennsylvania. Although Pennsylvania imposes an
income tax on corporations, Corporation is protected from the imposition of
this tax by the application of the Federal law, Public Law 86-272. Pennsylvania
also imposes a capital stock tax, which that state does impose upon
Corporation. Although Corporation is subject to the Pennsylvania capital stock
tax, this tax is not a tax on the Corporation's income from business activity
in Pennsylvania. It continues to be the case that Corporation does not have
income from business activity in a state other than Massachusetts that is
taxable in such state. Therefore, all of Corporation's income from its business
activities is allocated to Massachusetts. (Note that if Corporation were
entitled to apportion its income by reason of its activities in an additional
state, it would not be taxable in Nevada but would be taxable in Delaware and
Pennsylvania for purposes of determining its throwback sales under 830 CMR
63.38.1(9)(c)2. See 830 CMR 63.38.1(5)(a) and (b).)
Example 4. Same facts as in Example 3,
except that in Year 4, apart from its Massachusetts business activities and its
sales solicitation activities in Nevada and Pennsylvania, Corporation also
opens a sales office in Nevada. Nevada does not impose a corporate income tax.
However, if Nevada imposed a corporate income tax, Corporation would no longer
be protected from the imposition of this tax by the application of the Federal
law, Public Law 86-272. Therefore, Corporation has income from business
activity that is taxable in one state other than Massachusetts, and is required
to apportion its income. For purposes of determining Corporation's throwback
sales under 830 CMR 63.38.1(9)(c)2., Corporation is taxable in Nevada and also
Pennsylvania and Delaware. See830 CMR 63.38.1(5)(a) and
(b).
3.
"States" Outside the United States.
a. In the case of any foreign country or any
other "state" as defined in M.G.L. c. 63, § 30.13 and 830 CMR 63.38.1(2),
other than a state of the United States or political subdivision of a state of
the United States, the determination of whether such state has jurisdiction to
subject the taxpayer to a net income tax is made as though the federal
jurisdictional standards of the United States applied in that state. If
jurisdiction to tax is otherwise present, a foreign state is not considered to
lack jurisdiction by reason of the provisions of a treaty between the foreign
state and the United States or by reason of the provisions of P.L. 86-272,
15 U.S.C. §§
381 through
384.
b. For purposes of determining whether a
taxpayer must allocate its income to Massachusetts under M.G.L. c. 63, §
38(b), or apportion its income to Massachusetts under M.G.L. c. 63, §
38(c), a taxpayer is not subject to tax in a foreign state merely by virtue of
the taxpayer's sales of tangible personal property to purchasers in the foreign
state. However, if a taxpayer engaged in making such sales is otherwise
entitled to apportion its income under M.G.L. c. 63, § 38(c), and must
therefore calculate a sales factor under M.G.L. c. 63, § 38(f), then
solely for purposes of calculating its sales factor, such taxpayer will be
deemed to be taxable in a foreign state whenever it ships or delivers the
tangible personal property sold to a purchaser in that foreign state.
See830 CMR 63.38.1(9)(c)2.b.ii. The deemed taxability applies
only where a taxpayer is engaged in making sales of tangible personal property
in a foreign state and, for example, does not apply where a taxpayer is engaged
only in selling services or licensing intangible property in a foreign state.
In the latter cases, 830 CMR 63.38.1(5)(b)3.a applies.
(c)
Separate Company
Determination; Combined Reporting. Except as otherwise provided
herein, an individual corporation is subject to tax in another state or subject
to the tax jurisdiction of another state for purposes of 830 CMR 63.38.1(5)(a)
or (b) only on the basis of the separate activities of that individual
corporation, including without limitation activities attributed to that
corporation through partnerships engaged in related business activities with
the corporate partner, as described in
830 CMR 63.39.1
(Corporate Nexus). In the instance of a taxpayer that is a taxable member of a
combined group within the meaning of M.G.L. c. 63 § 32B and
830 CMR
63.32B.2, such taxable member is considered
taxable in any state in which any member of its combined group is subject to
tax with respect to income derived from the group's unitary business (or, in
the case of an affiliated group election, in any state in which a member of the
combined group is taxable). See
830 CMR
63.32B.2(7)(c). The rule in
the preceding sentence applies only if at least one member of the combined
group is entitled to apportion its income under M.G.L. c. 63 for the taxable
year in question. Id.
(6)
Consistent Accounting
Method.
(a) To the extent not
inconsistent with the provisions of M.G.L. c. 63, § 38, or 830 CMR
63.38.1, amounts included in the factors of the apportionment percentage must
be determined by the same accounting method as the taxpayer uses in determining
its federal taxable income for the same taxable period. If a taxpayer changes
its accounting methods for Massachusetts tax purposes but does not
simultaneously change its federal accounting methods, the taxpayer shall take
into account adjustments necessary to prevent amounts from being duplicated or
omitted from the taxpayer's taxable net income and apportionment factors,
utilizing the rules and principles of 26 U.S. Code § 481(a) ("Adjustments
required in method of accounting").
(b) A taxpayer's taxable year for
Massachusetts tax purposes is any fiscal or calendar year or period for which
the taxpayer is required to file a federal return. A taxpayer that engages in
business in Massachusetts for all or part of its taxable year must file a
Massachusetts return for the full federal year or period, and the apportionment
factors must reflect the full year or period. In the case of a "short" federal
tax year for which a separate federal return is required, the taxpayer must
file a Massachusetts return for the same short year, and the apportionment
factors on the return shall reflect the taxpayer's activity during only the
short year. The non-income measure of excise is prorated for short taxable
years under M.G.L. c. 63, § 39, but the excise attributable to income
earned during a short taxable year is not prorated.
(7)
Property Factor.
The property factor is a fraction the numerator of which is the average value
of the taxpayer's real and tangible personal property owned or rented and used
in Massachusetts during the taxable year and the denominator of which is the
average value of all of its real and tangible personal property owned or rented
and used during the taxable year.
(a)
Real and Tangible Personal Property. Real
and Tangible Personal Property includes land, buildings,
machinery, stock of goods, equipment, and other real and tangible personal
property, but does not include coin and currency unless held as a stock of
goods for resale. Leaseholds and leasehold improvements, whether located within
or without Massachusetts, are included within the meaning of "real and tangible
personal property", regardless of whether the taxpayer is entitled to remove
the improvements or the improvements revert to the lessor upon expiration of
the lease. In general, any real or tangible property whose cost is not
capitalized, but is directly expensed, for federal income tax purposes is
excluded from the numerator and denominator of the property factor, provided
that this exclusion shall not apply to otherwise depreciable property whose
cost is expensed pursuant to an election under the Code, such as the election
to expense under 26 U.S. Code § 179.
(b)
Property Used During the
Taxable Year. Real or tangible personal property owned or leased
by a taxpayer during the taxable year is included in the property factor if it
is used directly or indirectly during the taxable year for the production of
business income. Real or tangible personal property of a type that is
depreciable under 26 U.S. Code § 167 is considered to be used by the
taxpayer for the production of business income when it has been placed in
service within the meaning of Treas. Reg. § 1.167(a) through 10(b),
provided that the property has not been retired within the meaning of Treas.
Reg. § 1.167(a) through 8. Property or equipment under construction shall
be included in the property factor of a construction contractor to the extent
that the work completed exceeds progress payments received by the contractor.
Real or tangible personal property of a type that is not depreciable under 26
U.S. Code § 167 is presumed to be used directly or indirectly for the
production of business income unless the taxpayer or the Commissioner rebuts
this presumption under the facts of a particular case.
(c)
Property in
Transit. Property in transit between locations of the taxpayer to
which it belongs shall be considered to be at its destination for purposes of
the property factor. Property in transit between a buyer and seller which is
included by a taxpayer in the denominator of its property factor in accordance
with its regular accounting practices shall be included in the numerator
according to the state of destination. If goods in transit to a buyer are
included in the property factor of a seller, such state of destination for
property factor purposes shall be the state in which the seller's possession
and control of the property is transferred to the buyer. (830 CMR
63.38.1(9)(c)1.a.i through iv. shall not apply to the property
factor).
(d)
Mobile
Property. If a taxpayer owns or rents mobile property, as defined
in 830 CMR 63.38.1(2), and such property is used both within and outside of
Massachusetts during the taxable year, the numerator of the taxpayer's property
factor shall include the value of the property multiplied by a percentage which
represents the use of the property in Massachusetts relative to its use
everywhere during the taxable year. Except as otherwise required by special
apportionment regulations promulgated under the authority of M.G.L. c. 63,
§ 38(j), a taxpayer may elect to use any reasonable method for determining
the percentage of use of its mobile property in Massachusetts. The election is
made by filing a return that employs the chosen method for the first tax year,
ending on or after August 11, 1995 (the date on which the first version of 830
CMR 63.38.1 was promulgated), in which the taxpayer owns or rents mobile
property and apportions income to Massachusetts. The taxpayer must attach a
statement to its return describing the method chosen and must use the same
method consistently from year to year. The taxpayer must maintain records
adequate to substantiate its calculations. Once a taxpayer elects a particular
method, it may supplement its election prospectively with respect to new types
of mobile property that it may acquire in future years, but the Commissioner
generally will not allow a change in any method, once elected, either upon
application for abatement or upon filing of returns for future years, unless
the former method does not reasonably reflect the taxpayer's use of mobile
property in Massachusetts. In the case of a lease or rental of mobile property,
the rules of assignment set forth in 830 CMR 63.38.1(7)(d) apply to both the
lessor and the lessee of the property.
The Commissioner will presume that the methods stated in 830
CMR 63.38.1(7)(d)1. through 4. reasonably approximate the use of mobile
property in Massachusetts.
1. A
taxpayer may determine the use of mobile property in Massachusetts based upon
the proportion of time during the taxable year that the property is owned or
rented by a taxpayer and in actual use in Massachusetts relative to the total
time during the taxable year that the property is owned or rented by the
taxpayer and in actual use in jurisdictions where the taxpayer is subject to
tax.
2. A taxpayer may attribute
the use of on-road vehicles owned or rented by the taxpayer to Massachusetts by
a fraction, the numerator of which is the miles such vehicles were driven in
Massachusetts during the taxable year, and the denominator of which is the
number of miles that the vehicles were driven during the taxable year in
jurisdictions where the taxpayer is subject to tax. A taxpayer may maintain
mileage records on a per-vehicle basis or, if a taxpayer owns or rents a fleet
of vehicles that is located both within and outside of Massachusetts, on a
fleet basis, provided that all vehicles in a fleet must be of a substantially
similar type and value.
3. A
taxpayer may attribute the use of an automobile assigned to a traveling
employee to the state in which the automobile is registered, provided that the
taxpayer uses this method for all of its automobiles assigned to traveling
employees.
4. A taxpayer may
attribute the entire use of an item of mobile property owned or rented by the
taxpayer to the state in which the property is located for 80% or more of the
taxable year, provided that any taxpayer electing this method must use it with
respect to all items of mobile property that it owns or rents during the
taxable year and that are located in any one state for at least 80% of the
taxable year.
(e)
Valuation of Property Owned. Property owned by the
taxpayer is valued at its original cost. Without limitation, property owned by
a taxpayer includes property leased to another, provided that the transaction
is treated as a lease, rather than as a conditional sale, for federal income
tax purposes.
1.
Original
Cost. As a general rule,
Original Cost
means the basis of the property for federal income tax purposes (prior to any
federal adjustments) at the time of acquisition by the taxpayer and adjusted by
subsequent capital additions or improvements thereto and partial disposition
thereof, as, for example, by reason of sale, exchange, or abandonment, but not
adjusted for subsequent depreciation. However, 830 CMR 63.38.1(7)(e)1.a.
through d. shall apply.
a. If the original
cost of property is not ascertainable, the property is included in the factor
at its fair market value on the date of acquisition by the taxpayer.
b. Generally, if a taxpayer acquires assets
in a transaction in which the transferor does not recognize gain or loss under
26 U.S. Code, such as a reorganization, liquidation, gift, or contribution to
capital, and if under 26 U.S. Code the acquiring taxpayer carries over the
transferor's basis (or adjusted basis), then the original cost to the acquiring
taxpayer is the same as the original cost to the transferor.
c. If a taxpayer acquires assets in a
transaction in which, under 26 U.S. Code, there is a step-up in basis,
(e.g. 26 U.S. Code § 338 election), then the original
cost to the acquiring taxpayer for purposes of valuation of property is the
stepped-up basis.
d. The original
cost of property acquired by a taxpayer in a like-kind exchange is the original
cost of the property transferred by the taxpayer, plus any gain that 26 U.S.
Code requires the taxpayer to recognize on account of the exchange.
2.
Inventory or Stock
of Goods. Inventory or stock of goods is included in the property
factor in accordance with the valuation method used for federal income tax
purposes. Consigned inventory owned by the taxpayer is included in the property
factor.
3.
Averaging
Property Values. As a general rule, the average value of property
owned by a taxpayer is determined by averaging the values at the beginning and
end of the taxable year. However, the Commissioner may require averaging by
monthly values if such method is required to reflect properly the average value
of the taxpayer's property for the tax period. Averaging by monthly values will
generally be applied if substantial changes or fluctuations in the values of
the property occur during the taxable year or where property is acquired after
the beginning of the taxable year or disposed of before the end of the taxable
year. When a corporation makes a final disposition of its assets or liquidates,
thus terminating its taxable year (and the last month of such year), the value
of its items of property for such end of year (and month) shall be the value of
such items at the commencement of business on such day of final disposition or
liquidation.
(f)
Valuation of Rented Property. Property rented by the
taxpayer is valued at eight times its net annual rent, provided that such rate
reflects the fair rental value of the property as of the date of the rental
agreement.
1.
Items Included in
Rent. Rent is the actual sum in money or other consideration
payable directly or indirectly by the taxpayer or for its benefit for the use
of property, regardless of how such amounts may be designated. Rents include
amounts that are calculated as a percentage of sales or profits, and amounts
payable as additional rent or in lieu of rent, such as interest, taxes,
insurance, repairs, or any other items which are required to be paid by the
terms of the rental agreement. Rent does not include travel expenses such as
hotel or motel accommodations, or amounts paid to a lessor as
bona
fide service charges, such as payments for separately metered
utilities, janitorial services, or other
bona fide services
provided to a lessee that the lessee might, in regular commercial practice,
obtain from a party other than the lessor. If a payment includes rent and
bona fide service charges, and the amounts are not segregated,
the amount of the rental shall be determined on the basis of the relative fair
market values of the property and the services provided.
The following examples illustrate the application of 830 CMR
63.38.1(7)(f)1.:
Example 1. Pursuant to the terms of a
lease of real property, a taxpayer pays the lessor $12,000 a year rent, which
includes a $1,200 fee for janitorial services. Additionally, the taxpayer pays
taxes in the amount of $2,000 and interest in the amount of $1,000. The annual
rent is $13,800.
Example 2. A taxpayer stores part of
its inventory in a public warehouse. Under the terms of the contract, the total
charge for the year is $1,000, of which $700 was for the exclusive use of a
designated storage space and $300 for inventory insurance, handling and
shipping charges, and C.O.D. collections. The annual rent is
$700.
2.
Annual
Rent. As a general rule, the annual rental is the amount paid as
rent for property for a 12-month period. Where property is rented for less than
a 12-month period, the amount paid for the actual rental period shall be
considered to be the annual rent for the tax period. However, in the case of a
short taxable year, the rent paid for the short tax period shall be
annualized.
3.
Net
Annual Rent. Net annual rent is the annual rental paid by the
taxpayer, less the aggregate annual subrentals paid by subtenants of the
taxpayer. The net annual rent may not be less than an amount which bears the
same relation to the annual rent paid by the taxpayer as the property used by
the taxpayer bears to the total property.
The following example illustrates the application of 830 CMR
63.38.1(7)(f)3.:
A corporation rents a ten-story building at an annual rent of
$1,000,000. It occupies two stories and sublets eight stories for $1,000,000 a
year. The net annual rent of the corporation must not be less than two-tenths
of the corporation's annual rent for the entire year, or
$200,000.
4.
Property Used at No Charge or Nominal Rent. If
property owned by others is used by the taxpayer at no charge or rented by the
taxpayer for a nominal amount, the net annual rent for such property shall be
the fair market rental value for such property, as determined on the basis of
rentals of substantially similar properties in the same market in transactions
negotiated at arm's length. However, all rentals of property from federal or
state governmental entities shall be deemed to be at fair value.
(g)
Property Reporting
Consistency. A taxpayer must use the same rules for valuing
property or for including or excluding types of property in both the numerator
and the denominator of the property factor. If a taxpayer changes its method of
valuing property, or of excluding or including property in the property factor,
from the method used in its return in the prior year, the taxpayer must
disclose in the return for the current year the presence of such change, the
nature and extent of the change, and the reason for the change. The
Commissioner may disregard changes in the current year or in future tax years
if they have not been adequately disclosed.
(8)
Payroll Factor.
The payroll factor is a fraction the numerator of which is the total amount
paid for compensation in Massachusetts during the taxable year by the taxpayer
and the denominator of which is the total amount paid for compensation
everywhere during the taxable year.
(a)
Effect of Method of Accounting.
1.
General Rule. The
total amount paid for compensation is computed on the cash basis, as reported
for unemployment compensation purposes.
2.
Alternative Accrual Method
Election. Notwithstanding 830 CMR 63.38.1(8)(a)1., a taxpayer that
uses the accrual method of accounting in computing its taxable net income may
elect for purposes of 830 CMR 63.38.1(8) to use the accrual method in
determining the total amount of compensation paid in Massachusetts during the
taxable year.
a.
Election. In order to elect the accrual method, a
taxpayer must properly complete and file its return reporting the total
compensation accrued during the taxable year along with an electing statement
that "pursuant to 830 CMR 63.38.1(8)(a)2.a., the taxpayer is electing the
accrual method of accounting for purposes of computing the payroll factor." An
election by the taxpayer is binding for all subsequent taxable years except as
provided at 830 CMR 63.38.1(8)(a)2.b.
b.
Revocation of
Election. A taxpayer may not revoke an election under 830 CMR
63.38.1(8)(a)2. to use the accrual method of accounting for determining the
payroll factor except with the prior written approval of the Commissioner. The
Commissioner may grant such approval for any taxable year upon the written
request of the taxpayer for a letter ruling, under
830 CMR 62C.3.2,
if the request is submitted to the Commissioner on or before the due date,
including extensions, for the filing of the taxpayer's return, as determined
under M.G.L. chs. 62, 62C, or 63, as applicable. Permission to change
accounting methods under 830 CMR 63.38.1(8) will be granted only for a valid
business purpose other than a reduction in tax.
(b)
Compensation Paid in
Massachusetts. Compensation is paid in Massachusetts if any one of
the following tests is met:
1. The employee's
service is performed entirely within Massachusetts;
2. The employee's service is performed both
within and without Massachusetts, but the service performed outside
Massachusetts is incidental to the employee's service within Massachusetts.
Service is incidental if it is temporary or transitory in nature, or it is
rendered in connection with an isolated transaction;
3. Some of the employee's service is
performed in Massachusetts; and a. the employee's base of operations is in
Massachusetts; or b. there is no base of operations in any state, but the place
from which the employee's service is directed or controlled is in
Massachusetts; or c. the base of operations or the place from which the
employee's service is directed or controlled is not in any state in which some
part of the service is performed, but the employee's primary residence is in
Massachusetts.
(c)
Items Included. Compensation included in the payroll
factor includes wages, salaries, commissions, and any other form of
remuneration paid to employees for personal services rendered. Amounts will
generally be considered to be paid if they are treated as wages under M.G.L. c.
151A, § 1. However, in the event of any ambiguity in the treatment of a
particular item under M.G.L. c. 151A, § 1, the amount shall be treated as
paid to an employee if the amount constitutes income to the employee under 26
U.S. Code during the taxable year or if the amount would constitute income to
the employee during the taxable year if the employee were subject to 26 U.S.
Code.
Inclusion of items in the payroll factor depends upon the
particular facts and circumstances. In determining whether compensation is
includible in the payroll factor, the following guidelines will be
employed:
1. Compensation is includible
in the payroll factor if the compensation is paid for personal services
rendered by the employee to the taxpayer during the taxable year. Compensation
is not limited to payments described by the taxpayer as salary, wages,
commissions, or bonuses. For example, compensation would generally include
employee travel or other allowances in excess of expenses, or the value of
board, housing, or the personal use of an automobile, provided that 26 U.S.
Code includes these benefits in the gross income of the recipient.
2. Employer contributions under a qualified
cash or deferred arrangement as defined in 26 U.S. Code § 401(k) and
employer contributions to nonqualified deferred compensation plans are
generally included in the payroll factor. See M.G.L. c. 151A,
§ 1(s)(B).
(d)
Items Excluded. For purposes of the payroll factor,
compensation excludes payments that are not made by a taxpayer to its employees
for personal services rendered, including any amount specifically excluded from
the definition of "wages" under M.G.L. c. 151A, § 1(s)(A). The following
items are excluded without limitation (subject to the amendment of M.G.L. c.
151A):
1. Payments to or on behalf of
employees (including amounts paid for insurance or annuities) for sickness or
accident disability, hospitalization, or death, as provided by M.G.L. c. 151A,
§ 1(s)(A).
2. Payments to or
from qualified trusts under 26 U.S. Code § 401(a) (other than employer
contributions under qualified cash or deferred arrangements as defined in 26
U.S. Code § 401(k)), payments to or from qualified annuity plans or
contracts under 26 U.S. Code § 403, and payments to or from simplified
employee pensions under 26 U.S. Code § 408(k).
3. Employer's payments of employee's FICA
taxes.
4. Tips paid in any medium
other than cash, and cash tips which are less than $20 a month and not reported
to the employer pursuant to 26 U.S. Code § 6053(a).
5. Non-cash payments to employees for
services not in the course of the taxpayer's trade or business.
6. Payments made to independent contractors,
retirees, or other persons not properly classified as employees.
(e)
Treatment of
Leased and Temporary Employees.
1.
Leased Employees.
Compensation paid for personal services rendered by leased employees is
includible in the payroll factor of the taxpayer if the taxpayer is the
recipient of the services of the leased employee. Compensation for personal
services rendered by leased employees to client companies is excluded from the
payroll factor of employee leasing companies.
2.
Temporary
Employees. Compensation paid for personal services rendered to
client companies by employees of temporary help agencies is included in the
payroll factor of the temporary agency and is generally excluded from the
payroll factor of the client company. However, the Commissioner may require the
inclusion of compensation paid to temporary employees that perform services
under the direction and control of a client company in the payroll factor of
that client company in any taxable year in which all compensation paid to
temporary employees performing such services in Massachusetts for the client
company exceeds 50% of the client company's Massachusetts payroll, as
calculated without the inclusion of compensation paid to officers or
shareholders of the client company. For purposes of 830 CMR 63.38.1(8)(e)2., if
compensation paid to temporary employees is included in the payroll factor of a
client company, such compensation shall be 85% of the payments during the
taxable year by the client company to the temporary help agency or agencies
providing the temporary employees. Any adjustment to the payroll factor of a
client company shall not affect the payroll factor of the temporary help agency
or agencies providing the temporary employees.
(f)
Affiliated
Corporations. In order to prevent distortions in the payroll
factor, the Commissioner may require compensation paid to an employee of a
corporation that is a member of an affiliated group, as defined in 26 U.S.
Code, § 1504, to be included in the payroll factor of the group member for
which the employee performed an amount of services greater than the amount of
services the employee performed for any other group member, regardless of which
group member actually paid the compensation.
(g)
Payroll
Consistency. A taxpayer must use the same rules for determining
compensation paid in both the numerator and the denominator of the payroll
factor. If a taxpayer changes its method of determining compensation paid,
including, but not limited to, its method of accounting of such compensation,
from the method used in its return for the prior year, the taxpayer must
disclose in the return for the current year the presence of the change, the
nature and extent of the change, and the reason for the change. The
Commissioner may disregard changes in the current year or in future tax years
if they have not been adequately disclosed.
(9)
Sales Factor.
The sales factor is a fraction whose numerator is total sales of the taxpayer
in Massachusetts during the taxable year and whose denominator is total sales
of the taxpayer everywhere during the taxable year. In general, a taxpayer's
total sales are its gross receipts. However, certain items, as more
particularly referenced in 830 CMR 63.38.1(9)(a), are specifically excluded
from this computation. Also, in the case of the sale, exchange or other
disposition of a capital asset used in a taxpayer's trade or business the sales
to be included are measured by the gain from the transaction and not the gross
receipts. In the case of a transaction that is deemed to be a sale or exchange
under the provisions of 26 U.S. Code, the sales are the deemed receipts or gain
from the transaction under 26 U.S. Code, as the case may be, depending upon
whether the deemed transaction is a deemed sale or exchange of a capital asset.
(a)
Items Excluded From
Sales. Sales do not include the following items:
1. Interest.
2. Dividends.
3. Gross receipts from the maturity,
redemption, sale, exchange, or other disposition of securities as defined at
830 CMR 63.38.1(2).
4. Gross
receipts from the sale of business "good will" or similar intangible value,
including, without limitation, "going concern value" or "workforce in
place"(i.e., in the case of a sale or deemed sale of a
business).
5. Gross receipts that
result in an allocable item of income, irrespective as to whether that
allocable item of income is allocated to Massachusetts.
(b)
Items Included in
Sales. Sales include (but are not limited to) the following items:
1.
Manufacturing and Selling,
Purchasing and Reselling, Goods or Products. Sales include gross
sales, less returns and allowances, of goods or products (or other property of
a kind which would properly be included in inventory if on hand at the close of
the taxable year) which a taxpayer manufactures and sells or purchases and
resells. Sales also include all service charges, carrying charges, and other
non-interest charges incidental to sales. Federal excises and state excises are
included as part of sales if the taxes are passed on to the buyer or included
as part of the selling price of the product.
2.
Cost-plus
Contracts. In the case of a cost-plus-fee contract, such as
certain contracts for the operation of government-owned plants, sales include
the entire reimbursed cost, plus the fee. Receipts or gain attributable to the
sale of tangible personal property designed or constructed and sold under a
cost-plus-fee or similar arrangement are treated as receipts from the sale of
tangible personal property, and may not be treated as receipts from personal
services.
3.
Providing
Services. Sales include gross receipts from the performance of
services including commissions, fees, management charges, and similar items.
(See830 CMR 63.38.1(9)(b)8. regarding proper amount of service
fees in certain intercompany transactions.)
4.
Lease or Rental of Real or
Tangible Personal Property. Sales include the gross receipts from
renting, leasing, or licensing the use of real or tangible personal property
except in cases in which the lease, rental, or license of the asset in question
is treated, for purposes of M.G.L. c. 63, as a sale, exchange, or other
disposition of a capital asset used in a taxpayer's trade or business, in which
case sales include only the gain from the disposition of the property in
question.
5.
Sale,
Licensing, or Assignment of Intangible Property other than
Securities. Sales generally include gross receipts from the sale,
licensing, or assignment of intangible property other than securities or
business "good will" or similar intangible value, see 830 CMR
63.38.1(9)(a), except in cases in which the sale, licensing or assignment of
the property in question is treated, for purposes of M.G.L. c. 63, as a sale,
exchange, or other disposition of a capital asset used in a taxpayer's trade or
business, in which case the sales include the gain (and not the gross receipts)
from the disposition of the property in question. For detailed rules pertaining
to the sales factor rules that pertain to the license and sale of intangible
property see830 CMR 63.38.1(9)(d)5. and 6.
6.
Capitalized
Leases. Property subject to a capitalized lease for federal income
tax purposes is treated as subject to a capitalized lease for purposes of the
corporate excise, and sales include income or gain derived from a capitalized
lease transaction to the extent that the income or gain from such transaction
is included in the federal gross income of the taxpayer.
7.
Sale, Exchange, or Other
Disposition of Fixed Assets. In the case of the sale, exchange or
other disposition of a fixed asset used in a taxpayer's trade or business, such
as property, plant or equipment, sales are measured by the gain from such
transaction. Gain from the disposition of a fixed asset shall include (but is
not limited to) deemed gain from a transaction that is treated under 26 U.S.
Code as a sale of a taxpayer's assets and that results in the taxpayer's
recognition of income for Massachusetts purposes. For example, gain from the
deemed sale of assets (other than securities) by a target corporation under 26
U.S. Code § 338 is included in a target's sales factor. Similarly, the
gain that results from a payment of a dividend (other than securities) by a
subsidiary corporation to its parent that is deemed to be a sale of assets by
the subsidiary under 26 U.S. Code § 311(b) is included in the subsidiary's
sales factor.
8.
Intercompany Sales. Sales between affiliated
corporations, to the extent otherwise includible in the sales factor under
M.G.L. c. 63, § 38(f) and 830 CMR 63.38.1(9)(a) and (b), are generally
included in the sales factor of the selling corporation except as described in
830 CMR 63.38.1(9)(b)8. In the case of intercompany transactions included in
the sales factor under 830 CMR 63.38.1(9)(b)8., the amount of gross receipts
included in the sales factor shall reflect the fair market value of the
property or services provided in an arms-length transaction, subject to
adjustments or rules adopted by the Commissioner pursuant to M.G.L. c. 63,
§ 39A.
a.
Where Corporations
Are Members of the Same Combined Group. In general, transactions
between affiliates that are members of the same combined group within the
meaning of M.G.L. c. 63, § 32B and
830 CMR
63.32B.2 are not included in the sales factor
for purposes of the income measure. See
830 CMR
63.32B.2(7)(g). However,
when computing the non-income measure, a taxpayer shall include in its sales
factor any sales to affiliates that are members of the same combined group.
See 830 CMR
63.32B.2(6)(b)3.
b.
Where Corporations Are Not
Members of the Same Combined Group. When a taxpayer makes sales to
an affiliate and the two corporations are not members of the same combined
group within the meaning of M.G.L. c. 63, § 32B and
830 CMR
63.32B.2, the taxpayer's sales include the
gross receipts from such sales transactions, irrespective of whether the two
corporations are members of the same federal consolidated group.
c.
Exclusion of
Dividends. A payment from a subsidiary corporation to its parent
will be excluded from the numerator and denominator of the parent's sales
factor if, in substance, the payment represents a dividend, even if the payment
would otherwise be included in the parent's sales factor under 830 CMR
63.38.1(9)(b)8.b.
(c)
When Sales of Tangible
Personal Property are in Massachusetts. There are two rules for
determining whether a sale of tangible personal property is in Massachusetts.
Under the primary (destination) rule, a sale is in Massachusetts if the
property is delivered or shipped to a purchaser, including the United States
government, who takes possession within Massachusetts, regardless of the F.O.B.
point or other conditions of sale. Under the secondary (throwback) rule, a sale
is in Massachusetts if the selling taxpayer is not taxable in the state where
the property sold is delivered to the purchaser, and the property is not sold
by an agent of the taxpayer who is chiefly situated at, connected with, or sent
out from the taxpayer's owned or rented business premises outside of
Massachusetts.
1.
Destination
Sales. Sales are in Massachusetts if the property is delivered or
shipped to a purchaser in Massachusetts regardless of the F.O.B. point or other
condition of sale. Tangible property is deemed to have been shipped or
delivered to a purchaser within Massachusetts if:
a. the property is delivered directly by the
vendor to the possession and control of the purchaser or its agent within
Massachusetts unless the vendor can substantiate that no use is made of the
property in Massachusetts other than immediate transshipment; or
b. the property is delivered to the
possession and control of the purchaser by the vendor or by a carrier outside
of Massachusetts, if the property is immediately transshipped to
Massachusetts;
c. the property is
diverted to a purchaser in Massachusetts while en route to a
third-party consignee in another state; or
d. the third-party recipient of the tangible
personal property is located in Massachusetts, even if the property is ordered
from outside the state.
The following example illustrates the application of 830 CMR
63.38.1(9)(c)1.:
Example. Office Objects, Inc.
("Objects") manufactures office furniture in Massachusetts. Objects will either
ship furniture from its Massachusetts manufacturing facility to its customers
by common carrier, or it will allow customers to pick up their purchase at its
Massachusetts facility. Empty Environment, Inc., ("Empty"), a Rhode Island
corporation, purchases some office furniture from Objects. If Objects hires a
common carrier to ship the furniture to Rhode Island, the sale is not a
Massachusetts sale under the destination rule of 830 CMR 63.38.1(9)(c)1.
because Objects did not transfer possession and control of the furniture to
Empty in Massachusetts. If Empty uses its own truck and driver or hires its own
carrier to pick up the furniture from Object's Massachusetts facility and
transport it to Rhode Island, the sale will not be a Massachusetts sale under
the destination rule if the taxpayer substantiates that no use is made of the
property in Massachusetts other than the immediate
transshipment.
2.
Throwback Sales. Where tangible personal property is
delivered or shipped to a purchaser outside of Massachusetts, sales are in
Massachusetts if the taxpayer is not taxable in the state where the property is
delivered to the purchaser and the property is not sold by an agent of the
taxpayer who is chiefly situated at, connected with, or sent out from the
taxpayer's owned or rented business premises outside of Massachusetts.
a.
Burden of Proof.
If tangible personal property is delivered or shipped to a purchaser outside of
Massachusetts, the taxpayer has the burden of proving either that the taxpayer
is taxable in the state of the purchaser or that the tangible personal property
was sold by an agent of the taxpayer who is chiefly situated at, connected
with, or sent out from the taxpayer's owned or rented business premises outside
of Massachusetts.
b.
Taxable in the State of the Purchaser. For purposes of
the sales factor, the following special rules apply in determining whether a
taxpayer is considered taxable in the state of the purchaser.
i.
Taxable in Another
State. A taxpayer is taxable in the state of the purchaser if it
meets either test set out in 830 CMR 63.38.1(5). See830 CMR
63.38.1(5), Examples 1 through 4.
ii.
Foreign Sales. A
taxpayer is taxable in the state of the purchaser if tangible personal property
is delivered or shipped to a purchaser in a foreign country.
c.
Property Not Sold
by Agent Who Is Chiefly Situated at, Connected with or Sent out from Taxpayer's
Owned or Rented Business Premises Outside of Massachusetts. Where
the taxpayer is not taxable in the state of the purchaser, sales that are not
the direct result of the efforts of an agent of the taxpayer who is chiefly
situated at, connected with, or sent out from the taxpayer's owned or rented
business premises outside of Massachusetts are sales in Massachusetts. For
purposes of the sales factor, the following rules apply in determining whether
tangible personal property is considered sold by an agent chiefly situated at,
connected with or sent out from the taxpayer's owned or rented business
premises outside of Massachusetts.
i.
Independent Contractors. Independent contractors as
defined at 830 CMR 63.38.1(2), control their own activities and, in general,
are chiefly associated with their own offices. They are not agents chiefly
situated at, connected with or sent out from a taxpayer's owned or rented
business premises. In most cases, sales of a taxpayer's goods by independent
contractors are therefore included in the numerator of the taxpayer's sales
factor. However, if substantially all of a taxpayer's contacts with an
independent contractor are conducted and controlled by an agent or employee of
the taxpayer who is chiefly situated at, connected with or sent out from the
taxpayer's owned or rented business premises outside of Massachusetts, then
sales made by the independent contractor will be regarded as made by that agent
or employee.
ii.
Determining Who "Sold" Property. The person who
actually negotiates and effects an order is the person who sells the property.
The person who sells the property is generally not the person who performs mere
clerical approval acceptance, or processing, including a routine credit check
of the purchaser. The taxpayer has the burden of proving who sold the property.
Reorders of property originating from the efforts of a person
who negotiated and effected the original order are treated the same as the
original order unless this treatment is not reasonable in light of material
changes in the taxpayer's business operations after the time the original order
was placed.
A taxpayer's catalog sales, made when a customer, who has
received mail-order solicitations from the taxpayer, telephones or sends a
written order to a Massachusetts location of the taxpayer, are not sales made
by an agent from premises outside Massachusetts.
iii.
Determining Location of
Taxpayer's Owned or Rented Business Premises. The determination of
the particular business premises owned or rented by a taxpayer that an agent is
chiefly situated at, or that an agent is chiefly connected with, or that an
agent is chiefly sent out from, is a factual determination. In making the
determination, the following guidelines will be employed:
Business Premises. For purposes of the
sales factor, the taxpayer's owned or rented premises for the transaction of
business ("business premises") is the taxpayer's owned or rented sales office
that the selling agent customarily uses to receive instructions, directions, or
supervision from the taxpayer, or communications from customers; to replenish
stock or other materials; to repair equipment; or to perform any other function
necessary to the selling of the taxpayer's tangible personal property.
Facilities used exclusively as warehouses or manufacturing facilities are not
sales offices. The presence of company employees receiving orders and shipping
tangible personal property will not, by itself, change a facility from a
warehouse to a sales office.
Chiefly Situated at. In the case of an
agent who spends 50% or more of his or her time at a taxpayer's owned or rented
business premises, the agent is chiefly situated at that business
location.
Chiefly Sent out from. In the case of
an agent who spends more than 50% of his or her working hours away from a fixed
business premises, the agent is chiefly sent out from that business premises
where the agent customarily returns for various paperwork, correspondence and
administrative matters, such as participation in office meetings and
conferences, meetings with supervisors or managers, and preparation of sales
materials, contracts and the like.
Chiefly Connected With. In the case of
an agent who does not fall within the rules described above in - Chiefly
Situated at or - Chiefly Sent out From, the agent is chiefly connected with the
business premises that exercises supervision and control over the agent's
activities.
The following example illustrates the application of 830 CMR
63.38.1(9)(c)2.c.iii.
Taxpayer A has its executive office, sales office, and factory
in New York. Taxpayer A also rents a branch sales office in Massachusetts and a
warehouse in Rhode Island. Taxpayer A has four sales representatives in the New
England region.
Saleswoman Barbara Resides in
Massachusetts. She works daily at the branch sales office in
Massachusetts where she meets with customers, receives telephone orders,
approves and transmits approved orders to the warehouse personnel in Rhode
Island for shipment. Barbara is "situated at" the Massachusetts branch sales
office, and all sales made by Barbara are attributed to Massachusetts.
Salesman Bob operates out of his New Hampshire residence and
solicits orders throughout New Hampshire and Maine. Bob regularly visits,
reports to, and sends orders for approval to Saleswoman Barbara at the branch
office in Massachusetts. Based on the facts, Bob is "sent out from" the
taxpayer's rented branch sales office in Massachusetts. Assuming Taxpayer A is
not taxable in New Hampshire and Maine, all sales of tangible personal property
made by Bob to purchasers in New Hampshire and Maine are attributed to
Massachusetts.
Salesman John operates out of his Vermont residence and
solicits orders in Vermont. John was hired by, makes weekly reports to, and
receives instructions from, the Vice President of Sales who operates out of the
New York office. Although John routes his orders through the Massachusetts
branch office where they are approved, he has no other contacts with that
office. Based on the facts, John is "connected with" the taxpayer's owned New
York office. Whether or not Taxpayer A is taxable in Vermont, none of the
John's sales of tangible personal property to purchasers in Vermont are
attributed to Massachusetts.
Salesman Tom resides in Rhode Island and solicits orders in
Connecticut. Although Tom regularly visits the warehouse in Rhode Island, he
reports to, and sends orders for approval to Saleswoman Barbara at the branch
office in Massachusetts. Based on the facts, Tom is "connected with" the
taxpayer's rented branch sales office in Massachusetts. Assuming that Taxpayer
A is not taxable in Connecticut, all sales of tangible personal property made
by Tom to purchasers in Connecticut are attributed to
Massachusetts.
3.
Resale to Foreign
Government. Sales of tangible personal property to the United
States or any of its agencies or instrumentalities for resale to a foreign
government or an agency or instrumentality of a foreign government are not
sales in Massachusetts.
(d)
When Sales Other than Sales
of Tangible Personal Property Are in Massachusetts.
1.
General Rules.
a.
Market-based
Sourcing. Sales, other than sales of tangible personal property,
are in Massachusetts within the meaning of 830 CMR 63.38.1 if and to the extent
that the corporation's market for the sales is in Massachusetts as more fully
set forth in M.G.L. c, 63, § 38(f) and 830 CMR 63.38.1(9)(d). In general,
the provisions of 830 CMR 63.38.1(9)(d)4. through 7. establish uniform rules
for:
i. determining whether and to what extent
the market for a sale other than the sale of tangible personal property is in
Massachusetts;
ii. reasonably
approximating the state or states of assignment where such state or states
cannot be determined; and
iii.
excluding the sale where the state or states of assignment cannot be determined
or reasonably approximated.
b.
Outline of
Topics. The provisions in 830 CMR 63.38.1(9)(d) are organized as
follows.
i.
General
Rules.
a. Market-based Sourcing
b. Outline of Topics
c. Definitions
d. General Principles of Application;
Contemporaneous Records
e. Rules of
Reasonable Approximation
f. Rules
with respect to Exclusion of Sales from the Sales Factor
g. Changes in Methodology; Commissioner
Review
h. Industry-specific
Alternative Apportionment Rules
i.
Application to Services Provided Directly or Indirectly to a RIC
j. Further Guidance
ii.
Sale, Rental, Lease or
License of Real Property.
iii.
Rental, Lease or License of
Tangible Personal Property.
iv.
Sale of a
Service.
a. General
Rule
b. In-person Services
c. Services Delivered to the Customer or on
Behalf of the Customer, or Delivered Electronically Through the
Customer
d. Professional
Services
v.
License or Lease of Intangible Property
a. General Rules
b. License of a Marketing
Intangible
c. License of a
Production Intangible
d. License of
a Mixed Intangible
e. License of
Intangible Property where Substance of the Transaction Resembles a Sale of
Goods or Services
f.
Examples
vi.
Sale of Intangible Property.
a. Assignment of Sales
b. Examples
vii.
Special Rules.
a. Software Transactions
b. Sales or Licenses of Digital Goods and
Services
c. Enforcement of Legal
Rights
c.
Definitions. For the purposes of 830 CMR 63.38.1(9)(d)
the following terms have the following meanings.
Billing Address means the location
indicated in the books and records of the taxpayer as the primary mailing
address relating to a customer's account as of the time of the transaction as
kept in good faith in the normal course of business and not for tax avoidance
purposes.
Business Customer means a customer
that is a business operating in any form, including an individual that operates
a business through the form of a sole proprietorship. Sales to a non-profit
organization, to a trust, to the U.S. Government, to any foreign, state or
local government, or to any agency or instrumentality of such government shall
be treated as sales to a business customer and shall be assigned consistent
with the rules that apply to such sales.
Individual Customer means any customer
that is not a business customer.
Intangible Property, generally
includes, without limitation, copyrights; patents; trademarks; trade names;
brand names; franchises; licenses; trade secrets; trade dress; information;
know-how; methods; programs; procedures; systems; formulae; processes;
technical data; designs; licenses; literary, musical, or artistic compositions;
information; ideas; contract rights including broadcast rights; agreements not
to compete; goodwill and going concern value; securities
(see830 CMR 63.38.1(2) (definition of "security")); and,
except as otherwise provided in 830 CMR 63.38.1, computer software. In the case
of a sale of intangible property, such sale may or may not be includable in the
numerator and denominator of the taxpayer's sales factor, depending upon the
application of 830 CMR 63.38.1(9)(d)6.
Place of Order, means the physical
location from which a customer places an order for a sale other than a sale of
tangible personal property from a taxpayer, resulting in a contract with the
taxpayer.
State Where a Contract of Sale is Principally
Managed by the Customer, means the primary location at which an
employee or other representative of a customer serves as the primary contact
person for the taxpayer with respect to the implementation and day-to-day
execution of a contract entered into by the taxpayer with the
customer.
d.
General Principles of Application; Contemporaneous
Records. In order to satisfy the requirements of 830 CMR
63.38.1(9)(d), a taxpayer's assignment of sales of other than tangible personal
property must be consistent with the following principles:
i. A taxpayer's application of 830 CMR
63.38.1(9)(d) shall be based on objective criteria and shall consider all
sources of information reasonably available to the taxpayer at the time of its
tax filing including, without limitation, the taxpayer's books and records kept
in the normal course of business. A taxpayer's method of assigning its sales
shall be determined in good faith, applied in good faith, and applied
consistently with respect to similar transactions and year to year. A taxpayer
shall retain contemporaneous records that explain the determination and
application of its method of assigning its sales, including its underlying
assumptions, and shall provide such records to the Commissioner upon
request.
ii. The provisions of 830
CMR 63.38.1(9)(d)4. through 7. provide for various assignment rules that apply
sequentially in a hierarchy. For each sale to which a hierarchical rule
applies, a taxpayer must make a reasonable effort to apply the primary rule
applicable to the sale before seeking to apply the next rule in the hierarchy
(and must continue to do so with each succeeding rule in the hierarchy, where
applicable). For example, in some cases, the applicable rule first requires a
taxpayer to determine the state or states of assignment, and where the taxpayer
cannot do so, the rule then requires the taxpayer to reasonably approximate
such state or states. In such cases, the taxpayer must in good faith and with
reasonable effort attempt to determine the state or states of assignment
(i.e., apply the primary rule in the hierarchy) before it may
reasonably approximate such state or states.
iii. A taxpayer's method of assigning its
sales, including the use of a method of approximation, where applicable, must
reflect an attempt to obtain the most accurate assignment of sales consistent
with the regulatory standards set forth in 830 CMR 63.38.1(9)(d), rather than
an attempt to lower the taxpayer's tax liability. A method of assignment that
is reasonable for one taxpayer may not necessarily be reasonable for another
taxpayer, depending upon the applicable facts.
e.
Rules of Reasonable
Approximation.
i.
In
General. In general, the provisions of 830 CMR 63.38.1(9)(d)4.
through 7. establish uniform rules for determining whether and to what extent
the market for a sale other than the sale of tangible personal property is in
Massachusetts. The provisions of 830 CMR 63.38.1(9)(d)4. through 7. also set
forth rules of reasonable approximation, which apply where the state or states
of assignment cannot be determined. In some instances, the reasonable
approximation must be made in accordance with specific rules of approximation
prescribed by 830 CMR 63.38.1. See, e.g.,
830 CMR 63.38.1(9)(d)4.d. (pertaining to professional
services). In other cases, the applicable rule in 830 CMR 63.38.1(9)(d) permits
a taxpayer to reasonably approximate the state or states of assignment, using a
method that reflects an effort to approximate the results that would be
obtained under the applicable rules or standards set forth in 830 CMR
63.38.1(9)(d).
ii.
Approximation Based Upon Known Sales. In any instance
where, applying the applicable rules in 830 CMR 63.38.1(9)(d)4., pertaining to
sales of services, a taxpayer can ascertain the state or states of assignment
of a substantial portion of its sales of substantially similar services
("assigned sales"), but not all of such sales, and the taxpayer reasonably
believes, based on all available information, that the geographic distribution
of some or all of the remainder of such sales generally tracks that of the
assigned sales, it shall include those sales which it believes tracks the
geographic distribution of the assigned sales in its sales factor in the same
proportion as its assigned sales. 830 CMR 63.38.1(9)(a)1.e.ii. also applies in
the context of licenses and sales of intangible property where the substance of
the transaction resembles a sale of goods or services. See830
CMR 63.38.1(9)(d)5.e. and 6.a.v.
f.
Rules With respect to
Exclusion of Sales from the Sales Factor.
i. In any case in which a taxpayer cannot
ascertain the state or states to which a sale is to be assigned pursuant to the
applicable rules set forth in 830 CMR 63.38.1(9)(d) (including through the use
of a method of reasonable approximation, where relevant) using a reasonable
amount of effort undertaken in good faith, the sale shall be excluded from the
numerator and the denominator of the taxpayer's sales factor.
ii. In any case in which a taxpayer can
ascertain the state or states to which a sale is to be assigned pursuant to the
applicable rules set forth in 830 CMR 63.38.1(9)(d), but the taxpayer is not
taxable in one or more such states, the sales that would otherwise be assigned
to such states where the taxpayer is not taxable shall be excluded from the
numerator and denominator of the taxpayer's sales factor. The rules to
determine whether a taxpayer is taxable in a state are set forth at 830 CMR
63.38.1(5).
g.
Changes in Methodology; Commissioner Review.
i.
General Rules Applicable to
Original Returns. In any case in which a taxpayer files an
original return for a taxable year in which it properly assigns its sales using
a method of assignment, including a method of reasonable approximation, in
accordance with 830 CMR 63.38.1(9)(d), the application of such method of
assignment shall be deemed to be a correct determination by the taxpayer of the
state or states of assignment to which the method is properly applied. In such
cases, neither the Commissioner nor the taxpayer (through the form of an audit
adjustment, amended return, abatement application or otherwise) may modify the
taxpayer's methodology as applied for assigning such sales for such taxable
year. However, the Commissioner and the taxpayer may each subsequently, through
the applicable administrative process, correct either factual errors or
calculation errors with respect to the taxpayer's application of its filing
methodology.
ii.
Commissioner Authority to Adjust a Taxpayer's Return.
The Commissioner's ability to review and adjust a taxpayer's assignment of
sales on a return to more accurately assign such sales consistent with the
rules or standards of 830 CMR 63.38.1(9)(d), includes, but is not limited to,
each of the following potential actions.
(A)
In any case in which a taxpayer fails to properly assign a sale in accordance
with the rules set forth in 830 CMR 63.38.1(9)(d), including the failure to
properly apply a hierarchy of rules consistent with the principles of 830 CMR
63.38.1(9)(d)1.d.ii., the Commissioner may adjust the assignment of such sales
in accordance with the applicable rules in 830 CMR 63.38.1(9)(d).
(B) In any case in which a taxpayer uses a
method of approximation to assign its sales and the Commissioner determines
that the method of approximation employed by the taxpayer is not reasonable,
the Commissioner may substitute a method of approximation that the Commissioner
determines is appropriate or may exclude the sales from the taxpayer's
numerator and denominator, as appropriate.
(C) In any case in which the Commissioner
determines that a taxpayer's method of approximation is reasonable, but has not
been applied in a consistent manner with respect to similar transactions or
year to year, the Commissioner may require that the taxpayer apply its method
of approximation in a consistent manner.
(D) In any case in which a taxpayer excludes
sales from the numerator and denominator of its sales factor on the theory that
the assignment of such sales cannot be reasonably approximated, the
Commissioner may determine that the exclusion of such sales is not appropriate,
and may instead substitute a method of approximation that the Commissioner
determines is appropriate.
(E) In
any case in which a taxpayer fails to retain contemporaneous records that
explain the determination and application of its method of assigning its sales,
including its underlying assumptions, or fails to provide such records to the
Commissioner upon request, the Commissioner may treat the taxpayer's assignment
of sales as unsubstantiated, and may adjust the assignment of such sales in a
manner consistent with the applicable rules in 830 CMR 63.38.1(9)(d).
(F) In any case in which the Commissioner
concludes that a taxpayer's customer's billing address was selected for tax
avoidance purposes, the Commissioner may adjust the assignment of sales to such
customer in a manner consistent with the applicable rules in 830 CMR
63.38.1(9)(d).
iii.
Taxpayer Authority to Change a Method of Assignment on a
Prospective Basis. In filing its original return for a tax year, a
taxpayer may change its method of assigning its sales under 830 CMR
63.38.1(9)(d) from the method it used in the preceding year, including changing
its method of approximation from that used on previous returns. However, the
taxpayer may only make such change for purposes of improving the accuracy of
assigning its sales consistent with the 830 CMR 63.38.1(9)(d), including, for
example, to address the circumstance where there is a change in the information
that is available to the taxpayer as relevant for purposes of complying with
such rules. Further, a taxpayer that seeks to change its method of assigning
its sales must disclose, in the original return filed for the year of the
change, the fact that it is has made the change, and must retain and provide to
the Commissioner upon request documents that explain the nature and extent of
the change, and the reason for the change. If a taxpayer fails to adequately
disclose such change or retain and provide such records upon request, the
Commissioner may disregard the taxpayer's change and substitute an assignment
method that the Commissioner determines is appropriate.
iv.
Commissioner Authority to
Change a Method of Assignment on a Prospective Basis. The
Commissioner may direct a taxpayer to change its method of assigning its sales
in tax returns that have not yet been filed, including changing the taxpayer's
method of approximation, if upon reviewing the taxpayer's filing methodology
applied for a prior tax year, the Commissioner determines that such change is
appropriate to reflect a more accurate assignment of the taxpayer's sales
within the meaning of 830 CMR 63.38.1(9)(d), and determines that such change
can be reasonably adopted by the taxpayer. The Commissioner will provide the
taxpayer with a written explanation as to the reason for making such change. In
any case in which a taxpayer fails to comply with the Commissioner's direction
on subsequently filed returns, the Commissioner may deem the taxpayer's method
of assigning its sales on such returns to be unreasonable, and may substitute
an assignment method that the Commissioner determines is appropriate.
h.
Industry-specific
Alternative Apportionment Rules. Prior to the enactment of St.
2013, c. 46, § 37, the Commissioner promulgated six industry-specific
alternative apportionment regulations to address industries where the
application of the provisions of M.G.L. c. 63, § 38 were not reasonably
adapted to approximate the net income derived from business carried on within
Massachusetts.
See M.G.L. c. 63, § 38(j). Following the
enactment of St. 2013, c. 46, § 37, the Commissioner reviewed those six
industry-specific alternative apportionment regulations, and determined for
each industry that the provisions of M.G.L. c. 63, § 38 as a whole
continue not to be reasonably adapted to approximate the net income derived
from business carried on within Massachusetts. However, in the case of three of
the industries, the Commissioner determined that industry-specific alternative
sales factor rules were no longer needed in light of St. 2013, c. 46, §
37. In the case of the other three industries, the Commissioner determined that
the industry-specific alternative sales factor rules remain necessary.
i.
Industry-specific Sales Factor
Provisions that Remain in Effect. Prior to the enactment of St.
2013, c. 46, § 37 the Commissioner promulgated industry-specific
alternative apportionment regulations for pipeline companies, corporations
engaged in the electricity industry, and corporations engaged in the
telecommunications industry. See
830 CMR
63.38.8 (pipeline companies);
830 CMR
63.38.10 (electricity industry) and
830 CMR
63.38.11 (telecommunications industry). These
industry-specific regulations remain fully in effect and are not superseded in
whole or in part by 830 CMR 63.38.1(9)(d), as these regulations continue to
address circumstances where the provisions of M.G.L. c. 63, § 38,
including M.G.L. c. 63, § 38(f), are not reasonably adapted to approximate
the net income derived from business carried on within Massachusetts. However,
a special rule pertaining to taxpayers that provide telecommunications services
that are also engaged in the sale or license of digital goods and services
shall apply notwithstanding the rules set forth in
830 CMR
63.38.11. See830 CMR
63.38.1(9)(d)7.b.ii.
ii.
Industry-specific Sales Factor now Determined under 830 CMR
63.38.1.(9)(d). Prior to the enactment of St. 2013, c. 46, § 37 the
Commissioner promulgated industry-specific alternative apportionment
regulations for motor carriers, airlines, and courier and package delivery
services. See
830 CMR
63.38.2 (airlines);
830 CMR
63.38.3 (motor carriers);
830
CMR 63.38.4 (courier and package delivery
services). In each of these cases, the sales factor is now determined pursuant
to 830 CMR 63.38.1(9)(d). The industry-specific property and payroll factor
rules for those industries remain fully in
effect.
i.
Application to Services Provided Directly or Indirectly to a
RIC. Nothing in 830 CMR 63.38.1(9)(d) shall be construed to
supersede or affect the application of
830 CMR
63.38.7 that apply to mutual fund service
corporations. See M.G.L. c. 63, § 38(m). However, rules
with respect to mutual fund sales, as defined at 830 CMR 63.38.1(2), as made by
a taxpayer that is not a mutual fund service corporation, are set forth at 830
CMR 63.38.1(9)(d)4.d.iii.(D).
j.
Further Guidance. The Commissioner may issue further
public written statements with respect to the rules set forth in 830 CMR
63.38.1(9)(d). Such further guidance may, among other things, include guidance
with respect to:
i. what constitutes a
reasonable method of approximation within the meaning of such rules; and
ii. the circumstances in which a
filing change with respect to a taxpayer's method of reasonable approximation
will be deemed appropriate.
2.
Sale, Rental, Lease or License
of Real Property. In the case of a sale, rental, lease or license
of real property, the sale is in Massachusetts if and to the extent that the
property is in Massachusetts.
3.
Rental, Lease or License of Tangible Personal
Property. In the case of a rental, lease or license of tangible
personal property, the sale is in Massachusetts if and to the extent that the
property is in Massachusetts. If property is mobile property that is located
both within and without Massachusetts during the period of the lease or other
contract, the receipts assigned to Massachusetts shall be the receipts from the
contract period multiplied by the fraction used by the taxpayer for property
factor purposes under 830 CMR 63.38.1(7)(d) (as adjusted when necessary to
reflect differences between usage during the contract period and usage during
the taxable year).
4.
Sale of a Service.
a.
General Rule. The sale of a service is in
Massachusetts if and to the extent that the service is delivered at a location
in Massachusetts. In general, the term "delivered" shall be construed to refer
to the location of the taxpayer's market for the service provided and is not to
be construed by reference to the location of the property or payroll of the
taxpayer as otherwise determined for corporate apportionment purposes pursuant
to 830 CMR 63.38.1(7) and (8). The rules to determine the location of the
delivery of a service in the context of several specific types of service
transactions are set forth at 830 CMR 63.38.1(9)(d)4.b. through d.
b.
In-person
Services.
i.
In
General. Except as otherwise provided in 830 CMR
63.38.1(9)(d)4.b., in-person services are services that are physically provided
in person by the taxpayer, where the customer or the customer's real or
tangible property upon which the services are performed is in the same location
as the service provider at the time the services are performed. 830 CMR
63.38.1(9)(d)4.b. includes situations where the services are provided on behalf
of the taxpayer by a third-party contractor. Examples of in-person services
include, without limitation, warranty and repair services; cleaning services;
plumbing services; carpentry; construction contractor services; pest control;
landscape services; medical and dental services, including medical testing and
x-rays and mental health care and treatment; child care; hair cutting and salon
services; live entertainment and athletic performances; and in-person training
or lessons. In-person services include services within the description above
that are performed at:
(A) a location that is
owned or operated by the service provider; or
(B) a location of the customer, including the
location of the customer's real or tangible personal property.
Various professional services, including legal, accounting,
financial and consulting services, and other such services as described in 830
CMR 63.38.1(9)(d)4.d., although they may involve some amount of in-person
contact, are not treated as in-person services within the meaning of 830 CMR
63.38.1(9)(d)4.b.
ii.
Assignment of
Sales. Except as otherwise provided in 830 CMR 63.38.1(9)(d)4.b.,
where the service provided by the taxpayer is an in-person service, the
delivery of the service is at the location where the service is received.
Therefore, the sale is in Massachusetts if and to the extent the customer
receives the in-person service in Massachusetts. In assigning its sales of
in-person services, a taxpayer shall first attempt to determine the location
where a service is received, as follows:
(A)
Where the service is performed with respect to the body of an individual
customer in Massachusetts (e.g. hair cutting or x-ray
services) or in the physical presence of the customer in Massachusetts
(e.g. live entertainment or athletic performances), the
service is received in Massachusetts.
(B) Where the service is performed with
respect to the customer's real estate in Massachusetts or where the service is
performed with respect to the customer's tangible personal property at the
customer's residence or in the customer's possession in Massachusetts, the
service is received in Massachusetts.
(C) Where the service is performed with
respect to the customer's tangible personal property and the tangible personal
property is to be shipped or delivered to the customer, whether the service is
performed in Massachusetts or outside Massachusetts, the service is received in
Massachusetts if such property is shipped or delivered to the customer in
Massachusetts.
In any instance in which the state or states where a service is
actually received cannot be determined, but the taxpayer has sufficient
information regarding the place of receipt from which it can reasonably
approximate the state or states where the service is received, the taxpayer
shall reasonably approximate such state or states. In any instance where the
state to which the sale is to be assigned can be determined or reasonably
approximated, but the taxpayer is not taxable in such state, the sale that
would otherwise be assigned to such state shall be excluded from the numerator
and denominator of the taxpayer's sales factor. See 830 CMR
63.38.1(9)(d)1.f.ii.
iii.
Transportation and Delivery
Services.
(A)
In
General. Transportation and delivery services, involving the
physical transportation of people or tangible personal property from one
destination to another, are in-person services within the meaning of 830 CMR
63.38.1(9)(d)4.b. Special rules of assignment apply to receipts from the
provision of transportation and delivery services. The assignment of receipts
from such services depends upon whether such services are provided by air or by
other means as provided in 830 CMR 63.38.1(9)(d)4.b.iii.(B) and (C). Receipts
from a taxpayer's sale of transportation and delivery services are assigned
pursuant to this section whether the transportation and delivery services are
provided directly by the taxpayer or indirectly by another entity under common
ownership with the taxpayer as defined in
830 CMR
63.32B.2. If a taxpayer provides
transportation and delivery services exclusively by air, the rule in 830 CMR
63.38.1(9)(d)4.b.iii(B) applies to receipts from such services. If a taxpayer
provides transportation and delivery services both by air and by means other
than air, the rule in 830 CMR 63.38.1(9)(d)4.b.iii(C) applies to receipts from
such services. If a taxpayer that provides transportation and delivery services
also derives receipts from activities other than transportation and delivery
services, such other receipts are apportioned according to the applicable rules
under 830 CMR 63.38.1(9).
(B)
Transportation and Delivery Services Provided Exclusively by
Air. Transportation and delivery services provided exclusively by
air are assigned to the state or states of the aircraft departures associated
with such services. Therefore, the receipts assigned to Massachusetts shall be
determined by multiplying the taxpayer's total receipts from such services by
the percentage of the aircraft departures occurring in Massachusetts relative
to the aircraft departures that take place everywhere. In any case where the
services are provided by multiple aircraft types, the calculation shall be
weighted by the values of the aircraft types as provided in
830 CMR
63.38.2(3)(a). 830 CMR
63.38.1(9)(d)4.b.iii.(B) supersedes the rules set forth in
830 CMR
63.38.2 to the extent of any
inconsistency.
(C)
Transportation and Delivery Services Provided by Means other than
Exclusively by Air.
1. Except as
otherwise provided by 830 CMR 63.38.1(9)(d)4.b.iii(C), transportation and
delivery services (other than exclusively by air) are assigned to the state or
states of the departures and arrivals (in the case of the transportation of
people), or pickups and deliveries (in the case of the transportation of
tangible personal property), associated with such services. Therefore, the
receipts assigned to Massachusetts shall be determined by multiplying the
taxpayer's total receipts from such services by the percentage of the total
departures (or pickups) and arrivals (or deliveries) that take place in
Massachusetts relative to the departures (or pickups) and arrivals (or
deliveries) that take place everywhere. Transportation and delivery services to
which 830 CMR 63.38.1(9)(d)4.b.iii(C) applies include, without limitation, such
services as provided by cars, buses, trains, and trucks, and with respect to a
taxpayer that provides transportation and delivery services by both air and
means other than air, all of such transportation services. 830 CMR
63.38.1(9)(d)4.b.iii.C. supersedes the rules set forth in
830 CMR
63.38.3 (motor carriers) and
830
CMR 63.38.4 (courier and package delivery
services) to the extent of any inconsistency. 830 CMR 63.38.1(9)(d)4.b.iii(C),
does not apply to transportation and delivery services as provided through the
means of pipelines, which are governed by the industry-specific alternative
apportionment rules in
830 CMR
63.38.8.
2. For purposes of 830 CMR
63.38.1(9)(d)4.b.iii(C):
i. The location of a
"pickup" shall be the location at which an item of tangible personal property
is transferred from the customer or the customer's designee for transportation
and subsequent delivery; and
ii. The
location of a "delivery" shall be the location at which an item of tangible
personal property that has been transported is transferred to the customer or
the customer's designee.
iv.
Examples. Assume
in each of these examples that the taxpayer that provides the service is
taxable in Massachusetts and is to apportion its income pursuant to M.G.L. c.
63, § 38. Also, assume, where relevant, unless otherwise stated, that the
taxpayer is taxable in each state other than Massachusetts to which its sale or
sales would be assigned, so that there is no requirement in such examples that
such sale or sales be eliminated from the numerator and denominator of the
taxpayer's sales factor.
See830 CMR 63.38.1(9)(d)1.f.ii. Note
that for purposes of the examples it is irrelevant whether the services are
performed by an employee of the taxpayer or by an independent contractor acting
on the taxpayer's behalf.
Example 1. Salon Corp. has retail
locations in Massachusetts and in other states where it provides hair cutting
services to individual and business customers, the latter of whom are paid for
through the means of a company account. The sales of services provided at Salon
Corp.'s Massachusetts locations are in Massachusetts. The sales of services
provided at Salon Corp.'s locations outside Massachusetts, even when provided
to Massachusetts residents, are not Massachusetts sales.
Example 2. Landscape Corp. provides
landscaping and gardening services in Massachusetts and in neighboring states.
Landscape Corp. provides landscaping services at the Massachusetts vacation
home of an individual who is a resident of another state and who is located
outside Massachusetts at the time the services are performed. The sale of
services provided at the Massachusetts location is in Massachusetts.
Example 3. Same facts as in Example 2,
except that Landscape Corp. provides the landscaping services to Retail Corp.,
a corporation with retail locations in several states, and the services are
with respect to such locations of Retail Corp. that are in Massachusetts and in
other states. The sale of services provided to Retail Corp. is in Massachusetts
to the extent the services are provided in Massachusetts.
Example 4. Camera Corp. provides
camera repair services at a Massachusetts retail location to walk-in individual
and business customers. In some cases, Camera Corp. actually repairs a camera
that is brought to its Massachusetts location at a facility that is in another
state. In such cases, the repaired camera is then returned to the customer at
Camera Corp.'s Massachusetts location. The sale of such services is in
Massachusetts.
Example 5. Same facts as in Example 4,
except that a customer located in Massachusetts mails the camera directly to
the out-of-state facility owned by Camera Corp. to be fixed, and receives the
repaired camera back in Massachusetts by mail. The sale of the service is in
Massachusetts.
Example 6. Teaching Corp. provides
seminars in Massachusetts to individual and business customers. The seminars
and the materials used in connection with the seminars are prepared outside the
state, the teachers who teach the seminars include teachers that are resident
outside the state, and the students who attend the seminars include students
that are resident outside the state. Because the seminars are taught in
Massachusetts the sales of the services are in Massachusetts.
Example 7. Bus Corp. sells bus tickets
to individual and business customers at bus depots located in Massachusetts and
in other states, and also through phone and Internet sales. The bus tickets are
for travel to locations in Massachusetts and to locations in other states.
During the taxable year, Bus Corp. sells 150,000 bus tickets. Each ticket has a
departure location and an arrival location, for a total of 300,000 departure
and arrival locations. Of these bus tickets, 25,000 have a departure location
in Massachusetts and 20,000 have an arrival location in Massachusetts. The sale
of such transportation services shall be assigned by multiplying Bus Corp.'s
total revenues from such services by the percentage of Bus Corp.'s total
departures and arrivals that take place in Massachusetts relative to Bus
Corp.'s total number of departures and arrivals. Therefore, Bus Corp. must
determine the amount of its ticket sales that are to be assigned to
Massachusetts by multiplying its total such sales by a fraction equal to 45,000
divided by 300,000, or.15. For purposes of the analysis it is irrelevant where
and how the bus tickets are sold or whether the customer is an individual or
business customer.
c.
Services Delivered to the
Customer or on Behalf of the Customer, or Delivered Electronically Through the
Customer.
i.
In
General. Where the service provided by the taxpayer is not an
in-person service within the meaning of 830 CMR 63.38.1(9)(d)4.b. or a
professional service within the meaning of 830 CMR 63.38.1(9)(d)4.d., and the
service is delivered to or on behalf of the customer, or delivered
electronically through the customer, the sale is in Massachusetts if and to the
extent that the service is delivered in Massachusetts. For purposes of 830 CMR
63.38.1(9)(d)4.c., a service that is delivered "to" a customer is a service in
which the customer and not a third party is the recipient of the service. A
service that is delivered "on behalf of" a customer is one in which a customer
contracts for a service but one or more third parties, rather than the
customer, is the recipient of the service, such as fulfillment services
(see830 CMR 63.38.1(9)(d)4.c.ii.(A)) or the direct or indirect
delivery of advertising to the customer's intended audience (see
830 CMR 63.38.1(9)(d)4.c.ii.(C)). A service that is delivered
electronically "through" a customer is a service that is delivered
electronically to a customer for purposes of resale and subsequent electronic
delivery in substantially identical form to an end user or other third-party
recipient. Except in the instance of a service that is delivered through a
customer (where the service must be delivered electronically), a service is
included within the meaning of 830 CMR 63.38.1(9)(d)4.c., irrespective of the
method of delivery, e.g., whether such service is delivered by
a physical means or through an electronic transmission.
ii.
Assignment of
Sales. The assignment of a sale to a state or states in the
instance of a service that is delivered to the customer or on behalf of the
customer, or delivered electronically through the customer, depends upon the
method of delivery of the service and the nature of the customer. Separate
rules of assignment apply to services delivered by physical means and services
delivered by electronic transmission. (For purposes of 830 CMR
63.38.1(9)(d)4.c., a service delivered by an electronic transmission shall not
be considered a delivery by a physical means). In any instance where, applying
the rules set forth in 830 CMR 63.38.1(9)(d)4.c., the rule of assignment
depends on whether the customer is an individual or a business customer, and
the taxpayer acting in good faith cannot reasonably determine whether the
customer is an individual or business customer, the taxpayer shall treat the
customer as a business customer. In any instance where the state to which the
sale is to be assigned can be determined or reasonably approximated, but the
taxpayer is not taxable in such state, the sale that would otherwise be
assigned to such state shall be excluded from the numerator and denominator of
the taxpayer's sales factor.
See830 CMR 63.38.1(9)(d)1.f.ii.
(A)
Delivery to or on Behalf of a
Customer by Physical Means, Whether to an Individual or Business
Customer. Services delivered to a customer or on behalf of a
customer through a physical means include, for example, product delivery
services where property is delivered to the customer or to a third party on
behalf of the customer; the delivery of brochures, fliers or other direct mail
services; the delivery of advertising or advertising-related services to the
customer's intended audience in the form of a physical medium; and the sale of
custom software (
e.g., where software is developed for a
specific customer in a case where the transaction is properly treated as a
service transaction for purposes of M.G.L. c. 63) where the taxpayer installs
the custom software at the customer's site. 830 CMR 63.38.1(9)(d)4.c.ii.(i)
applies whether the taxpayer's customer is an individual customer or a business
customer.
1.
Rule of
Determination. In assigning the sale of a service delivered to a
customer or on behalf of a customer through a physical means, a taxpayer must
first attempt to determine the state or states where such services are
delivered. Where the taxpayer is able to determine the state or states where
the service is delivered, it shall assign the sale to such state or
states.
2.
Rule of
Reasonable Approximation. Where the taxpayer cannot determine the
state or states where the service is actually delivered, but has sufficient
information regarding the place of delivery from which it can reasonably
approximate the state or states where the service is delivered, it shall
reasonably approximate such state or states.
3.
Examples. Assume
in each of these examples that the taxpayer that provides the service is
taxable in Massachusetts and is to apportion its income pursuant to M.G.L. c.
63, § 38. Also, assume, where relevant, unless otherwise stated, that the
taxpayer is taxable in each state other than Massachusetts to which its sale or
sales would be assigned, so that there is no requirement in such examples that
such sale or sales must be eliminated from the numerator and denominator of the
taxpayer's sales factor.
See830 CMR 63.38.1(9)(d)1.f.ii.
Example 1. Direct Mail Corp., a
corporation based outside Massachusetts, provides direct mail services to its
customer, Business Corp. Business Corp. transacts with Direct Mail Corp. to
deliver printed fliers to a list of customers that is provided to it by
Business Corp. Some of Business Corp.'s customers are in Massachusetts and some
of those customers are in other states. Direct Mail Corp. will use the postal
service to deliver the printed fliers to Business Corp'.s customers. The sale
of Direct Mail Corp.'s services to Business Corp. is assigned to Massachusetts
to the extent that the services are delivered on behalf of Business Corp. to
Massachusetts customers (i.e., to the extent that the fliers
are delivered on behalf of Business Corp. to Business Corp.'s intended audience
in Massachusetts).
Example 2. Ad Corp. is a corporation
based outside Massachusetts that provides advertising and advertising-related
services in Massachusetts and in neighboring states. Ad Corp. enters into a
contract at a location outside Massachusetts with an individual customer who is
not a Massachusetts resident to design advertisements for billboards to be
displayed in Massachusetts, and to design fliers to be mailed to Massachusetts
residents. All of the design work is performed outside Massachusetts. The sale
of the design services is in Massachusetts because the service is physically
delivered on behalf of the customer to the customer's intended audience in
Massachusetts.
Example 3. Same facts as Example 2,
except that the contract is with a business customer that is based outside
Massachusetts. The sale of the design services is in Massachusetts because the
services are physically delivered on behalf of the customer to the customer's
intended audience in Massachusetts.
Example 4. Fulfillment Corp., a
corporation based outside Massachusetts, provides product delivery fulfillment
services in Massachusetts and in neighboring states to Sales Corp., a
corporation located outside Massachusetts that sells tangible personal property
through a mail order catalog and over the Internet to customers. In some cases
when a customer purchases tangible personal property from Sales Corp. to be
delivered in Massachusetts, Fulfillment Corp. will, pursuant to its contract
with Sales Corp., deliver that property from its fulfillment warehouse located
outside Massachusetts. The sale of the fulfillment services of Fulfillment
Corp. to Sales Corp. is assigned to Massachusetts to the extent that
Fulfillment Corp'.s deliveries on behalf of Sales Corp. are to recipients in
Massachusetts.
Example 5. Software Corp., a software
development corporation, enters into a contract with a business customer, Buyer
Corp., which is physically located in Massachusetts, to develop custom software
to be used in Buyer Corp.'s business. Software Corp. develops the custom
software outside Massachusetts, and then physically installs the software on
Buyer Corp.'s computer hardware located in Massachusetts. The development and
sale of the custom software is properly characterized as a service transaction,
and the sale is assigned to Massachusetts because the software is physically
delivered to the customer in Massachusetts.
Example 6. Same facts as Example 5,
except that Buyer Corp. has offices in Massachusetts and several other states,
but is commercially domiciled outside Massachusetts and orders the software
from a location outside Massachusetts. The receipts from the development and
sale of the custom software service are assigned to Massachusetts because the
software is physically delivered to the customer in
Massachusetts.
(B)
Delivery to a Customer by Electronic Transmission.
Services delivered by electronic transmission include, without limitation,
services that are transmitted through the means of wire, lines, cable, fiber
optics, electronic signals, satellite transmission, audio or radio waves, or
other similar means, whether or not the service provider owns, leases or
otherwise controls the transmission equipment. In the case of the delivery of a
service by electronic transmission to a customer, the following rules apply.
1.
Services Delivered by
Electronic Transmission to an Individual Customer.
a.
Rule of
Determination. In the case of the delivery of a service to an
individual customer by electronic transmission, the service is delivered in
Massachusetts if and to the extent that the taxpayer's customer receives the
service in Massachusetts. If the taxpayer can determine the state or states
where the service is received, it shall assign the sale to such state or
states.
b.
Rules of
Reasonable Approximation. If the taxpayer cannot determine the
state or states where the customer actually receives the service, but has
sufficient information regarding the place of receipt from which it can
reasonably approximate the state or states where the service is received, it
shall reasonably approximate such state or states. Where a taxpayer does not
have sufficient information from which it can determine or reasonably
approximate the state or states in which the service is received, it shall
reasonably approximate such state or states using the customer's billing
address.
2.
Services Delivered By Electronic Transmission to a Business
Customer.
a.
Rule of
Determination. In the case of the delivery of a service to a
business customer by electronic transmission, the service is delivered in
Massachusetts if and to the extent that the taxpayer's customer receives the
service in Massachusetts. If the taxpayer can determine the state or states
where the service is received, it shall assign the sale to such state or
states. For purposes of 830 CMR 63.38.1(9)(d)4.c.ii.(B)2., it is intended that
the state or states where the service is received reflect the location at which
the service is directly used by the employees or designees of the
customer.
b.
Rule of
Reasonable Approximation. If the taxpayer cannot determine the
state or states where the customer actually receives the service, but has
sufficient information regarding the place of receipt from which it can
reasonably approximate the state or states where the service is received, it
shall reasonably approximate such state or states.
c.
Secondary Rule of Reasonable
Approximation. In the case of the delivery of a service to a
business customer by electronic transmission where a taxpayer does not have
sufficient information from which it can determine or reasonably approximate
the state or states in which the service is received, such state or states
shall be reasonably approximated as set forth in
830 CMR
63.38.7(a). In such cases,
unless the taxpayer can apply the safe harbor set forth in 830 CMR
63.38.1(9)(d)4.c.ii.(B)2.d. the taxpayer shall reasonably approximate the state
or states in which the service is received as follows: first, by assigning the
sale to the state where the contract of sale is principally managed by the
customer; second, if the state where the customer principally manages the
contract is not reasonably determinable, by assigning the sale to the
customer's place of order; and third, if the customer's place of order is not
reasonably determinable, by assigning the sale using the customer's billing
address; provided, however, that in any instance in which the taxpayer derives
more than 5% of its sales of services from a customer, the taxpayer is required
to identify the state in which the contract of sale is principally managed by
that customer.
d.
Safe
Harbor. In the case of the delivery of a service to a business
customer by electronic transmission a taxpayer may not be able to determine, or
reasonably approximate under 830 CMR 63.38.1(9)(d)4.c.ii.(B)2.b., the state or
states in which the service is received. In these cases, the taxpayer may, in
lieu of the rule stated at 830 CMR
63.38.1(9)(d)4.c.ii.(B)2.c., apply the safe harbor stated in 830 CMR
63.38.1(9)(d)4.c.ii.(B)2.d. Under this safe harbor, a taxpayer may assign its
sales to a particular customer based upon the customer's billing address in any
taxable year in which the taxpayer (1) engages in substantially similar service
transactions with more than 250 customers, whether business or individual, and
(2) does not derive more than 5% of its sales of services from such customer.
This safe harbor applies only for purposes of 830 CMR
63.38.1(9)(d)4.c.ii.(B)2., to services delivered by electronic transmission to
a business customer, and not otherwise.
3.
Examples. Assume
in each of these examples that the taxpayer that provides the service is
taxable in Massachusetts and is to apportion its income pursuant to M.G.L. c.
63, § 38. Also, assume, where relevant, unless otherwise stated, that the
taxpayer is taxable in each state other than Massachusetts to which its sale or
sales would be assigned, so that there is no requirement in such examples that
such sale or sales must be eliminated from the numerator and denominator of the
taxpayer's sales factor.
See 830 CMR 63.38.1(9)(d)1.f.ii.
Further, assume where relevant, unless otherwise stated, that the safe harbor
set forth at 830 CMR 63.38.1(9)(d)4.c.ii.(B)2.d., does not apply.
Example 1. Support Corp., a
corporation that is based outside Massachusetts, provides software support and
diagnostic services to individual and business customers that have previously
purchased certain software from third-party vendors. These individual and
business customers are located in Massachusetts and other states. Support Corp.
supplies its services on a case by case basis when directly contacted by its
customer. Support Corp. generally provides these services through the Internet
but sometimes provides these services by phone. In all cases, Support Corp.
verifies the customer's account information before providing any service. Using
the information that Support Corp. verifies before performing a service,
Support Corp. can determine where its services are received, and therefore must
assign its sales to these locations. The sales made to Support Corp.'s
individual and business customers are in Massachusetts to the extent that
Support Corp.'s services are received in Massachusetts. See830
CMR 63.38.1(9)(d)4.c.ii.(B)1. and 2.
Example 2. Online Corp., a corporation
based outside Massachusetts, provides web-based services through the means of
the Internet to individual customers who are resident in Massachusetts and in
other states. These customers access Online Corp.'s web services primarily in
their states of residence, and sometimes, while traveling, in other states. For
a substantial portion of its sales, either Online Corp. can determine the state
or states where such services are received, or, where it cannot determine such
state or states, it has sufficient information regarding the place of receipt
to reasonably approximate such state or states. However, Online Corp. cannot
determine or reasonably approximate the state or states of receipt for all of
such sales. Assuming that Online Corp. reasonably believes, based on all
available information, that the geographic distribution of the sales for which
it cannot determine or reasonably approximate the location of the receipt of
its services generally tracks those for which it does have this information,
Online Corp. must assign to Massachusetts the sales for which it does not know
the customers' location in the same proportion as those sales for which it has
this information. See830 CMR 63.38.1(9)(d)1.e.ii.
Example 3. Same facts as in Example 2,
except that Online Corp. reasonably believes that the geographic distribution
of the sales for which it cannot determine or reasonably approximate the
location of the receipt of its web-based services do not generally track the
sales for which it does have this information. Online Corp. must assign the
sales of its services for which it lacks information as provided to its
individual customers using the customers' billing addresses.
See830 CMR 63.38.1(9)(d)4.c.ii.(B)1.b.
Example 4. Same facts as in Example 3,
except that Online Corp. is not taxable in one state to which some of its sales
would be otherwise assigned. The sales that would be otherwise assigned to that
state are to be excluded from the numerator and denominator of Online Corp.'s
sales factor. See830 CMR 63.38.1(9)(d)4.c.ii.(B); 830 CMR
63.38.1(9)(d)1.f.ii.
Example 5. Net Corp., a corporation
based outside Massachusetts, provides web-based services to a business
customer, Business Corp., a company with offices in Massachusetts and two
neighboring states. Particular employees of Business Corp. access the services
from computers in each Business Corp. office. Assume that Net Corp. determines
that Business Corp. employees in Massachusetts were responsible for 75% of
Business Corp.'s use of Net Corp.'s services, and Business Corp. employees in
other states were responsible for 25% of Business Corp.'s use of Net Corp.'s
services. In such case, 75% of the sale is received in Massachusetts, and
therefore 75% of the sale is in Massachusetts. See830 CMR
63.38.1(9)(d)4.c.ii.(B)2.a. Assume alternatively that Net Corp. lacks
sufficient information regarding the location or locations where Business
Corp.'s employees used the services to determine or reasonably approximate such
location or locations. Under these circumstances, if Net Corp. derives 5% or
less of its sales from Business Corp., Net Corp. must assign the sale under 830
CMR 63.38.1(9)(d)4.c.ii.(B)2.c. to the state where Business Corp. principally
managed the contract, or if that state is not reasonably determinable, to the
state where Business Corp. placed the order for the services, or if that state
is not reasonably determinable, to the state of Business Corp.'s billing
address. If Net Corp. derives more than 5% of its sales of services from
Business Corp., Net Corp. is required to identify the state in which its
contract of sale is principally managed by Business Corp. and must assign the
receipts to that state.
Example 6. Net Corp., a corporation
based outside Massachusetts, provides web-based services through the means of
the Internet to more than 250 individual and business customers in
Massachusetts and in other states. Assume that for each customer Net Corp.
cannot determine the state or states where its web services are actually
received, and lacks sufficient information regarding the place of receipt to
reasonably approximate such state or states. Also assume that Net Corp. does
not derive more than 5% of its sales of services from any single customer. Net
Corp. may apply the safe harbor stated in 830 CMR 63.38.1(9)(d)4.c.ii.(B)2.d.,
and may assign its sales using each customer's billing address. If Net Corp. is
not taxable in one or more states to which some of its sales would be otherwise
assigned, it must exclude those sales from the numerator and denominator of its
sales factor. See 830 CMR
63.38.1(9)(d)1.f.ii.
(C)
Services Delivered
Electronically Through or on Behalf of an Individual or Business
Customer. A service delivered electronically "on behalf of" the
customer is one in which a customer contracts for a service to be delivered
electronically but one or more third parties, rather than the customer, is the
recipient of the service, such as the direct or indirect delivery of
advertising on behalf of a customer to the customer's intended audience. A
service delivered electronically "through" a customer to third-party recipients
is a service that is delivered electronically to a customer for purposes of
resale and subsequent electronic delivery in substantially identical form to
end users or other third-party recipients.
1.
Rule of Determination. In the case of the delivery of
a service by electronic transmission, where the service is delivered
electronically to end users or other third-party recipients through or on
behalf of the customer, the service is delivered in Massachusetts if and to the
extent that the end users or other third-party recipients are in Massachusetts.
For example, in the case of the direct or indirect delivery of advertising on
behalf of a customer to the customer's intended audience by electronic means,
the service is delivered in Massachusetts to the extent that the audience for
such advertising is in Massachusetts. In the case of the delivery of a service
to a customer that acts as an intermediary in reselling the service in
substantially identical form to third-party recipients, the service is
delivered in Massachusetts to the extent that the end users or other
third-party recipients receive such services in Massachusetts. 830 CMR
63.38.1(9)(d)4.c.ii.(C) apply whether the taxpayer's customer is an individual
customer or a business customer and whether the end users or other third-party
recipients to which the services are delivered through or on behalf of the
customer are individuals or businesses.
2.
Rule of Reasonable
Approximation. If the taxpayer cannot determine the state or
states where the services are actually delivered to the end users or other
third-party recipients either through or on behalf of the customer, but has
sufficient information regarding the place of delivery from which it can
reasonably approximate the state or states where the services are delivered, it
shall reasonably approximate such state or states.
3.
Select Secondary Rules of
Reasonable Approximation.
i.
Where a taxpayer's service is the direct or indirect electronic delivery of
advertising on behalf of its customer to the customer's intended audience, if
the taxpayer lacks sufficient information regarding the location of the
audience from which it can determine or reasonably approximate such location,
the taxpayer shall reasonably approximate the audience in a state for such
advertising using the following secondary rules of reasonable approximation.
Where a taxpayer is delivering advertising directly or indirectly to a known
list of subscribers, the taxpayer shall reasonably approximate the audience for
advertising in a state using a percentage that reflects the ratio of the
state's subscribers in the specific geographic area in which the advertising is
delivered relative to the total subscribers in such area. For a taxpayer with
less information about its audience, the taxpayer shall reasonably approximate
the audience in a state using the percentage that reflects the ratio of the
state's population in the specific geographic area in which the advertising is
delivered relative to the total population in such area.
ii. Where a taxpayer's service is the
delivery of a service to a customer that then acts as the taxpayer's
intermediary in reselling such service to end users or other third-party
recipients, if the taxpayer lacks sufficient information regarding the location
of the end users or other third-party recipients from which it can determine or
reasonably approximate such location, the taxpayer shall reasonably approximate
the extent to which the service is received in a state by using the percentage
that reflects the ratio of the state's population in the specific geographic
area in which the taxpayer's intermediary resells such services, relative to
the total population in such area.
4.
Examples. Assume
in each of these examples that the taxpayer that provides the service is
taxable in Massachusetts and is to apportion its income pursuant to M.G.L. c.
63, § 38. Also, assume, where relevant, unless otherwise stated, that the
taxpayer is taxable in each state other than Massachusetts to which its sale or
sales would be assigned, so that there is no requirement in such examples that
such sale or sales must be eliminated from the numerator and denominator of the
taxpayer's sales factor.
See830 CMR 63.38.1(9)(d)1.f.ii.
Example 1. Cable TV Corp., a
corporation that is based outside of Massachusetts, has two revenue streams.
First, Cable TV Corp. sells advertising time to business customers pursuant to
which the business customers' advertisements will run as commercials during
Cable TV Corp.'s televised programming. Some of these business customers,
though not all of them, have a physical presence in Massachusetts. Second,
Cable TV Corp. sells monthly subscriptions to individual customers in
Massachusetts and in other states. Cable TV Corp.'s sale of advertising time to
its business customers is assigned to Massachusetts to the extent that the
audience for Cable TV Corp.'s televised programming during which the
advertisements run is in Massachusetts. See830 CMR
63.38.1(9)(d)4.c.ii.(C)1. If Cable TV Corp. is unable to determine the actual
location of its audience for the programming, and lacks sufficient information
regarding audience location to reasonably approximate such location, Cable TV
Corp. must approximate its Massachusetts audience using the percentage that
reflects the ratio of its Massachusetts subscribers in the geographic area in
which Cable TV Corp.'s televised programming featuring such advertisements is
delivered relative to its total number of subscribers in such area.
See830 CMR 63.38.1(9)(d)4.c.ii.(C)3.i. To the extent that
Cable TV Corp.'s sales of monthly subscriptions represent the sale of a
service, such sales are properly assigned to Massachusetts in any case in which
the programming is received by a customer in Massachusetts.
See830 CMR 63.38.1(9)(d)4.c.ii.(B)1. In any case in which
Cable TV Corp. cannot determine the actual location where the programming is
received, and lacks sufficient information regarding the location of receipt to
reasonably approximate such location, such sales of Cable TV Corp.'s monthly
subscriptions are assigned to Massachusetts where its customer's billing
address is in Massachusetts. See830 CMR
63.38.1(9)(d)4.c.ii.(B)1.b. Note that whether and to the extent that the
monthly subscription fee represents a fee for a service or for a license of
intangible property does not affect the analysis or result as to the state or
states to which the sales are properly assigned. See830 CMR
63.38.1(9)(d)5.e.
Example 2. Network Corp., a
corporation that is based outside of Massachusetts, sells advertising time to
business customers pursuant to which the customers' advertisements will run as
commercials during Network Corp.'s televised programming as distributed by
unrelated cable television and satellite television transmission companies.
Network Corp.'s sale of advertising time to its business customers is assigned
to Massachusetts to the extent that the audience for Network Corp.'s televised
programming during which the advertisements will run is in Massachusetts.
See830 CMR 63.38.1(9)(d)4.c.ii.(C)1. If Network Corp. cannot
determine the actual location of the audience for its programming during which
the advertisements will run, and lacks sufficient information regarding
audience location to reasonably approximate such location, Network Corp. must
approximate the amount of the sales that constitutes Massachusetts sales by
multiplying the amount of such sales by a percentage that reflects the ratio of
the Massachusetts population in the specific geographic area in which the
televised programming containing the advertising is run relative to the total
population in such area. See830 CMR
63.38.1(9)(d)4.c.ii.(C)3.i. In any case in which Network Corp.'s sales would be
assigned to a state in which Network Corp. is not taxable, such sales shall be
excluded from the numerator and denominator of Network Corp.'s sales factor.
See830 CMR 63.38.1(9)(d)1.f.ii.
Example 3. Web Corp., a corporation
that is based outside Massachusetts, provides Internet content to viewers in
Massachusetts and other states. Web Corp. sells advertising space to business
customers pursuant to which the customers' advertisements will appear in
connection with Web Corp.'s Internet content. Web Corp. receives a fee for
running the advertisements that is determined by reference to the number of
times the advertisement is viewed or clicked upon by the viewers of its
website. Web Corp.'s sale of advertising space to its business customers is
assigned to Massachusetts to the extent that the viewers of the Internet
content are in Massachusetts, as measured by viewings or clicks.
See830 CMR 63.38.1(9)(d)4.c.ii.(C)1. If Web Corp. is unable to
determine the actual location of its viewers, and lacks sufficient information
regarding the location of its viewers to reasonably approximate such location,
Web Corp. must approximate the amount of its Massachusetts sales by multiplying
the amount of such sales by a percentage that reflects the Massachusetts
population in the specific geographic area in which the content containing the
advertising is delivered relative to the total population in such area.
See830 CMR 63.38.1(9)(d)4.c.ii.(C)3.i. In any case in which
Web Corp.'s sales would be assigned to a state in which Web Corp. is not
taxable, such sales shall be excluded from the numerator and denominator of Web
Corp.'s sales factor. See830 CMR 63.38.1(9)(d).1.f.ii.
Example 4. Retail Corp., a corporation
that is based outside of Massachusetts, sells tangible property through its
retail stores located in Massachusetts and other states, and through a mail
order catalog. Answer Co., a corporation that operates call centers in multiple
states, contracts with Retail Corp. to answer telephone calls from individuals
placing orders for products found in Retail Corp.'s catalogs. In this case, the
phone answering services of Answer Co. are being delivered to Retail Corp.'s
customers and prospective customers. Therefore, Answer Co. is delivering a
service electronically to Retail Corp.'s customers or prospective customers on
behalf of Retail Corp., and must assign the proceeds from this service to the
state or states from which the phone calls are placed by such customers or
prospective customers. If Answer Co. cannot determine the actual locations from
which phone calls are placed, and lacks sufficient information regarding the
locations to reasonably approximate such locations, Answer Co. must approximate
the amount of its Massachusetts sales by multiplying the amount of its fee from
Retail Corp. by a percentage that reflects the Massachusetts population in the
specific geographic area from which the calls are placed relative to the total
population in such area. See830 CMR 63.38.1(9)(d)4.c.i; 830
CMR 63.38.1(9)(d)4.c.ii(C). Answer Co.'s sales shall also be excluded from the
numerator and denominator of its sales factor in any case in which such sales
would be assigned to a state in which Answer Co. is not taxable.
See830 CMR 63.38.1(9)(d).1.f.ii.
Example 5. Web Corp., a corporation
that is based outside of Massachusetts, sells tangible property to customers
via its Internet website. Design Co. designed and maintains Web Corp.'s
website, including making changes to the site based on customer feedback
received through the site. Design Co.'s services are delivered to Web Corp.,
the proceeds from which are assigned pursuant to 830 CMR
63.38.1(9)(d)4.c.ii(B). The fact that Web Corp.'s customers and prospective
customers incidentally benefit from Design Co.'s services, and may even
interact with Design Co. in the course of providing feedback, does not
transform the service into one delivered "on behalf of" Web Corp. to Web
Corp.'s customers and prospective customers.
Example 6. Wholesale Corp., a
corporation that is based outside Massachusetts, develops an Internet-based
information database outside Massachusetts and enters into a contract with
Retail Corp. whereby Retail Corp. will market and sell access to this database
to end users. Depending on the facts, the provision of database access may be
either the sale of a service or the license of intangible property or may have
elements of both. Assume that on the particular facts applicable in this
example Wholesale Corp. is selling database access in transactions properly
characterized as involving the performance of a service. When an end user
purchases access to Wholesale Corp.'s database from Retail Corp., Retail Corp.
in turn compensates Wholesale Corp. in connection with that transaction. In
this case, Wholesale Corp.'s services are being delivered through Retail Corp
to the end user. Wholesale Corp. must assign its sales to Retail Corp. to the
state or states in which the end users receive access to Wholesale Corp.'s
database. If Wholesale Corp. cannot determine the state or states where the end
users actually receive access to Wholesale Corp.'s database, and lacks
sufficient information regarding the location from which the end users access
the database to reasonably approximate such location, Wholesale Corp. must
approximate the extent to which its services are received by end users in
Massachusetts by using a percentage that reflects the ratio of the
Massachusetts population in the specific geographic area in which Retail Corp.
regularly markets and sells Wholesale Corp.'s database relative to the total
population in such area. See830 CMR
63.38.1(9)(d)4.c.ii.(C)3.ii. Note that it does not matter for purposes of the
analysis whether Wholesale Corp's sale of database access constitutes a service
or a license of intangible property, or some combination of both.
See830 CMR 63.38.1(9)(d)5.e. In any case in which Wholesale
Corp.'s sales would be assigned to a state in which Wholesale Corp. is not
taxable, such sales shall be excluded from the numerator and denominator of
Wholesale Corp.'s sales factor. See830 CMR
63.38.1(9)(d).1.f.ii.
d.
Professional
Services.
i.
In
General. Except as otherwise provided in 830 CMR
63.38.1(9)(d)4.d.ii, professional services are services that require
specialized knowledge and in some cases require a professional certification,
license or degree. Professional services include, without limitation,
management services, bank and financial services, financial custodial services,
investment and brokerage services, fiduciary services, tax preparation, payroll
and accounting services, lending and credit card services, legal services,
consulting services, video production services, graphic and other design
services, engineering services, and architectural services.
ii.
Overlap with Other Categories
of Services.
(A) Certain services
that fall within the definition of "professional services" set forth in 830 CMR
63.38.1(9)(d)4.d.i. are nevertheless treated as "in-person services" within the
meaning of 830 CMR 63.38.1(9)(d)4.b., and are assigned under 830 CMR
63.38.1(9)(d)4.b. Specifically, professional services that are physically
provided in person by the taxpayer such as carpentry, certain medical and
dental services or child care services, where the customer or the customer's
real or tangible property upon which the services are provided is in the same
location as the service provider at the time the services are performed, are
"in-person services" and are assigned as such, notwithstanding that they may
also be considered to be "professional services". However, professional
services where the service is of an intellectual or intangible nature, such as
legal, accounting, financial and consulting services, are assigned as
professional services under 830 CMR 63.38.1(9)(d)4.d.iii., notwithstanding the
fact that such services may involve some amount of in-person contact.
(B) Professional services may in some cases
include the transmission of one or more documents or other communications by
mail or by electronic means. However, in such cases, despite this transmission,
the assignment rules that apply are those set forth in 830 CMR
63.38.1(9)(d)4.d.iii., and not those set forth in 830 CMR 63.38.1(9)(d)4.c.,
pertaining to services delivered to a customer or through or on behalf of a
customer.
iii.
Assignment of Sales. In the case of a professional
service, it is generally possible to characterize the location of delivery in
multiple ways by emphasizing different elements of the service provided, no one
of which will consistently represent the market for the services. Therefore,
for purposes of consistent application of the market sourcing rule stated in
M.G.L. c. 63, § 38(f), the Commissioner has concluded that the location of
delivery in the case of professional services is not susceptible to a general
rule of determination, and must be reasonably approximated. The assignment of a
sale of a professional service depends in many cases upon whether the customer
is an individual or business customer. In any instance in which the taxpayer,
acting in good faith, cannot reasonably determine whether the customer is an
individual or business customer, the taxpayer shall treat the customer as a
business customer. For purposes of assigning the sale of a professional
service, a taxpayer's customer is the person who contracts for such service,
irrespective of whether another person pays for or also benefits from the
taxpayer's services. Except as provided in 830 CMR 63.38.1(9)(d)4.d.iii.(D)
(mutual fund sales), in any instance in which the taxpayer is not taxable in
the state to which a sale shall be assigned, the sale shall be excluded from
the numerator and denominator of the taxpayer's sales factor.
See830 CMR 63.38.1(9)(d)1.f.ii.
(A)
General Rule.
Sales of professional services other than those services described in 830 CMR
63.38.1(9)(d)4.d.iii.(B) (architectural and engineering services), 830 CMR
63.38.1(9)(d)4.d.iii.(C) (services provided by a financial institution) and 830
CMR 63.38.1(9)(d)4.d.iii.(D) (certain services provided to RICs)), are assigned
in accordance with 830 CMR 63.38.1(9)(d)4.d.iii.(A).
1.
Professional Services
Delivered to Individual Customers. Except as otherwise provided in
830 CMR 63.38.1(9)(d)4.d., in any instance in which the service provided is a
professional service and the taxpayer's customer is an individual customer, the
state or states in which the service is delivered shall be reasonably
approximated as set forth in 830 CMR 63.38.1(9)(d)4.d.iii.(A)1. In particular,
the taxpayer shall assign the sale to the customer's state of primary
residence, or, if the taxpayer cannot reasonably identify the customer's state
of primary residence, to the state of the customer's billing address; provided,
however, in any instance in which the taxpayer derives more than 5% of its
sales of services from an individual customer, the taxpayer is required to
identify the customer's state of primary residence and must assign the receipts
from the service or services provided to that customer to that state.
2.
Professional Services
Delivered to Business Customers. Except as otherwise provided in
830 CMR 63.38.1(9)(d)4.d., in any instance in which the service provided is a
professional service and the taxpayer's customer is a business customer, the
state or states in which the service is delivered shall be reasonably
approximated as set forth in 830 CMR 63.38.1(9)(d)4.d.iii.(A)2. In particular,
unless the taxpayer may use the safe harbor set forth at 830 CMR
63.38.1(9)(d)4.d.iii.(A)3., the taxpayer shall assign the sale as follows:
first, by assigning the receipts to the state where the contract of sale is
principally managed by the customer; second, if such place of customer
management is not reasonably determinable, to the customer's place of order;
and third, if such customer place of order is not reasonably determinable, to
the customer's billing address; provided, however, in any instance in which the
taxpayer derives more than 5% of its sales of services from a customer, the
taxpayer is required to identify the state in which the contract of sale is
principally managed by the customer.
3.
Safe Harbor; Large Volume of
Transactions. Notwithstanding 830 CMR 63.38.1(9)(d)4.d.iii.(A)1.
and 2., a taxpayer may assign its sales to a particular customer based on the
customer's billing address in any taxable year in which the taxpayer (1)
engages in substantially similar service transactions with more than 250
customers, whether individual or business, and (2) does not derive more than 5%
of its sales of services from such customer. This safe harbor applies only for
purposes of 830 CMR 63.38.1(9)(d)4.d.iii.(A), and not otherwise.
(B)
Architectural and
Engineering Services with Respect to Real or Tangible Personal
Property. Architectural and engineering services with respect to
real or tangible personal property are professional services within the meaning
of 830 CMR 63.38.1(9)(d)4.d. However, unlike in the case of the general rule
that applies to professional services, (1) the sale of such an architectural
service is assigned to a state or states if and to the extent that the services
are with respect to real estate improvements located, or expected to be
located, in such state or states; and (2) the sale of such an engineering
service is assigned to a state or states if and to the extent that the services
are with respect to tangible or real property located in such state or states,
including real estate improvements located in, or expected to be located in,
such state or states. 830 CMR 63.38.1(9)(d)4.d. applies whether or not the
customer is an individual or business customer. In any instance in which
architectural or engineering services are not described in 830 CMR
63.38.1(9)(d)4.d.iii.(B), the sale of such services shall be assigned under the
general rule for professional services. See830 CMR
63.38.1(9)(d)4.d.iii.(A).
(C)
Services Provided by a Financial Institution. The
apportionment rules that apply to financial institutions are set forth at
M.G.L. c. 63, § 2A. M.G.L. c. 63, § 2A includes specific rules to
determine a financial institution's sales factor. See M.G.L.
c. 63, § 2A(d). However, M.G.L. c. 63, § 2A also provides that
receipts from sales, other than sales of tangible personal property, including
service transactions, that are not otherwise apportioned under M.G.L. c. 63,
§ 2A(d), are to be assigned pursuant to M.G.L. c. 63, § 38(f).
See M.G.L. c. 63, § 2A(d)(xi). In any instance in which a
financial institution performs services that are to be assigned pursuant to
M.G.L. c. 63, § 38(f), including, for example, financial custodial
services, those services shall be considered professional services within the
meaning of 830 CMR 63.38.1(9)(d)4.d., and shall be assigned according to the
general rule for professional service transactions as set forth at 830 CMR
63.38.1(9)(d)4.d.iii.(A).
(D)
Mutual Fund Sales. Mutual fund sales within the
meaning of 830 CMR 63.38.1, generally are sales of professional services for
purposes of 830 CMR 63.38.1(9)(d)4.d. See830 CMR 63.38.1(2)
(definition of mutual fund sales). However, the rules to assign mutual fund
sales made by a mutual fund service corporation are those set forth in
830 CMR
63.38.7, and not those set forth in 830 CMR
63.38.1. Also, in the case of mutual fund sales made by a taxpayer that is not
a mutual fund service corporation, such mutual fund sales shall be assigned by
applying the sourcing methodology described in
830 CMR
63.38.7(4)(c)4. to such
sales. In these cases, consistent with the rules of M.G.L. c. 63, § 38(f)
and
830 CMR
63.38.7, the mutual fund sales made by the
taxpayer directly or indirectly to the RIC are included in the numerator and
denominator of the taxpayer's sales factor irrespective as to whether the
taxpayer is taxable in one or more of the states in which the RIC's
shareholders are domiciled.
iv.
Examples. Unless
otherwise stated, assume in each of these examples, where relevant:
(a) that the taxpayer that provides the
service is taxable in Massachusetts and is to apportion its income pursuant to
M.G.L. c. 63, § 38;
(b) that
the taxpayer is taxable in each state other than Massachusetts to which its
sale or sales would be assigned, so that there is no requirement in such
examples that such sale or sales must be excluded from the numerator and
denominator of the taxpayer's sales factor, see830 CMR
63.38.1(9)(d)1.f.ii.;
(c) that the
safe harbor set forth at 830 CMR 63.38.1(9)(d)4.ii.(A).3 does not apply; and
(d) that the taxpayer's service at
issue is not provided directly or indirectly to a RIC,
see 830
CMR 63.38.1(9)(d)4.d.iii.(D).
Example 1. Broker Corp. provides
securities brokerage services to individual customers who are resident in
Massachusetts and in other states. Assume that Broker Corp. knows the state of
primary residence for many of its customers, and where it does not know this
state of primary residence, it knows the customer's billing address. Also
assume that Broker Corp. does not derive more than 5% of its sales of services
from any one individual customer. Where Broker Corp. knows its customer's state
of primary residence, it shall assign the sale to that state. Where Broker
Corp. does not know its customer's state of primary residence, but rather knows
the customer's billing address, it shall assign the sale to that state.
See830 CMR 63.38.1(9)(d)4.d.iii.(A)1.
Example 2. Same facts as in Example 1,
except that Broker Corp. has several individual customers from whom it derives,
in each instance, more than 5% of its sales of services. Sales to customers
from whom Broker Corp. derives 5% or less of its sales of services shall be
assigned as described in example 1. For each customer from whom it derives more
than 5% of its sales of services, Broker Corp. is required to determine the
customer's state of primary residence and must assign the receipts from the
services provided to that customer to that state. In any case in which a 5%
customer's state of primary residence is Massachusetts, a sale made to that
customer must be assigned to Massachusetts; in any case in which a 5%
customer's state of primary residence is not Massachusetts a sale made to that
customer is not assigned to Massachusetts. Where a sale is assigned to a state
other than Massachusetts, if the state of assignment (i.e.,
the state of primary residence of the individual customer) is a state in which
Broker Corp. is not taxable, receipts from the sales shall be excluded from the
numerator and denominator of Broker Corp.'s sales factor. See
830 CMR 63. 38. 1(9)(d)4.d.iii.(A); 830 CMR 63.38.1(9)(d)1.f.ii.
Example 3. Architecture Corp. provides
building design services as to buildings located, or expected to be located, in
Massachusetts to individual customers who are resident in Massachusetts and
other states, and to business customers that are based in Massachusetts and
other states. Architecture Corp.'s sales are assigned to Massachusetts because
the locations of the buildings to which its design services relate are in
Massachusetts, or are expected to be in Massachusetts. For purposes of
assigning these sales, it is not relevant where, in the case of an individual
customer, the customer primarily resides or is billed for such services, and it
is not relevant where, in the case of a business customer, the customer
principally manages the contract, placed the order for the services or is
billed for such services. Further, such sales are assigned to Massachusetts
even if Architecture Corp.'s designs are either physically delivered to its
customer in paper form in a state other than Massachusetts or are
electronically delivered to its customer in a state other than Massachusetts.
See830 CMR 63.38.1(9)(d)4.d.iii.(B).
Example 4. Law Corp. provides legal
services to individual clients who are resident in Massachusetts and in other
states. In some cases, Law Corp. may prepare one or more legal documents for
its client as a result of these services and/or the legal work may be related
to litigation or a legal matter that is ongoing in a state other than where the
client is resident. Assume that Law Corp. knows the state of primary residence
for many of its clients, and where it does not know this state of primary
residence, it knows the client's billing address. Also assume that Law Corp.
does not derive more than 5% of its sales of services from any one individual
client. Where Law Corp. knows its client's state of primary residence, it shall
assign the sale to that state. Where Law Corp. does not know its client's state
of primary residence, but rather knows the client's billing address, it shall
assign the sale to that state. For purposes of the analysis it is irrelevant
whether the legal documents relating to the service are mailed or otherwise
delivered to a location in another state, or the litigation or other legal
matter that is the underlying predicate for the services is in another state.
See830 CMR 63.38.1(9)(d)4.d.ii.(B) and iii.(A)1.
Example 5. Same facts as in Example 4,
except that Law Corp. provides legal services to several individual clients who
it knows have a primary residence in a state where Law Corp. is not taxable.
Receipts from these services shall be excluded from the numerator and
denominator of Law Corp.'s sales factor even if the billing address of one or
more of these clients is in a state in which Law Corp. is taxable, including
Massachusetts. See830 CMR 63.38.1(9)(d)4.d.iii.(A)1.; 830 CMR
63.38.1(9)(d)1.f.ii.
Example 6. Law Corp. provides legal
services to several multistate business clients. In each case, Law Corp. knows
the state in which the agreement for legal services that governs the client
relationship is principally managed by the client. In one case, the agreement
is principally managed in Massachusetts; in the other cases, the agreement is
principally managed in a state other than Massachusetts. Where the agreement
for legal services is principally managed by the client in Massachusetts the
sale of the services shall be assigned to Massachusetts; in the other cases,
the sale is not assigned to Massachusetts. In the case of the sale that is
assigned to Massachusetts, the sale shall be so assigned even if (1) the legal
documents relating to the service are mailed or otherwise delivered to a
location in another state, or (2) the litigation or other legal matter that is
the underlying predicate for the services is in another state.
See830 CMR 63.38.1(9)(d)4.d.ii.(B) and iii.(A)2.
Example 7. Same facts as in example 6,
except that Law Corp. is not taxable in one of the states other than
Massachusetts in which Law Corp.'s agreement for legal services that governs
the client relationship is principally managed by the business client. Receipts
from these latter services shall be excluded from the numerator and denominator
of Law Corp.'s sales factor. See830 CMR 63.38.1(9)(d)4.d.iii.
and iii.(A)2.; 830 CMR 63.38.1(9)(d)1.f.ii.
Example 8. Consulting Corp., a company
that provides consulting services to law firms and other customers, is hired by
Law Corp. in connection with legal representation that Law Corp. provides to
Client Co. Specifically, Consulting Corp. is hired to provide expert testimony
at a trial being conducted by Law Corp. on behalf of Client Co. Client Co. pays
for Consulting Corp.'s services directly. Assuming that Consulting Corp. knows
that its agreement with Law Co. is principally managed by Law Corp. in
Massachusetts, the sale of Consulting Corp.'s services shall be assigned to
Massachusetts. It is not relevant for purposes of the analysis that Client Co.
is the ultimate beneficiary of Consulting Corp.'s services, or that Client Co.
pays for Consulting Corp.'s services directly. See830 CMR
63.38.1(9)(d)4.d.iii.(A)2.
Example 9. Bank Corp. provides
financial custodial services to 100 individual customers who are resident in
Massachusetts and in other states, including the safekeeping of some of its
customers' financial assets. Assume for purposes of this example that Bank
Corp. knows the state of primary residence for many of its customers, and where
it does not know this state of primary residence, it knows the customer's
billing address. Also assume that Bank Corp. does not derive more than 5% of
its sales of all of its services from any single customer. Note that because
Bank Corp. does not have more than 250 customers, it may not apply the safe
harbor for professional services stated in 830 CMR 63.38.1(9)(d)4.d.iii.(A)3.
Where Bank Corp. knows its customer's state of primary residence, it must
assign the sale to that state. Where Bank Corp. does not know its customer's
state of primary residence, but rather knows the customer's billing address, it
must assign the sale to that state. Bank Corp.'s sales are assigned to
Massachusetts if the customer's state of primary residence (or billing address,
in cases where it does not know the customer's state of primary residence) is
in Massachusetts, even if Bank Corp.'s financial custodial work, including the
safekeeping of the customer's financial assets, takes place in a state other
than Massachusetts. See830 CMR 63.38.1(9)(d)4.d.iii.(A)1. and
(C).
Example 10. Same facts as Example 9,
except that Bank Corp. has more than 250 customers, individual or business.
Bank Corp. may apply the safe harbor for professional services stated in 830
CMR 63.38.1(9)(d)4.d.iii.(A)3., and may assign its sales to a state or states
using each customer's billing address. If Bank Corp is not taxable in one or
more states to which some of its sales would be assigned, it must exclude the
sales that would be assigned to those states from the numerator and denominator
of its sales factor. See830 CMR 63.38.1(9)(d)4.d.iii.,
iii.(C); 830 CMR 63.38.1(9)(d)1.f.ii.
Example 11. Same facts as Example 10,
except that Bank Corp. derives more than 5% of its sales from a single
individual customer. As to the sales made to this customer, Bank Corp. is
required to determine the individual customer's state of primary residence and
must assign the receipts from the service or services provided to that customer
to that state. See830 CMR 63.38.1(9)(d)4.d.iii.(A)1., iii.(C).
Sales to all other customers are assigned as described in Example 10.
Example 12. Advisor Corp., a
corporation that provides investment advisory services, provides such advisory
services to Investment Co. Investment Co. is a multistate business client of
Advisor Corp. that uses Advisor Corp.'s services in connection with investment
accounts that it manages for individual clients, who are the ultimate
beneficiaries of Advisor Corp.'s services. Assume that Investment Co.'s
individual clients are persons that are resident in numerous states, which may
or may not include Massachusetts. Assuming that Advisor Corp. knows that its
agreement with Investment Co. is principally managed by Investment Co. in
Massachusetts, the sale of Advisor Corp.'s services shall be assigned to
Massachusetts. It is not relevant for purposes of the analysis that the
ultimate beneficiaries of Advisor Corp.'s services may be Investment Co.'s
clients, who are residents of numerous states. See830 CMR
63.38.1(9)(d)4.d.iii.(A)2.
Example 13. Same facts as Example 12,
except that in addition to providing investment advisory services to Investment
Co., Advisor Corp. also provides its advisory services to Mutual Fund Co., a
regulated investment company with shareholders that are resident in numerous
states, including Massachusetts. Advisor Corp. is not a mutual fund service
corporation; however Advisor Corp.'s services provided to Mutual Fund Co.
constitute mutual fund sales within the meaning of 830 CMR 63.38.1.
See830 CMR 63.38.1(2). Advisor Corp.'s mutual fund sales to
Mutual Fund Co. shall be assigned to Massachusetts to the extent that Mutual
Fund Co.'s shareholders of record are domiciled in Massachusetts.
See830 CMR 63.38.1(9)(d)4.d.iii.(D). However, unlike in the
rule set forth generally in 830 CMR 63.38.1(9)(d), there shall be no exclusion
of such sales from the numerator and denominator of Advisor Corp.'s sales
factor in any case in which such shareholders of record are domiciled in a
state in which Advisor Corp. is not taxable. See id. In
contrast to its mutual fund sales made to Mutual Fund Co., Advisor Corp.'s
advisory services provided to Investment Co. are assigned as stated in Example
12, and its sales to Investment Co. shall be excluded from the numerator and
denominator of Advisor Corp.'s sales factor if such sales would be assigned to
a state in which Advisor Corp. is not taxable. See830 CMR
63.38.1(9)(d)4.d.iii. and iii.(A)2.
Example 14. Advisor Corp. provides
investment advisory services to Investment Fund LP, a partnership that invests
in securities and other assets. Assuming that Advisor Corp. knows that its
agreement with Investment Fund LP is principally managed by Investment Fund LP
in Massachusetts, the sale of Advisor Corp.'s services shall be assigned to
Massachusetts. See830 CMR 63.38.1(9)(d)4.d.iii.(A)2. Note
that, unlike in the case of mutual fund sales (see 830 CMR
63.38.1(9)(d)4.d.iii.(D)), it is not relevant for purposes of the analysis that
the partners in Investment Fund LP are residents of numerous states.
Example 15. Design Corp. is a
corporation based outside Massachusetts that provides graphic design and
similar services in Massachusetts and in neighboring states. Design Corp.
enters into a contract at a location outside Massachusetts with an individual
customer to design fliers for the customer. Assume that Design Corp. does not
know the individual customer's state of primary residence and does not derive
more than 5% of its sales of services from the individual customer. All of the
design work is performed outside Massachusetts. The sale is in Massachusetts if
the customer's billing address is in Massachusetts. See 830
CMR 63.38.1(9)(d)4.d.iii.(A)1.
5.
License or Lease of Intangible
Property.
a.
General
Rules.
i. The receipts from the
license of intangible property are in Massachusetts if and to the extent the
intangible is used in Massachusetts. In general, the term "use" shall be
construed to refer to the location of the taxpayer's market for the use of the
intangible property that is being licensed and is not to be construed to refer
to the location of the property or payroll of the taxpayer as otherwise
determined for corporate apportionment purposes pursuant to 830 CMR 63.38.1(7)
and (8). 830 CMR 63.38.1(7) and (8) determines the location of the use of
intangible property in the context of several specific types of licensing
transactions are set forth at 830 CMR 63.38.1(9)(d)5.b. through e. For purposes
of the rules set forth in 830 CMR 63.38.1(9)(d)5., a lease of intangible
property is to be treated the same as a license of intangible
property.
ii. In general, a license
of intangible property that conveys all substantial rights in such property is
treated as a sale of intangible property for tax purposes. See
830 CMR 63.38.1(9)(d)6. Note, however, that for purposes of 830 CMR
63.38.1(9)(d)5. and 6., a sale or exchange of intangible property is treated as
a license of such property where the receipts from the sale or exchange derive
from payments that are contingent on the productivity, use or disposition of
the property
iii. Intangible
property licensed as part of the sale or lease of tangible property is treated
under 830 CMR 63.38.1(9) as the sale or lease of tangible property.
iv. In any instance in which the taxpayer is
not taxable in the state to which the receipts from the license of intangible
property are assigned, the receipts shall be excluded from the numerator and
denominator of the taxpayer's sales factor. See 830 CMR
63.38.1(9)(d)1.f.ii.
v. To the
extent that the transfer of either a security, as defined in 830 CMR
63.38.1(2), or business "goodwill" or similar intangible value, including,
without limitation, "going concern value" or "workforce in place," may be
characterized as a license or lease of intangible property, receipts from such
transaction shall be excluded from the numerator and the denominator of the
taxpayer's sales factor.
b.
License of a Marketing
Intangible. Where a license is granted for the right to use
intangible property in connection with the sale, lease, license, or other
marketing of goods, services, or other items (i.e., a
marketing intangible), the royalties or other licensing fees paid by the
licensee for such right are assigned to Massachusetts to the extent that the
fees are attributable to the sale or other provision of goods, services, or
other items purchased or otherwise acquired by customers in Massachusetts.
Examples of a license of a marketing intangible include, without limitation,
the license of a service mark, trademark, or trade name; certain copyrights;
the license of a film, television or multimedia production or event for
commercial distribution; and a franchise agreement. In each of these instances
the license of the marketing intangible is intended to promote consumer sales.
In the case of the license of a marketing intangible, where a taxpayer has
actual evidence of the amount or proportion of its receipts that is
attributable to Massachusetts, it shall assign such amount or proportion to
Massachusetts. In the absence of actual evidence of the amount or proportion of
the licensee's receipts that are derived from Massachusetts customers, the
portion of the licensing fee to be assigned to Massachusetts shall be
reasonably approximated by multiplying the total fee by a percentage that
reflects the ratio of the Massachusetts population in the specific geographic
area in which the licensee makes material use of the intangible property to
regularly market its goods, services or other items relative to the total
population in such area. Where the license of a marketing intangible is for the
right to use the intangible property in connection with sales or other
transfers at wholesale rather than directly to retail customers, the portion of
the licensing fee to be assigned to Massachusetts shall be reasonably
approximated by multiplying the total fee by a percentage that reflects the
ratio of the Massachusetts population in the specific geographic area in which
the licensee's goods, services, or other items are ultimately marketed using
the intangible property relative to the total population of such
area.
c.
License of a
Production Intangible. Where a license is granted for the right to
use intangible property other than in connection with the sale, lease, license,
or other marketing of goods, services, or other items, and the license is to be
used in a production capacity (a "production intangible"), the licensing fees
paid by the licensee for such right are assigned to Massachusetts to the extent
that the use for which the fees are paid takes place in Massachusetts. Examples
of a license of a production intangible include, without limitation, the
license of a patent, a copyright, or trade secrets to be used in a
manufacturing process, where the value of the intangible lies predominately in
its use in such process. In the case of a license of a production intangible,
it shall be presumed that the use of the intangible property takes place in the
state of the licensee's commercial domicile (where the licensee is a business)
or the licensee's state of primary residence (where the licensee is an
individual) unless the taxpayer or the Commissioner can reasonably establish
the location(s) of actual use. Where the Commissioner can reasonably establish
that the actual use of intangible property pursuant to a license of a
production intangible takes place in part in Massachusetts, it shall be
presumed that the entire use is in Massachusetts except to the extent that the
taxpayer can demonstrate that the actual location of a portion of the use takes
place outside Massachusetts.
d.
License of a Mixed Intangible. Where a license of
intangible property includes both a license of a marketing intangible and a
license of a production intangible (a "mixed intangible") and the fees to be
paid in each instance are separately and reasonably stated in the licensing
contract, the Commissioner will accept such separate statement for purposes of
830 CMR 63.38.1 if it is reasonable. Where a license of intangible property
includes both a license of a marketing intangible and a license of a production
intangible and the fees to be paid in each instance are not separately and
reasonably stated in the contract, it shall be presumed that the licensing fees
are paid entirely for the license of the marketing intangible except to the
extent that the taxpayer or the Commissioner can reasonably establish
otherwise.
e.
License of
Intangible Property where Substance of Transaction Resembles a Sale of Goods or
Services.
i.
In
General. In some cases, the license of intangible property will
resemble the sale of an electronically-delivered good or service rather than
the license of a marketing intangible or a production intangible. In such
cases, the receipts from the licensing transaction shall be assigned by
applying 830 CMR 63.38.1(9)(d)4.c.ii.(B) and (C), as if the transaction were a
service delivered to an individual or business customer or delivered
electronically through an individual or business customer, as applicable.
Examples of transactions to be assigned under 830 CMR 63.38.1(9)(d)5.e.
include, without limitation, the license of database access, the license of
access to information, the license of digital goods (see830
CMR 63.38.1(9)(d)7.b.), and the license of certain software
(e.g., where the transaction is not the license of pre-written
software that is treated as the sale of tangible personal property,
see830 CMR 63.38.1(9)(d)7.a.).
ii.
Sublicenses.
Pursuant to 830 CMR 63.38.1(9)(d)5.e.i., 830 CMR 63.38.1(9)(d)4.c.ii.(C) may
apply where a taxpayer licenses intangible property to a customer that in turn
sublicenses the intangible property to end users as if the transaction were a
service delivered electronically through a customer to end users. In
particular, 830 CMR 63.38.1(9)(d)4.c.ii.(C) that apply to services delivered
electronically to a customer for purposes of resale and subsequent electronic
delivery in substantially identical form to end users or other recipients may
also apply with respect to licenses of intangible property for purposes of
sublicense to end users, provided that for this purposes. the intangible
property sublicensed to an end user shall not fail to be substantially
identical to the property that was licensed to the sublicensor merely because
the sublicense transfers a reduced bundle of rights with respect to such
property (e.g., because the sublicensee's rights are limited
to its own use of the property and do not include the ability to grant a
further sublicense), or because such property is bundled with additional
services or items of property.
f.
Examples. Assume
in each of these examples that the taxpayer that licenses the intangible
property is taxable in Massachusetts and is to apportion its income pursuant to
M.G.L. c. 63, § 38. Also, assume, where relevant, unless otherwise stated,
that the taxpayer is taxable in each state other than Massachusetts to which
its sale or sales would be assigned, so that there is no requirement in such
examples that such sale or sales must be eliminated from the numerator and
denominator of the taxpayer's sales factor.
See830 CMR
63.38.1(9)(d)1.f.ii.
Example 1. Crayon Corp. and Dealer Co.
enter into a license contract under which Dealer Co. as licensee is permitted
to use trademarks that are owned by Crayon Corp. in connection with Dealer
Co.'s sale of certain products to retail customers. Under the contract, Dealer
Co. is required to pay Crayon Corp. a licensing fee that is a fixed percentage
of the total volume of monthly sales made by Dealer Co. of products using the
Crayon Corp. trademarks. Under the contract, Dealer Co. is permitted to sell
the products at multiple store locations, including store locations that are
both within and without Massachusetts. Further, the licensing fees that are
paid by Dealer Co. are broken out on a per-store basis. The licensing fees paid
to Crayon Corp. by Dealer Co. represent fees from the license of a marketing
intangible. The portion of the fees to be assigned to Massachusetts shall be
determined by multiplying the fees by a percentage that reflects the ratio of
Dealer Co.'s receipts that are derived from its Massachusetts stores relative
to Dealer Co.'s total receipts. See830 CMR
63.38.1(9)(d)5.b.
Example 2. Program Corp., a
corporation that is based outside Massachusetts, licenses programming that it
owns to licensees, such as cable networks, that in turn will offer the
programming to their customers on television or other media outlets in
Massachusetts and in all other U.S. states. Each of these licensing contracts
constitutes the license of a marketing intangible. For each licensee, assuming
that Program Corp. lacks evidence of the actual number of viewers of the
programming in Massachusetts, the component of the licensing fee paid to
Program Corp. by the licensee that constitutes Program Corp.'s Massachusetts
sales is determined by multiplying the amount of the licensing fee by a
percentage that reflects the ratio of the Massachusetts audience of the
licensee for the programming relative to the licensee's total U.S. audience for
the programming. See830 CMR 63.38.1(9)(d)5.b. If Program Corp.
is not taxable in any state in which the licensee's audience is located, the
sales that would be assigned to such state shall be excluded from the numerator
and denominator of Program Corp.'s sales factor. See830 CMR
63.38.1(9)(d)1.f.ii. Note that the analysis and result as to the state or
states to which sales are properly assigned would be the same to the extent
that the substance of Program Corp.'s licensing transactions may be determined
to resemble a sale of goods or services, instead of the license of a marketing
intangible. See830 CMR 63.38.1(9)(d)5.e.
Example 3. Moniker Corp. enters into a
license contract with Wholesale Co. Pursuant to the contract Wholesale Co. is
granted the right to use trademarks owned by Moniker Corp. to brand sports
equipment that is to be manufactured by Wholesale Co. or an unrelated entity,
and to sell the manufactured equipment to unrelated companies that will
ultimately market the equipment to consumers in a specific geographic region,
including a foreign country. The license agreement confers a license of a
marketing intangible, even though the trademarks in question will be affixed to
property to be manufactured. In addition, the license of the marketing
intangible is for the right to use the intangible property in connection with
sales to be made at wholesale rather than directly to retail customers. The
component of the licensing fee that constitutes the Massachusetts sales of
Moniker Corp. is determined by multiplying the amount of the fee by a
percentage that reflects the ratio of the Massachusetts population in the
specific geographic region relative to the total population in such region.
See830 CMR 63.38.1(9)(d)5.b. If Moniker Corp. is not taxable
in any state (including a foreign country, see830 CMR
63.38.1(2)) in which Wholesale Co.'s ultimate consumers are located, the sales
that would be assigned to such state shall be excluded from the numerator and
denominator of Moniker Corp.'s sales factor. See830 CMR
63.38.1(9)(d)1.f.ii.
Example 4. Formula, Inc and Appliance
Co. enter into a license contract under which Appliance Co. is permitted to use
a patent owned by Formula, Inc. to manufacture appliances. The license contract
specifies that Appliance Co. is to pay Formula, Inc. a royalty that is a fixed
percentage of the gross receipts from the products that are later sold. The
contract does not specify any other fees. The appliances are both manufactured
and sold in Massachusetts and several other states. Assume the licensing fees
are paid for the license of a production intangible, even though the royalty is
to be paid based upon the sales of a manufactured product
(i.e., the license is not one that includes a marketing
intangible). Because the Commissioner can reasonably establish that the actual
use of the intangible property takes place in part in Massachusetts, the
royalty is assigned based to the location of such use rather than to location
of the licensee's commercial domicile, in accordance with 830 CMR
63.38.1(9)(d)5.c. It is presumed that the entire use is in Massachusetts except
to the extent that the taxpayer can demonstrate that the actual location of
some or all of the use takes place outside Massachusetts. Assuming that
Formula, Inc. can demonstrate the percentage of manufacturing that takes place
in Massachusetts using the patent relative to such manufacturing in other
states, that percentage of the total licensing fee paid to Formula, Inc. under
the contract will constitute Formula, Inc.'s Massachusetts sales.
See830 CMR 63.38.1(9)(d)5.c.
Example 5. Axel Corp. enters into a
license agreement with Biker Co. in which Biker Co. is granted the right to
produce motor scooters using patented technology owned by Axel Corp., and also
to sell such scooters by marketing the fact that the scooters were manufactured
using the special technology. The contract is a license of both a marketing and
production intangible, i.e., a mixed intangible. The scooters
are manufactured outside Massachusetts. Assume that Axel Corp. lacks actual
information regarding the proportion of Biker Co.'s receipts that are derived
from Massachusetts customers. Also assume that Biker Co. is granted the right
to sell the scooters in a U.S. geographic region in which the Massachusetts
population constitutes 25% of the total population during the period in
question. The licensing contract requires an up front licensing fee to be paid
by Biker Co. to Axel Corp. and does not specify what percentage of the fee
derives from Biker Co.'s right to use Axel Corp.'s patented technology. Because
the fees for the license of the marketing and production intangible are not
separately and reasonably stated in the contract, it is presumed that the
licensing fees are paid entirely for the license of a marketing intangible,
unless either the taxpayer or Commissioner reasonably establishes otherwise.
Assuming that neither party establishes otherwise, 25% of the licensing fee
constitutes Massachusetts sales. See830 CMR 63.38.1(9)(d)5.b.
and d.
Example 6. Same facts as Example 5,
except that the license contract specifies separate fees to be paid for the
right to produce the motor scooters and for the right to sell the scooters by
marketing the fact that the scooters were manufactured using the special
technology. The licensing contract constitutes both the license of a marketing
intangible and the license of a production intangible. Assuming that the
separately stated fees are reasonable, the Commissioner will:
(1) assign no part of the licensing fee paid
for the production intangible to Massachusetts, and
(2) assign 25% of the licensing fee paid for
the marketing intangible to Massachusetts.
See830 CMR
63.38.1(9)(d)5.d.
Example 7. Better Burger Corp., which
is based outside Massachusetts, enters into franchise contracts with
franchisees who agree to operate Better Burger restaurants as franchisees in
various states. Several of the Better Burger Corp. franchises are in
Massachusetts. In each case, the franchise contract between the individual and
Better Burger provides that the franchisee is to pay Better Burger Corp. an
upfront fee for the receipt of the franchise and monthly franchise fees, which
cover, among other things, the right to use the Better Burger name and service
marks, food processes and cooking know-how, as well as fees for management
services. The upfront fees for the receipt of the Massachusetts franchises
constitute fees paid for the licensing of a marketing intangible. These fees
constitute Massachusetts sales because the franchises are for the right to make
Massachusetts sales. The monthly franchise fees paid by Massachusetts
franchisees constitute fees paid for (1) the license of marketing intangibles
(the Better Burger name and service marks), (2) the license of production
intangibles (food processes and know-how) and (3) personal services (management
fees). The fees paid for the license of the marketing intangibles and the
production intangibles constitute Massachusetts sales because in each case the
use of the intangibles is to take place in Massachusetts.
See830 CMR 63.38.1(9)(d)5.b. and c. The fees paid for the
personal services are to be assigned pursuant to 830 CMR 63.38.1(9)(d)4.
Example 8. Online Corp., a corporation
based outside Massachusetts, licenses an information database through the means
of the Internet to individual customers that are resident in Massachusetts and
in other states. These customers access Online Corp.'s information database
primarily in their states of residence, and sometimes, while traveling, in
other states. The license is a license of intangible property that resembles a
sale of goods or services and shall be assigned in accordance with 830 CMR
63.38.1(9)(d)5.e. If Online Corp. can determine or reasonably approximate the
state or states where its database is accessed, then it must do so. Assuming
that Online Corp. cannot determine or reasonably approximate the location where
its database is accessed, Online Corp. must assign the sales made to the
individual customers using the customers' billing addresses to the extent
known. Assume for purposes of this example that Online Corp. knows the billing
address for each of its customers. In this case, Online Corp.'s sales made to
its individual customers are in Massachusetts in any case in which the
customer's billing address is in Massachusetts. See830 CMR
63.38.1(9)(d)4.c.ii.(B)1.
Example 9. Net Corp., a corporation
based outside Massachusetts, licenses an information database through the means
of the Internet to a business customer, Business Corp., a company with offices
in Massachusetts and two neighboring states. The license is a license of
intangible property that resembles a sale of goods or services and shall be
assigned in accordance with 830 CMR 63.38.1(9)(d)5.e. Assume that Net Corp.
cannot determine where its database is accessed but reasonably approximates
that 75% of Business Corp.'s database access took place in Massachusetts, and
25% of Business Corp.'s database access took place in other states. In such
case, 75% of the receipts from database access is in Massachusetts. Assume
alternatively that Net Corp. lacks sufficient information regarding the
location where its database is accessed to reasonably approximate such
location. Under these circumstances, if Net Corp. derives 5% or less of its
receipts from database access from Business Corp., Net Corp. must assign the
sale under 830 CMR 63.38.1(9)(d)4.c.ii.(B)2. to the state where Business Corp.
principally managed the contract, or if that state is not reasonably
determinable to the state where Business Corp. placed the order for the
services, or if that state is not reasonably determinable to the state of
Business Corp.'s billing address. If Net Corp. derives more than 5% of its
receipts from database access from Business Corp., Net Corp. is required to
identify the state in which its contract of sale is principally managed by
Business Corp. and must assign the receipts to that state.
See830 CMR 63.38.1(9)(d)4.c.ii.(B)2.
Example 10. Net Corp., a corporation
based outside Massachusetts, licenses an information database through the means
of the Internet to more than 250 individual and business customers in
Massachusetts and in other states. The license is a license of intangible
property that resembles a sale of goods or services and shall be assigned in
accordance with 830 CMR 63.38.1(9)(d)5.e. Assume that Net Corp. cannot
determine or reasonably approximate the location where its information database
is accessed. Also assume that Net Corp. does not derive more than 5% of its
sales of database access from any single customer. Net Corp. may apply the safe
harbor stated in 830 CMR 63.38.1(9)(d)4.c.ii.(B)2.d., and may assign its sales
to a state or states using each customer's billing address. If Net Corp. is not
taxable in one or more states to which some of its sales would be otherwise
assigned, it must exclude those sales from the numerator and denominator of its
sales factor. See830 CMR 63.38.1(9)(d)1.f.ii.
Example 11. Web Corp., a corporation
based outside of Massachusetts, licenses an Internet-based information database
to business customers who then sublicense the database to individual end users
that are resident in Massachusetts and in other states. These end users access
Web Corp.'s information database primarily in their states of residence, and
sometimes, while traveling, in other states. Web Corp.'s license of the
database to its customers includes the right to sublicense the database to end
users, while the sublicenses provide that the rights to access and use the
database are limited to the end users' own use and prohibit the individual end
users from further sublicensing the database. Web Corp. receives a fee from
each customer based upon the number of sublicenses issued to end users. The
license is a license of intangible property that resembles a sale of goods or
services and shall be assigned by applying the rules set forth in 830 CMR
63.38.1(9)(d)4.c.ii.(C). See830 CMR 63.38.1(9)(d)5.e. If Web
Corp. can determine or reasonably approximate the state or states where its
database is accessed by end users, then it must do so. Assuming that Web Corp.
lacks sufficient information from which it can determine or reasonably
approximate the location where its database is accessed by end users, Web Corp.
must approximate the extent to which its database is accessed in Massachusetts
using a percentage that represents the ratio of the Massachusetts population in
the specific geographic area in which Web Corp.'s customer sublicenses the
database access relative to the total population in such area.
See830 CMR 63.38.1(9)(d)4.c.ii.(C)3.ii.
6.
Sale of
Intangible Property.
a.
Assignment of Sales. The assignment of a sale to a
state or states in the instance of a sale or exchange of intangible property
depends upon the nature of the intangible property sold. For purposes of 830
CMR 63.38.1(9)(d)6., a sale or exchange of intangible property includes a
license of such property where the transaction is treated for tax purposes as a
sale of all substantial rights in the property and the receipts from
transaction are not contingent on the productivity, use or disposition of the
property. For the rules that apply where the consideration for the transfer of
rights is contingent on the productivity, use or disposition of the property,
see830 CMR 63.38.1(9)(d)5.a. and 6.a.iv.
i.
Contract Right or Government
License that Authorizes Business Activity in Specific Geographic
Area. In the case of a sale or exchange of intangible property
where the property sold or exchanged is a contract right, government license or
similar intangible property that authorizes the holder to conduct a business
activity in a specific geographic area, the sale is assigned to a state if and
to the extent that the intangible property is used or otherwise associated with
the state. Where the intangible property is used in, or otherwise associated
with, only Massachusetts the taxpayer shall assign the sale to Massachusetts.
Where the intangible property is used in or is otherwise associated with
Massachusetts and one or more other states, the taxpayer shall assign the sale
to Massachusetts to the extent that the intangible property is used in, or
associated with, Massachusetts, through the means of a reasonable
approximation.
ii.
Agreement Not to Compete. An agreement or covenant not
to compete in a specified geographic area requires the contract party to
refrain from conducting certain business activity in that specified area. In
the case of an agreement or covenant not to compete the receipts are to be
assigned to a state based upon the percentage that reflects the state's
population in the U.S. geographic area specified in the contract relative to
the total population in such area.
iii.
Taxpayer Not Taxable in
State of Assignment. In any instance in which, pursuant to 830 CMR
63.38.1(9)(d)6.a.i. and ii., the state to which the sale is to be assigned can
be determined or reasonably approximated, but where the taxpayer is not taxable
in such state, the sale that would otherwise be assigned to such state shall be
excluded from the numerator and denominator of the taxpayer's sales factor.
See830 CMR 63.38.1(9)(d)1.f.ii.
iv.
Sale that Resembles a License
(Receipts are Contingent on Productivity, Use or Disposition of the Intangible
Property). In the case of a sale or exchange of intangible
property where the receipts from the sale or exchange are contingent on the
productivity, use or disposition of the property, the receipts from the sale
shall be assigned by applying 830 CMR 63.38.1(9)(d)5. (pertaining to the
license or lease of intangible property).
v.
Sale that Resembles a Sale of
Goods and Services. In the case of a sale or exchange of
intangible property where the substance of the transaction resembles a sale of
goods or services and where the receipts from the sale or exchange do not
derive from payments contingent on the productivity, use or disposition of the
property, the receipts from the sale shall be assigned by applying 830 CMR
63.38.1(9)(d)5.e. (relating to licenses of intangible property that resemble
sales of goods and services). Examples of such transactions include those that
are analogous to the license transactions cited as examples in 830 CMR
63.38.1(9)(d)5.e.
vi.
Excluded Sales. The sale of a security as defined at
830 CMR 63.38.1(2) and the sale of business "goodwill" or similar intangible
value, including, without limitation, "going concern value" and "workforce in
place," shall be excluded from the numerator and denominator of a taxpayer's
sales factor. See M.G.L. c. 63, § 38(f). Also, except as
otherwise provided in 830 CMR 63.38.1(9)(d), the sale of intangible property
that is not referenced in 830 CMR 63.38.1(9)(d)6.a.i., ii., iv., or v., shall
be excluded from the numerator and the denominator of the taxpayer's sales
factor. The sale of intangible property that is not referenced in 830 CMR
63.38.1(9)(d)6.a.i., ii., iv., or v., and that therefore is excluded from the
numerator and denominator of the taxpayer's sales factor includes, without
limitation, the sale of a partnership interest that is not otherwise a security
within the meaning of 830 CMR 63.38.1(2).
b.
Examples. Assume
in each of these examples that the taxpayer that provides the service is
taxable in Massachusetts and is to apportion its income pursuant to M.G.L. c.
63, § 38. Also, assume, where relevant, unless otherwise stated, that the
taxpayer is taxable in each state other than Massachusetts to which some of its
sales would be assigned, so that there is no requirement in such examples that
such sales to other states must be excluded from the taxpayer's numerator and
denominator.
See 830 CMR 63.38.1(9)(d)1.f.ii.
Example 1. Airline Corp., a
corporation based outside Massachusetts, sells its rights to use several gates
at an airport located in Massachusetts to Buyer Corp., a corporation that is
based outside Massachusetts. The contract of sale is negotiated and signed
outside of Massachusetts. The sale is in Massachusetts because the intangible
property sold is a contract right that authorizes the holder to conduct a
business activity solely in Massachusetts. See830 CMR
63.38.1(9)(d)6.a.i.
Example 2. Wireless Corp., a
corporation based outside Massachusetts, sells a license issued by the Federal
Communications Commission (FCC) to operate wireless telecommunications services
in a designated area in Massachusetts to Buyer Corp., a corporation that is
based outside Massachusetts. The contract of sale is negotiated and signed
outside of Massachusetts. The sale is in Massachusetts because the intangible
property sold is a government license that authorizes the holder to conduct
business activity solely in Massachusetts. See id.
Example 3. Same facts as in Example 2
except that Wireless Corp. sells to Buyer Corp. an FCC license to operate
wireless telecommunications services in a designated area in Massachusetts and
an adjacent state. Wireless Corp. must attempt to reasonably approximate the
extent to which the intangible property is used in or associated with
Massachusetts. For purposes of making this reasonable approximation, Wireless
Corp. may rely upon credible data that identifies the percentage of persons
that use wireless telecommunications in the two states covered by the license.
See id.
Example 4. Same facts as in Example 3
except that Wireless Corp. is not taxable in the adjacent state in which the
FCC license authorizes it to operate wireless telecommunications services. The
receipts paid to Wireless Corp. that would be assigned to the adjacent state
must be excluded from the numerator and denominator of Wireless Corp's sales
factor. See830 CMR 63.38.1(9)(d)6.a.i.; 830 CMR
63.38.1(9)(d)1.f.ii.
Example 5. Sports League Corp., a
corporation that is based outside Massachusetts, sells the rights to broadcast
the sporting events played by the teams in its league in all 50 U.S. states to
Network Corp. Although the games played by Sports League Corp. will be
broadcast in all 50 states, the games are of greater interest in the northeast
region of the country, including Massachusetts. Because the intangible property
sold is a contract right that authorizes the holder to conduct a business
activity in a specified geographic area, Sports League Corp. must attempt to
reasonably approximate the extent to which the intangible property is used in
or associated with Massachusetts. For purposes of making this reasonable
approximation, Sports League Corp. may rely upon audience measurement
information that identifies the percentage of the audience for its sporting
events in Massachusetts and the other states. See830 CMR
63.38.1(9)(d)6.a.i.
Example 6. Same facts as in Example 5,
except that Sports League Corp. is not taxable in one state. The receipts paid
to Sports League Corp. that would be assigned to that state must be excluded
from the numerator and denominator of Sports League Corp.'s sales factor.
See830 CMR 63.38.1(9)(d)6.a.i.; 830 CMR
63.38.1(9)(d)1.f.ii.
Example 7. Business Corp., a
corporation based outside Massachusetts engaged in business activities in
Massachusetts and other states, enters into a covenant not to compete with
Competition Corp., a corporation that is based outside Massachusetts, in
exchange for a fee. The agreement requires Business Corp. to refrain from
engaging in certain business activity in Massachusetts and other states. The
component of the fee that constitutes a Massachusetts sale is determined by
multiplying the amount of the fee by a fraction represented by the percentage
of the Massachusetts population over the total population in the specified
geographic region. See830 CMR 63.38.1(9)(d)6.a.ii. In any case
in which a portion of the fee would be assigned to a state in which Business
Corp. is not taxable, such portion shall be excluded from the numerator and
denominator of Business Corp.'s sales factor. See830 CMR
63.38.1(9)(d)1.f.ii.
Example 8. Business Corp., a
corporation that is commercially domiciled in Massachusetts, sells all of its
assets including its business goodwill, to a business customer that is based in
Massachusetts. The sale of the goodwill shall be excluded from the numerator
and denominator of Business Corp.'s sales factor. See830 CMR
63.38.1(9)(d)6.a.vi.
Example 9. Inventor Corp., a
corporation that is based outside Massachusetts, sells patented technology that
it has developed to Buyer Corp., a business customer that is based in
Massachusetts. Assume that the sale is not one in which the receipts derive
from payments that are contingent on the productivity, use or disposition of
the property. See830 CMR 63.38.1(9)(d)6.a.iv. Inventor Corp.
understands that Buyer Corp. is likely to use the patented technology in
Massachusetts, but the patented technology can be used anywhere
(i.e., the rights sold are not rights that authorize the
holder to conduct a business activity in a specific geographic area). The sale
of the patented technology shall be excluded from the numerator and denominator
of Inventor Corp.'s sales factor. See 830 CMR
63.38.1(9)(d)6.a.vi.
7.
Special Rules.
a.
Software
Transactions. A license or sale of pre-written software for
purposes other than commercial reproduction (or other exploitation of the
intellectual property rights), when transferred on a tangible medium, is
treated as the sale of tangible personal property, rather than as either the
license or sale of intangible property or the performance of a service. In such
cases, the receipts are in Massachusetts as determined under the rules for the
sale of tangible personal property set forth at 830 CMR 63.38.1(9)(c). In all
other cases, the receipts from a license or sale of software are to be assigned
to Massachusetts as determined otherwise under 830 CMR 63.38.1
(e.g., depending on the facts, as the development and sale of
custom software, see830 CMR 63.38.1(9)(d)4.c., as a license of
a marketing intangible, see830 CMR 63.38.1(9)(d)5.b., as a
license of a production intangible, see830 CMR
63.38.1(9)(d)5.c., as a license of intangible property where the substance of
the transaction resembles a sale of goods or services, see830
CMR 63.38.1(9)(d)5.e., or as a sale of intangible property,
see830 CMR 63.38.1(9)(d)6) .
b.
Sales or Licenses of Digital
Goods or Services.
i.
In General. In the case of a sale or license of
digital goods or services, including, among other things, the sale of various
video, audio and software products or similar transactions, the receipts from
the sale or license shall be assigned by applying 830 CMR
63.38.1(9)(d)4.c.ii.(B) or (C), as if the transaction were a service delivered
to an individual or business customer or delivered through or on behalf of an
individual or business customer. For purposes of the analysis, it is not
relevant what the terms of the contractual relationship are or whether the sale
or license might be characterized, depending upon the particular facts, as, for
example, the sale or license of intangible property or the performance of a
service. See830 CMR 63.38.1(9)(d)5.e. and (6)a.v.
ii.
Telecommunications
Companies. In the case of a taxpayer that provides
telecommunications or ancillary services and that is thereby subject to the
provisions of
830 CMR
63.38.11, the sale or license of digital
goods or services not otherwise assigned for apportionment purposes pursuant to
830 CMR
63.38.11 shall be assigned pursuant to 830
CMR 63.38.1(9)(d)7.b.ii., by applying 830 CMR 63.38.1(9)(d)4.c.ii.(B) or (C) as
if the transaction were a service delivered to an individual or business
customer or delivered through or on behalf of an individual or business
customer. See
830 CMR
63.38.11(3). However, in
applying such rules, if the taxpayer cannot determine the state or states where
a customer receives the purchased product it may reasonably approximate this
location using the customer's place of "primary use" of the purchased product,
applying the definition of "primary use" set forth in
830 CMR
63.38.11.
c.
Enforcement of Legal
Rights. Receipts attributable to the protection or enforcement of
legal rights of a taxpayer through litigation, arbitration, or settlement of
legal disputes or claims, including the filing and pursuit of claims under
insurance contracts, shall be excluded from the numerator and denominator of
the taxpayer's sales factor. For purposes of 830 CR 63.38.1, in the case of a
settlement agreement, it shall not be relevant how the parties to the agreement
characterize the payment made under the agreement.
(e)
Exclusion of Factors Related to Items Excluded from Federal Gross
Income. Where items of gross income are excluded from the federal
gross income of a taxpayer, the gross receipts to which such items of gross
income are directly attributable are similarly excluded from the numerator and
denominator of the taxpayer's sales factor. Also, any property or payroll (or
appropriate portion thereof) that relate to such receipts are similarly
excluded from the property or payroll factors of the taxpayer. See
also
830 CMR
63.32B.2(7)(f).
(f)
Sales Factor
Consistency. A taxpayer must use the same rules for excluding or
including gross receipts in both the numerator and the denominator of the sales
factor. If the taxpayer changes its method of excluding or including gross
receipts in the sales factor from the method used in its return in the prior
year, the taxpayer must disclose in the return for the current year the fact of
such change, the nature and extent of the change, and the reason for the
change. The Commissioner may disregard changes in the current year or in future
tax years if they have not been adequately disclosed. See
also830 CMR 63.38.1(9)(d)1.g.
(10)
Section 38
Manufacturers.
(a)
General. A section 38 manufacturer that has income
from business activity which is taxable both in Massachusetts and in another
state shall determine the part of its net income derived from business carried
on in Massachusetts by applying an apportionment percentage that shall be a
fraction that is equal to the corporation's sales factor, determined under 830
CMR 63.38.1(9).
(b)
Section 38 Manufacturer Defined.
1.
General. A
corporation is a section 38 manufacturer for any taxable year if (i) it is
engaged in manufacturing during the taxable year and (ii) its manufacturing
activity during the taxable year is substantial. A corporation that is so
engaged in manufacturing and whose manufacturing activities are substantial is
a section 38 manufacturer for the taxable year regardless of whether, or to
what extent, it conducts its manufacturing activities in Massachusetts. The
principles set forth in
830 CMR
58.2.1(6)(b):
Manufacturing apply for purposes of determining whether a
process constitutes manufacturing.
2.
Substantial
Manufacturing. A corporation's manufacturing activity is
substantial for any taxable year if the corporation meets any of the following
tests:
a. The corporation derives 25% or more
of its receipts for the taxable year from the sale of manufactured goods that
the corporation manufactures;
b.
The corporation pays 25% or more of its payroll for the taxable year to
employees working in manufacturing operations and derives 15% or more of its
receipts for the taxable year from the sale of manufactured goods that the
corporation manufactures;
c. The
corporation uses 25% or more of its tangible property in manufacturing during
the taxable year and derives 15% or more of its receipts for the taxable year
from the sale of manufactured goods that the corporation
manufactures;
d. The corporation
uses 35% or more of its tangible property in manufacturing during the taxable
year.
3.
Coordination with
830 CMR
58.2.1:
Manufacturing Corporations. For purposes of 830 CMR
63.38.1(10) b.2., the following shall apply.
a. For any taxable year, the percentage of
receipts derived from a corporation's sale of manufactured goods that it
manufactures shall be equal to the gross receipts fraction determined for that
taxable year under
830 CMR
58.2.1(6)(e)1.:
Gross Receipts Fraction, except that gross receipts
attributable to business activities (including manufacturing activities)
performed outside Massachusetts shall be taken into account in the
fraction;
b. For any taxable year,
the percentage of payroll paid to employees working in manufacturing operations
shall be equal to the employees fraction determined for that taxable year under
830 CMR
58.2.1(6)(e)3.:
Employees Fraction, except that payroll attributable to
business activities (including manufacturing activities) performed outside
Massachusetts shall be taken into account in the fraction; and
c. For any taxable year, the percentage of
tangible property used in manufacturing operations shall be equal to the
tangible property fraction determined for that taxable year under
830 CMR
58.2.1(6)(e)2.:
Tangible Property Fraction, except that tangible property used
in business activities (including manufacturing activities) performed outside
Massachusetts shall be taken into account in the
fraction.
(11)
One or More Factors
Inapplicable.
(a)
Three Factor Apportionment. Where a taxpayer is
required to determine the part of its net income derived from business carried
on in Massachusetts using an apportionment percentage that employs three
factors, the following shall apply:
1.
Two Factors Applicable. In cases where only two of the
three apportionment factors (property, payroll, sales) are applicable, the
taxable net income of the taxpayer is apportioned by a fraction, the numerator
of which is the remaining two factors with their respective weights and the
denominator of which is the number of times that such factors are used in the
numerator.
2.
One
Factor Applicable. In cases where only one of the three
apportionment factors (property, payroll, sales) is applicable, the taxable net
income of the taxpayer is apportioned solely by that factor with its respective
weight, and the denominator is the number of times the factor is used in the
numerator.
3.
No
Factors Applicable. In cases where none of the three apportionment
factors (property, payroll, sales) is applicable, the taxable net income of the
taxpayer is presumed to be 100% apportioned to Massachusetts unless the
taxpayer demonstrates that such apportionment will not reasonably approximate
its income derived from business carried on within Massachusetts. Where none of
the three apportionment factors is applicable to a taxpayer's activities, the
taxpayer is encouraged to apply for alternative apportionment under M.G.L. c.
63, § 42.
4.
Determination of Applicability. For purposes of
determining whether a factor is applicable, the following shall apply:
a. A factor is not inapplicable merely
because the numerator of the factor is zero. However, a factor is inapplicable
if both its numerator and denominator are zero.
b. A factor is inapplicable and,
consequently, is not used to calculate a taxpayer's apportionment percentage if
the denominator of the factor is less than 3.33% of the taxpayer's taxable net
income, or if the factor is otherwise determined to be insignificant in
producing income.
(b)
Single Factor
Apportionment. Where (i) a taxpayer is required to determine the
part of its net income derived from business carried on in Massachusetts using
its sales factor only and (ii) the sales factor is inapplicable, then the
taxable net income of the taxpayer is presumed to be 100% apportioned to
Massachusetts unless the taxpayer demonstrates that such apportionment will not
reasonably approximate its income derived from business carried on within
Massachusetts. Under these circumstances, the taxpayer is encouraged to apply
for alternative apportionment under M.G.L. c. 63, § 42. In the instance of
a Section 38 manufacturer the sales factor is inapplicable if the denominator
of the factor is less than 3.33% of the taxpayer's taxable net income, or if
the factor is otherwise determined to be insignificant in producing
income.
(12)
Corporate Partners. A corporation with an interest in
a partnership must include its distributive share of the partnership income,
loss, or deduction in calculating its income, in accordance with 26 U.S. Code
and M.G.L. c. 63. The character of any item included in the distributive share
is determined as if it were realized or incurred directly by the corporation.
Except as otherwise provided, the trade or business of the partnership is
treated as the trade or business of the corporation. For purposes of
determining whether the corporation is a mutual fund service corporation or a
Section 38 manufacturer, the corporation's pro rata share (as
defined in 830 CMR 63.38.1(12)(f)) of all of the partnership's items, factors
and activities shall be taken into account to the extent relevant to the
determination, whether or not the corporation and the partnership are engaged
in related business activities. If the partnership and corporate partner are
engaged in related business activities, the corporation's pro
rata share (as defined in 830 CMR 63.38.1(12)(f)) of partnership
property, payroll, and sales are included in the partner's apportionment
factors, subject to the special rules provided in 830 CMR 63.38.1(12)(d).
(Except as otherwise expressly stated, the partnership rules provided in 830
CMR 63.38.1(12) presume that a partnership and corporate partner are engaged in
related business activities.)
(a)
Taxable in Massachusetts.
1. A corporation that is not otherwise
subject to Massachusetts tax jurisdiction is nevertheless taxable in
Massachusetts if it is a general partner in a partnership whose activities, if
conducted directly by the corporation, would subject the corporation to the
excise under M.G.L. c. 63, § 39. See
830 CMR
63.39.1(8).
2. In general, a corporation that is not
otherwise subject to Massachusetts tax jurisdiction is taxable in Massachusetts
if it is a limited partner in a partnership whose activities, if conducted
directly by the corporation, would subject the corporation to the excise under
M.G.L. c. 63, § 39. However, as provided in 830 CMR 63.38.1(4)(d), the
business activities of the partnership and the corporate limited partner are,
in certain circumstances, presumed to be unrelated, so that unless the
presumption is rebutted, such partner is taxable in Massachusetts only with
respect to the partnership activity. Moreover, under the circumstances
described in
830 CMR 63.39.1(8)(b) through
(d) (relating to certain partnerships dealing
in securities, publicly traded partnerships, and certain de minimis limited
partnership holdings), the activities of the partnership are not attributed to
the corporation, and the corporation is not taxable in Massachusetts merely by
virtue of holding such a limited partnership interest.
(b)
Taxable in Another
State. A corporation is taxable in another state within the
meaning of 830 CMR 63.38.1(5) if the corporation is a general partner in a
partnership with business activities in that state that cause either the
partnership or its partners to be taxable in that state described in 830 CMR
63.38.1(5). A corporation that is a limited partner in a partnership with
business activity in another state is taxable in another state within the
meaning of 830 CMR 63.38.1(5) if and to the extent that the corporation would
be taxed in Massachusetts under the same facts and circumstances that exist in
the other state. A corporation holding a limited partnership interest in a
partnership that does business in another state is taxable in the other state
for purposes of apportioning its partnership income, but not for purposes of
apportioning income from its other business activities, unless the corporate
partner and the partnership are engaged in related business activities, or
unless the corporate partner is separately taxable in the other state on the
basis of its other (unrelated) business activities.
(c)
Income Measure of the
Excise. When computing its net income for the taxable year, a
corporation must include its distributive share of partnership items for any
partnership year ending with or within its taxable year. The following examples
illustrate the application of 830 CMR 63.38.1(12)(c):
1. Corporation C holds a 20% profits interest
in Partnership P. C's income for the year was $1,000,000 and P's income for the
same year was $800,000. The income of C is $1,160,000 ($1,000,000 plus 20% of
$800,000).
2. Corporation C holds a
90% profits interest in Partnership P. C incurred a loss of $500,000 for the
year but P's income was $1,000,000. The income of C is $400,000 (90% of
$1,000,000 = $900,000 less the loss of $500,000).
(d)
Special Apportionment
Rules. In general, if a corporate partner is taxable in another
state, it must apportion its taxable net income using the apportionment
percentage in M.G.L. c. 63, § 38. However, the following shall apply:
1.
Property Factor.
In determining the denominator of its property factor, a corporate partner must
include its
pro rata share of the total value of the
partnership's real and tangible personal property, owned or rented, used during
the partnership's taxable year. In determining the numerator of its property
factor, a corporate partner must include its pro rata share of the value of
such property located in Massachusetts.
a. In
order to avoid duplication, however, certain adjustments must be made to the
value of any property leased or rented by the corporation to the partnership or
vice versa.
i. Where a corporation rents
property to the partnership, it must include the original cost of the property
in its property factor. No portion of the value of this property as rental
property of the partnership is included.
ii. Where the partnership rents property to
the corporation, the corporation includes in its property factor the sum of:
A. the original cost of the property
multiplied by the corporation's percentage of interest in the partnership;
plus
B. eight times the net annual
rental rate of the property, multiplied by the difference between 100% and the
corporation's percentage of interest in the partnership.
b. The following examples
illustrate the application of 830 CMR 63.38.1(12)(d)1.:
i. Corporation C has a 20% profits interest
in Partnership P. C owns a building (original cost $100,000) which it rents to
P at a fair market rate of $12,000 per year. C must include the $100,000
original cost of the building in its property factor. No portion of the value
of the property as rental property of the partnership is included in C's
property factor.
ii. The facts are
the same as in the previous example except that P owns the building and rents
it to C. C will include $20,000 (20% of $100,000) in its property factor
because of its interest in P. C will also include $76,800 ([$12,000 x 8] x 80%)
in its property factor to account for the rented building used in its
operations. Thus, the building's value in C's property factor is $96,800
($20,000, plus $76,800).
2.
Payroll Factor.
In determining the denominator of its payroll factor, a corporate partner must
include its
pro rata share of the total compensation paid by
the partnership during the partnership's taxable year. In determining the
numerator of its payroll factor, a corporate partner must include its
pro rata share of such compensation paid in Massachusetts
during the taxable year. The following example illustrates the application of
830 CMR 63.38.1(12)(d)2.:
Corporation C has a 20% profits interest in Partnership P. C's
own payroll is $1,000,000, half of which is attributable to Massachusetts
employees, and P's payroll is $800,000, one quarter of which is attributable to
Massachusetts employees. The denominator of C's payroll factor is $1,160,000
($1,000,000, plus 20% of $800,000, or $160,000). The numerator of C's payroll
factor is $540,000 (50% of $1,000,000 plus 25% of $160,000).
3.
Sales Factor. In
determining the denominator of its sales factor, a corporate partner must
include its
pro rata share of the partnership's total sales
during the partnership's taxable year. In determining the numerator of its
sales factor, a corporate partner must include its
pro rata
share of such sales in Massachusetts.
a. In
order to avoid duplication, however, the following sales must be eliminated
from both the numerator and denominator of the sales factor:
i. sales by the corporation to the
partnership in an amount equal to the total of such sales multiplied by the
corporation's profits interest in the partnership; and
ii. sales by the partnership to the
corporation in an amount not to exceed the total of all sales made by the
partnership multiplied by the corporation's profits interest in the
partnership.
b. The
following examples illustrate the application of 830 CMR 63.38.1(12)(d)3.
i. Corporation C's profits interest in
Partnership P is 20%. C's sales were $20,000,000 for the year, $5,000,000 of
which were made to P. P made sales of $10,000,000 during the same year, none of
which were to C or the other partners.
The denominator of C's sales factor is $21,000,000 determined
as follows:
|
Sales by Corporation C |
..................................................... |
20,000,000 |
|
Add: Corporation C's interest |
|
(20%) in Partnership P's sales |
..................................................... |
2,000,000 |
|
Less: Corporation C's interest |
|
(20%) in Corporation C's sales to |
|
Partnership P |
.................. 1,000,000
.................. |
................. 1,000,000 |
|
Denominator of sales factor |
..................................................... |
21,000,000 |
ii. The
following facts apply to examples A. through C. below. Corporation C's profits
interest in Partnership P is 20%, and Corporation D's profits interest is 80%.
A. The sales made by C, D, and P are as
follows:
|
Corporation C |
................................. |
20,000,000 |
|
Corporation D |
...................................... |
60,000,000 |
|
Partnership P: |
|
To Corporation C |
.....................................................
|
2,000,000 |
|
To Corporation D |
.....................................................
|
8,000,000 |
|
10,000,000 |
The denominator of Corporation C's sales factor is $20,000,000
determined as follows:
|
Sales by Corporation C |
.......................................
|
20,000,000 |
|
Add: Corporation C's interest |
|
(20%) in Partnership P's sales |
.......................................
|
2,000,000 |
|
Less: Partnership P's sales to Corporation
C |
.......................................
|
2,000,000
|
-0- |
The denominator of Corporation D's sales factor is $60,000,000
determined as follows:
|
Sales by Corporation D |
....................................... |
60,000,000 |
|
Add: Corporation D's interest
(80%) in Partnership P's sales
¦¦¦¦¦¦ |
.......................................
8,000,000
|
|
Less: Partnership P's sales to Corporation D
¦. |
.........................8,000,000 |
-0- |
|
60,000,000 |
B. The
sales made by Corporation C, Corporation D, and Partnership P are as follows:
|
Corporation C
Corporation D |
.......................................
....................................... |
20,000,000
60,000,000 |
|
Partnership P: |
|
To Corporation C |
.......................................
|
1,000,000 |
|
To Corporation D |
.......................................
|
9,000,000 |
|
10,000,000 |
The denominator of Corporation C's sales factor is $21,000,000
determined as follows:
|
Sales by Corporation C |
....................................... |
20,000,000 |
|
Add: Corporation C's interest (20%) in Partnership
P's sales |
........................ 2,000,000
|
|
Less: Partnership P's sales to Corporation
C |
........................1,000,000 |
1,000,000 |
|
Denominator of Corporation C's sales
factor |
........................ |
21,000,000 |
The denominator of Corporation D's sales factor is $60,000,000
determined as follows:
|
Sales by Corporation D |
........................ |
60,000,000 |
|
Add: Corporation D's interest
(80%) in Partnership P's sales |
........................ 8,000,000 |
|
Less: Intercompany sales between Partnership P and
Corporation D |
............... 8,000,000
1 |
-0- |
|
Denominator of Corporation |
|
D's sales factor................ |
60,000,000 |
C. The
sales made by Corporation C, Corporation D, and Partnership P are as follows:
|
Corporation
C | ........................ |
20,000,000 |
|
Corporation
D | ........................ |
80,000,000 |
|
Partnership P: |
|
To Corporation C |
.....................3,000,000 |
|
To Corporation D |
..........................6,000,000 |
|
To Corporation X |
...............1,000,000 |
10,000,000 |
__________________________
1 Not to exceed taxpayer's interest
in Partnership P's sales.
The denominator of Corporation C's sales factor is $20,200,000
determined as follows:
|
Sales by Corporation C |
........................ |
20,000,000 |
|
Add: Corporation C's interest in Partnership P's
sales to nonpartner X Corporation (20% x $1,000,000) |
........................ |
200,000 |
|
Corporation C's interest in Partnership P's sales to
Partners
(20% x $9,000,000) |
...............1,800,000 |
|
Less: Intercompany sales from Partnership P to
Corporation C |
.............1,800,000
2 |
-0- |
|
Denominator of Corporation C's sales
factor |
........................ |
20,200,000 |
The denominator of Corporation D's sales factor is $82,000,000
determined as follows:
|
Sales by Corporation D |
........................ |
80,000,000 |
|
Add: Corporation D's interest in Partnership P's
sales to nonpartner X Corporation |
|
(80% x $1,000,000) |
........................ |
800,000 |
|
Corporation D's interest in Partnership P's sales to
Partners (80% x $9,000,000) |
........................... 7,200,000 |
|
Less: Intercompany sales from Partnership P to
Corporation D |
.............. 6,000,000 |
82,000,000 |
(e) For purposes of the non-income measure of
the excise, the classification and valuation of a general or limited
partnership interest shall be determined by the books and records of the
corporation, as maintained under generally accepted accounting principles
(GAAP), as provided as follows:
1. Where (i) a
corporation's ownership interest in a general or limited partnership (as
determined under GAAP) is less than 20% and (ii) the corporation and the
partnership are not required to be included in the same consolidated or
combined financial statement under GAAP, the corporation shall use the cost
method of accounting for its investment in the partnership.
2. Where (i) a corporation's ownership
interest in a general or limited partnership (as determined under GAAP) is 20%
or more and (ii) the corporation and the partnership are not required to be
included in the same consolidated or combined financial statement under GAAP,
the corporation shall use the equity method of accounting for its investment in
the partnership.
3. Where (i) a
corporation owns any interest in a general or limited partnership and (ii) the
corporation and the partnership are required to be included in the same
consolidated or combined financial statement under GAAP, the corporation may
account for its investment in the partnership either (i) by using the equity
method or (ii) by consolidating or combining its assets and activities with
those of the partnership in the manner required by GAAP; provided that the
corporation must use the same method to report its interest in partnerships
consistently from taxable year to taxable year.
_____________________________
2 Not to exceed taxpayer's interest
in Partnership P's sales.
(f)
Pro Rata
Share. For purposes of 830 CMR 63.38.1(12), a
partner's pro rata share of a partnership's items, factors and
activities shall be its percentage interest in partnership profit or loss for
the taxable year, as stated on the partner's Schedule K-1, provided however,
that if, under the partnership agreement, a partner's share of gain or loss
from the sale of particular partnership assets is specially allocated in a
manner different from its profit or loss ratio stated on Schedule K-1, and such
special allocation has "substantial economic effect" as defined in Treas. Reg.
§ 1.704-1(b)(2), gross receipts from sales of such assets shall be
assigned to its sales factor in the same proportion as the partner's interest
in gain or loss from the sale. In the event of a termination or other change in
a partner's interest during the taxable year, the partner's pro
rata share of payroll and sales must be modified to reflect
partnership payroll and sales during the actual period that the partner held
its interest.
(13)
Alternative Apportionment Methods.
(a) If a taxpayer claims that the allocation
or apportionment provisions of 830 CMR 63.38.1 are not reasonably adapted to
approximate the net income derived from business carried on in Massachusetts, a
taxpayer may apply to the Commissioner to have such income determined by an
alternative apportionment method pursuant to the provisions of M.G.L. c. 63,
§ 42 and
830 CMR
63.42.1.
(b) The provisions of 830 CMR 63.38.1(13)(a),
notwithstanding, if the Commissioner determines that the apportionment
provisions of 830 CMR 63.38.1 are not reasonably adapted to approximate the net
income derived from business carried on in Massachusetts by certain industries,
the Commissioner may, by regulation, adopt alternative apportionment provisions
for such industries. To the extent the Commissioner adopts alternative
apportionment regulations for certain industries, the rules contained in the
alternative apportionment regulations will supersede the provisions of 830 CMR
63.38.1 to the extent provided.
(14)
Effective
Dates. The provisions in 830 CMR 63.38.1 generally shall apply to
tax years beginning on or after January 2, 2015, except to the extent that a
provision (i) is subject to a specific effective date provided in 830 CMR
63.38.1, (ii) is subject to a specific effective date created by legislation
(including the rules enacted pursuant to St. 2013, c. 46, § 37, pertaining
to the sales factor apportionment of sales of other than tangible personal
property, which are effective for taxable years beginning on or after January
1, 2014, see830 CMR 63.38.1(9)(d)) , or (iii) reflects a
position appearing in a prior public written statement or other Department of
Revenue publication, including electronic publication. All rules that antedate
830 CMR 63.38.1, whether appearing in a prior public written statement or other
Department of Revenue publication, continue in force and effect except to the
extent any such rules are revised or altered by 830 CMR 63.38.1. 830 CMR
63.38.1 notwithstanding, for periods prior to January 2, 2015, the Commissioner
reserves the right to assert a position reflected in this regulation that is
not inconsistent with a prior public written statement, and that otherwise is
consonant with the law in effect at that time.
REGULATORY AUTHORITY
830 CMR 63.38.1: M.G.L. c. 14, § 6(1); M.G.L. c. 62C,
§ 3; M.G.L. c. 63, § 38(j),(k),(l),(m)(n).
