Code of Massachusetts Regulations
830 CMR - DEPARTMENT OF REVENUE
Title 830 CMR 63.00 - Taxation of corporations
Section 63.38.10 - Apportionment of Income of Electric Industry

Universal Citation: 830 CMR 63.00 MA Code of Regs 63.38.10

Current through Register 1531, September 27, 2024

(1) Statement of Purpose, Outline of Topics, Effective Date.

(a) Statement of Purpose. The purpose of 830 CMR 63.38.10 is to provide alternative apportionment rules, as provided in M.G.L. c. 63, § 38(j), for the electric industry. Generally, 830 CMR 63.38.10 provides rules for allocating and apportioning income derived from sales of electricity, unforced capacity, electricity brokerage services, ancillary services related to electricity, electricity transmission and distribution services, and from buying and selling financial instruments related to electricity. Except as modified by 830 CMR 63.38.10, the general allocation and apportionment provisions found in 830 CMR 63.38.1 continue to apply.

(b) Outlines of Topics. 830 CMR 63.38.10 is organized as follows:
1. Statement of Purpose, Outline of Topics, Effective Date;

2. Definitions;

3. Sales Factor Sourcing Rules;

4. Taxable in Another State;

5. Apportionment Percentage;

6. Examples.

(c) Effective Date. The provisions of 830 CMR 63.38.10 shall be effective for taxable years beginning on or after December 16, 2016. The provisions of 830 CMR 63.38.10 as promulgated on November 30, 2007 are hereby repealed and replaced but remain applicable for taxable years beginning on or after November 30, 2007 and before December 16, 2016.

(2) Definitions. For purposes of 830 CMR 63.38.10 the following terms shall have the following meanings unless the context requires otherwise:

Affiliate, an individual or entity that is related to the taxpayer within the scope of Code § 267(b) or § 707(b)(1).

Agent, an individual or entity as defined in 830 CMR 63.38.1(2).

Alternative Energy Producer, an individual or entity that owns or operates a "cogeneration facility" or "small power production facility" as defined in M.G.L. c. 164, § 1 that does not engage in the retail sale of electricity other than sales to end-use customers that are within the confines of an industrial park that existed prior to March 1, 1982, and had, as of that date, electricity-generating capacity of more than 15 megawatts. See M.G.L. c. 164, § 1. See also 220 CMR 11.02: General Definitions.

Ancillary Services, services as defined in M.G.L. c. 164, § 1 that support generation, transmission, and distribution services including the following:

(a) reactive power/voltage control;

(b) loss compensation;

(c) scheduling and dispatch;

(d) load following;

(e) system protection service; and

(f) energy imbalance service.

Code, the Internal Revenue Code in effect for the taxable year.

Competitive Supplier, an individual or entity as defined in 220 CMR 11.02: General Definitions licensed by the Department of Telecommunications and Energy to sell electricity and supporting ancillary services to end-use customers.

Distribution Company, a company as defined in M.G.L. c. 164, § 1. See also 220 CMR 11.02: General Definitions.

Distribution Service, the delivery of electricity over lines which operate at a voltage level typically equal to or greater than 110 volts and less than 69,000 volts to an end-use customer within Massachusetts.

Electric Company, a company as defined in M.G.L. c. 164, § 1. See also 220 CMR 11.02: General Definitions.

Electric Utility, an individual or entity as defined in M.G.L. c. 164A, § 1.

Electricity Broker, an individual or entity as defined in 220 CMR 11.02: General Definitions that facilitates or arranges for the purchase and sale of electricity and supporting ancillary services to end-use customers, but generally does not sell electricity.

End-use Customer, a purchaser of electricity and/or distribution, transmission, and/or supporting ancillary services, and/or electricity brokerage services for any purpose other than resale in the regular course of business.

Generation Facility, plant or equipment used to produce, manufacture, or otherwise generate electricity, as defined in 220 CMR 11.02: General Definitions.

Generator, an individual or entity engaged in the business of producing, manufacturing, or generating electricity.

Installed Capacity, the maximum productive capacity, i.e., megawatt capability, of an installed capacity resource, e.g., generating facility, dispatchable load, external resource or transaction, or demand resource.

ISO New England, a private not-for-profit corporation headquartered in Holyoke Massachusetts regulated by the Federal Energy Regulatory Commission (FERC) and designated by FERC to be the regional transmission organization for the New England region.

Located in Massachusetts, having a dwelling or other physical location or place of business in Massachusetts, e.g., owning or leasing real or tangible property in Massachusetts or having one or more employees located in Massachusetts.

Payroll Factor, the payroll factor as defined in M.G.L. c. 63, § 38(e). See also 830 CMR 63.38.1(8).

Power Marketer, an individual or entity that generally becomes an owner of electricity for the purpose of selling it at wholesale but does not own a generation, transmission, or distribution facility.

Property Factor, the property factor as defined in M.G.L. c. 63, § 38(d). See also 830 CMR 63.38.1(7).

Retail Sale, a sale of electricity and/or distribution, transmission, and/or supporting ancillary services, or brokerage services, for any purpose other than resale in the regular course of business.

Sales, generally, "sales" as defined in M.G.L. c. 63, § 38(f). However, "sales" additionally shall include receipts from buying or selling financial instruments related to electricity (e.g., derivatives, forwards, futures, swaps, options, basis contracts). Furthermore, in the case of a financial instrument, "sales" means gross receipts received under any purchase or sale contract net of any offsetting contract receipts.

Sales Factor, the sales factor as defined in M.G.L. c. 63, § 38(f), with the adjustments provided in 830 CMR 63.38.10.

Taxable Net Income, the part of the net income of a taxpayer, adjusted as required by M.G.L. c. 63, § 38(a)(1) and (2), that is taxable both within and without Massachusetts and therefore apportionable under M.G.L. c. 63, § 38(c).

Taxpayer, any individual or entity that is entitled or required to allocate or apportion income under or by reference to M.G.L. c. 63, § 38 that is engaged in the business of generating and/or selling:

(a) electricity;

(b) unforced capacity; or

(c) ancillary, transmission, or distribution services within Massachusetts including an electric company, electric utility, power marketer, alternative energy producer, electricity broker, competitive supplier, and marketing affiliate of a distribution company, and also including any individual or entity substantially engaged in the business of buying or selling financial instruments relating to electricity (e.g., derivatives, forwards, futures, swaps, options, basis contracts).

The term Taxpayer does not include financial institutions as defined in M.G.L. c. 63, § 1.

Transmission Service, the delivery of power over lines that operate at a voltage level typically equal to or greater than 69,000 volts from generating facilities across interconnected high voltage lines to where the power enters a distribution system.

Unforced Capacity, the amount of installed capacity available at any given time and the measurement by which installed capacity is bought and sold.

(3) Sales Factor Sourcing Rules. For purposes of determining the sales described in 830 CMR 63.38.10(5)(a), sales shall be sourced to Massachusetts as follows:

(a) retail sales of electricity by a generator, an electric company or utility, a power marketer, an alternative energy producer, a competitive supplier, or similar vendor, or agent or affiliate of such, are "in Massachusetts" if, as a result of the sale, electricity is delivered to a location, metered or otherwise, in Massachusetts;

(b) retail sales of brokerage services by an electricity broker or agent or affiliate of the electricity broker are "in Massachusetts" if, as a result of the sale, electricity is delivered to a location, metered or otherwise, in Massachusetts;

(c) wholesale sales of electricity by a generator or agent or affiliate of the generator are "in Massachusetts" to the extent that the generation facility that generated the electricity is located in Massachusetts;

(d) wholesale sales of electricity by an electric company or utility that does not itself generate the electricity sold, an agent or affiliate of such electric company or utility, a power marketer or similar vendor or an agent or affiliate of such power marketer or similar vendor are "in Massachusetts" as follows:
1. if the taxpayer's place of business from which a sales order or other contract originates is located in Massachusetts and the transaction is priced, traded, or settled by an exchange, marketplace, or intermediary located in Massachusetts, 100% of the receipts shall be sourced to Massachusetts;

2. if the taxpayer's place of business from which a sales order or other contract originates is not located in Massachusetts but the transaction is priced, traded, or settled by an exchange, marketplace, or intermediary located in Massachusetts, 20% of the receipts shall be sourced to Massachusetts;

3. if the taxpayer's place of business from which a sales order or other contract originates is located in Massachusetts but the transaction is priced, traded, or settled by an exchange, marketplace, or intermediary located in another state, 80% of the receipts shall be sourced to Massachusetts;

(e) sales of financial instruments relating to electricity (e.g., derivatives, forwards, futures, swaps, options, basis contracts) are in Massachusetts applying the sourcing rules in 830 CMR 63.38.10(3)(d)1. through 3.;

(f) a sale of unforced capacity is "in Massachusetts" to the extent that the installed capacity resource to which it relates is located in Massachusetts;

(g) sales of transmission services are "in Massachusetts" in proportion to the ratio of the wire mileage of the taxpayer's transmission lines located in Massachusetts divided by the wire mileage of the taxpayer's transmission lines located everywhere;

(h) a sale of distribution services is "in Massachusetts" if, as a result of the sale, electricity is delivered to a location, metered or otherwise, in Massachusetts; and

(i) a sale of an ancillary service is "in Massachusetts" to the extent that the service (e.g., generation, transmission, or distribution) to which it relates is "in Massachusetts." In such cases, the ratio of ancillary services in Massachusetts to ancillary services everywhere shall be the same as the ratio of related services in Massachusetts to related services everywhere.

(4) Taxable in Another State: Throwout. Any sales or receipts described in 830 CMR 63.38.10(3)(a) through (i) that would be sourced to a state in which the Taxpayer is not taxable shall be excluded from the numerator and denominator of the sales factor. For purposes of 830 CMR 63.38.10(4), a taxpayer is taxable in another state if:

(a) in that state the Taxpayer is subject to a net income tax, a franchise tax measured by net income, or a franchise tax for the privilege of doing business; or

(b) that state has jurisdiction to subject the Taxpayer to a net income tax, regardless of whether, in fact, that state does or does not subject the Taxpayer to the tax.

(5) Apportionment Percentage. Except as otherwise provided, a taxpayer as defined in 830 CMR 63.38.10(2) that has taxable net income that is taxable both within and outside of Massachusetts shall apportion its income to Massachusetts according to the provisions of M.G.L. c. 63, § 38(c) by multiplying the taxable net income by a fraction, the numerator of which is the property factor plus the payroll factor plus two times the sales factor, and the denominator of which is four. In the case of a manufacturing corporation as defined in M.G.L. c. 63, § 38(l)(1), single sales factor apportionment shall apply as required in M.G.L. c. 63, § 38(l)(2)(v). The property and payroll factors shall be computed in accordance with the provisions of M.G.L. c. 63, §§ 38(d) and (e) and 830 CMR 63.38.1. In computing the sales factor, the numerator shall consist of:

(a) the taxpayer's sales derived from generating and/or selling, transmitting, or distributing electricity, or from selling unforced capacity, electricity brokerage or ancillary services, or from buying and selling financial instruments related to electricity, that are sourced to Massachusetts in accordance with the provisions of 830 CMR 63.38.10; plus

(b) the taxpayer's sales not derived from such activities that are sourced to Massachusetts in accordance with the provisions of M.G.L. c. 63, § 38(f) and 830 CMR 63.38.1.

(6) Examples. The following examples illustrate the provisions of 830 CMR 63.38.10. Nexus with Massachusetts and the states where customers are located is to be assumed on the part of the taxpayer in each example.

Example 1. Marina Light Corporation (MLC) is a generator of electricity and owns one generation facility located in Rhode Island. During the taxable year, most of the electricity generated from this facility is sold to two Massachusetts electric utilities and one nonMassachusetts electric company. They in turn sell the electricity to end-use customers or at wholesale. During the taxable year, each Massachusetts utility pays MLC $3,000,000 for the electricity it purchases. The non-Massachusetts electric company pays MLC $1,000,000. A small percentage of the electricity MLC generates is sold at retail to an end-use customer located in Massachusetts and electricity is delivered to a metered location in Massachusetts as a result. The Massachusetts end-use customer pays MLC $350,000 for the electricity it purchases.

In calculating MLC's sales factor, pursuant to sourcing rule 830 CMR 63.38.10(3)(a), only the $350,000 in retail sales to the Massachusetts end-use customer would be included in MLC's numerator as electricity is delivered to a metered location in Massachusetts as a result of the sale. None of the $7,000,000 in wholesale sales would be included as, pursuant to sourcing rule 830 CMR 63.38.10(3)(c), the generation facility that generated the electricity is not located in Massachusetts. MLC's sales factor is: $350,000 ÷ $7,350,000 = -.048

Example 2. EnergyWise is a corporation that engages in energy trading activities. EnergyWise employs two power marketers in conducting such activities. One of these individuals resides in Massachusetts, the other resides in Connecticut. Each is a member of ISO New England, an exchange or marketplace located in Massachusetts, and utilizes the ISO marketplace in making sales. Each sells electricity to other power marketers located in and outside Massachusetts and to industrial end-use customers located in and outside Massachusetts.

The Massachusetts power marketer begins each sale by a phone call placed from or received at the Massachusetts office supplied to him by EnergyWise. During the taxable year, EnergyWise collects receipts from such sales as follows: $500,000 in wholesale sales from Massachusetts power marketers; $300,000 in wholesale sales from non-Massachusetts power marketers; $1,000,000 from industrial end-use customers located in Massachusetts; and $400,000 from industrial end-use customers located outside Massachusetts. In the first of the two final cases, electricity is delivered, as a result of the sale, to a metered location in Massachusetts; in the final case, electricity is delivered to a metered location outside Massachusetts.

The Connecticut power marketer similarly begins each sale by a phone call placed from or received at the Connecticut office supplied to him by EnergyWise. During the taxable year, EnergyWise collects receipts from such sales as follows: $200,000 in wholesale sales from nonMassachusetts power marketers; $100,000 in wholesale sales from Massachusetts power marketers; $100,000 from industrial end-use customers located outside Massachusetts; and $1,500,000 from industrial end-use customers located in Massachusetts. In the first of the two final cases, electricity is delivered, as a result of the sale, to a metered location outside Massachusetts; in the final case, electricity is delivered to a metered location in Massachusetts.

In calculating EnergyWise's sales factor, pursuant to sourcing rule 830 CMR 63.38.10(3)(a), the $1,000,000 in retail sales by the Massachusetts power marketer and the $1,500,000 in retail sales by the Connecticut power marketer to industrial end-use customers located in Massachusetts would be included in EnergyWise's numerator as electricity is delivered, as a result of the sale, to a metered location in Massachusetts. None of the $400,000 in retail sales by the Massachusetts power marketer or the $100,000 in retail sales by the Connecticut power marketer to industrial end-use customers located outside Massachusetts would be included however, as electricity is delivered, as a result of the sale, to a metered location outside Massachusetts. Additionally, pursuant to sourcing rule 830 CMR 63.38.10(3)(d)1., all of the wholesale sales by the Massachusetts power marketer, the $500,000 in sales to Massachusetts power marketers and the $300,000 in sales to non-Massachusetts power marketers, would be included in EnergyWise's numerator, as all of the sales originated in Massachusetts and were priced, traded, or settled by ISO New England, an exchange or marketplace located in Massachusetts. Finally, pursuant to sourcing rule 830 CMR 63.38.10(3)(d)2., only 20% of the wholesale sales by the Connecticut power marketer, or $40,000 of the $200,000 in sales to non-Massachusetts power marketers and $20,000 of the $100,000 in sales to the Massachusetts power marketers, would be included in EnergyWise's numerator, as all of the sales originated outside Massachusetts but were priced, traded, or settled by ISO New England, an exchange or marketplace located in Massachusetts. EnergyWise's sales factor is: ($1,000,000 + $1,500,000 + $500,000 + $300,000 + $40,000 + $20,000) ÷ $4,100,000 =.82

Example 3. To hedge its price risk due to the expected use of electricity in the summer months, the marketing department of RI Electric (RIE), a Rhode Island electric utility, contracts with Megafinancial Bank ("MFB"), a New York swap dealer, on February 1st and executes a fixed-for-floating electricity swap. The terms of the deal are as follows: RIE agrees to pay MFB $30 per megawatt-hour for 150,000 megawatt-hours of electricity. In return, MFB agrees to pay RIE the "floating" market price. The "floating" market price is to be based on the average daily real time locational marginal price ("LMP") on July 31st as reported by ISO-New England. The trade date is August 1st.

The average real time LMP per megawatt-hour for electricity reported by ISO-New England for July 31st is $32. On August 1,st MFB pays RIE the net difference or $300,000 ($2.00 per MWh x 150,000 MWh = $300,000). Additionally, on August 1st RIE buys 150,000 megawatt-hours of electricity for $32.00 per megawatt-hour and sells it to a Massachusetts end-use customer for $32.50 per megawatt-hour. Electricity is delivered to a metered location in Massachusetts as a result of the sale and RIE receives $75,000.

In calculating RIE's sales factor, pursuant to sourcing rule 830 CMR 63.38.10(3)(d)2. and (3)(e), only 20% of the $300,000 from MFB, or $60,000, would be included in its numerator, as the sale originated outside Massachusetts but the "floating" market price component of the electricity swap contract is priced by reference to ISO-New England, an exchange or marketplace located in Massachusetts. Additionally, pursuant to sourcing rule 830 CMR 63.38.10(3)(a), the $75,000 retail sale to the Massachusetts end-use customer would be included in RIE's numerator as electricity is delivered to a metered location in Massachusetts as a result of the sale. RIE's sales factor is: ($60,000 + $75,000) ÷ $375,000 =.36

Example 4. Brightstar is a Massachusetts corporation that engages exclusively in wholesale energy trading activities. Brightstar employs two power marketers in conducting such activities. Both of these individuals utilize the New York ISO marketplace exclusively in pricing and making sales to other power marketers located in and outside Massachusetts. One of these individuals resides and works in Massachusetts; the other resides and works in New York. The Massachusetts power marketer begins each sale by a phone call placed from or received at his Massachusetts office. The New York power marketer begins each sale by a phone call placed from or received at his New York office.

Brightstar collects receipts from sales by its Massachusetts power marketer as follows: $200,000 in wholesale sales from non-Massachusetts power marketers and $10,000 in wholesale sales from Massachusetts power marketers. Additionally, Brightstar collects receipts from sales by its New York power marketer as follows: $600,000 in wholesale sales from non-Massachusetts power marketers and $100,000 in wholesale sales from Massachusetts power marketers.

In calculating Brightstar's sales factor, pursuant to sourcing rule 830 CMR 63.38.1(3)(d)3., 80% of the wholesale sales by the Massachusetts power marketer, or $160,000 of the $200,000 in wholesale sales to non-Massachusetts power marketers and $8,000 of the $10,000 in wholesale sales to Massachusetts power marketers, would be included in Brightstar's numerator, as all of the sales originated in Massachusetts but were priced, traded, or settled by New York ISO, an exchange or marketplace located in New York. None of the wholesale sales by the New York power marketer, neither the $600,000 in wholesale sales to non-Massachusetts power marketers nor the $100,000 in wholesale sales to Massachusetts power marketers, would be included in Brightstar's numerator however, as none of these sales originated in Massachusetts or were priced, traded, or settled by an exchange or marketplace located in Massachusetts. Brightstar's sales factor is: ($160,000 + $8,000) ÷ $910,000 =.18

Example 5. South Shore Electric Company (SSEC) generates from its generation facility in Massachusetts a small amount of electricity that it sells at wholesale to customers located in and outside Massachusetts. The total receipts from such sales is $1,000,000. Similarly, SSEC sells a small amount of transmission services to customers located in and outside Massachusetts. The total receipts from such sales is $1,800,000. The bulk of SSEC's business consists of sales of distribution services to Massachusetts and non-Massachusetts end-use customers. As to these latter distribution services, its Massachusetts sales total $10,000,000 and its non-Massachusetts sales total $4,000,000 during the taxable year. SSEC has 1,500 miles of transmission lines, 225 miles of which are located in Massachusetts.

In calculating SSEC's sales factor, pursuant to sourcing rule 830 CMR 63.38.10(3)(c), all of SSEC's wholesale sales of electricity, or $1,000,000, would be included in its numerator, as the generation facility that generated the electricity is located in Massachusetts. Additionally, pursuant to sourcing rule 830 CMR 63.38.10(3)(g), only $270,000 of SSEC's $1,800,000 in sales of transmission services would be included in its numerator. That figure is derived by dividing the wire mileage of SSEC's transmission lines located in Massachusetts, or 225 miles, by the wire mileage of SSEC's transmission lines located everywhere, or 1,500 miles and then by multiplying the result by SSEC's total receipts from sales of transmission services, or $1,800,000. Finally, pursuant to sourcing rule 830 CMR 63.38.10(3)(h), SSEC's numerator would include one last figure, the $10,000,000 in sales of distribution services to end-use customers located in Massachusetts. SSEC's sales factor is: ($1,000,000 + $270,000 + $10,000,000) ÷ $16,800,000 =.67

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