Massachusetts joined a small but growing group of states that are using a company’s economic activity in the state as a reason for having to pay corporate income tax.
The state Department of Revenue published a regulation Oct. 18 amending the conditions under which a general business corporation is subject to Massachusetts’s general corporate excise tax.
Citing the Supreme Court’s South Dakota v. Wayfair, Inc., decision, the rule adds “considerable in-state sales derived through either economic or virtual contacts” to the physical presence circumstances which make a general business corporation—whether in- or out-of-state—subject to the excise tax.
The June 2018 Wayfair ruling tossed out the court’s 1992 physical presence standard affirmed in Quill Corp. v. North Dakota, which limited the ability of states to tax remote sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law requiring remote sellers to collect sales tax if they had more than $100,000 in in-state sales or 200 transactions would pass constitutional muster.
Since the ruling, most states have either passed versions of South Dakota’s law or begun enforcing laws and rules already on the books that require businesses to pay sales tax if they meet a sales threshold or have an economic connection in their states. Many states are also telling marketplace facilitators such as Amazon.com Inc., eBay Inc., and Etsy Inc. to collect taxes for sellers on their online platforms.
The new Massachusetts rule applies to taxpayers with more than $500,000 in receipts attributable to sources within the state, said Richard Call, partner in the Boston office of McDermott Will & Emery. Call said Oct. 18 that the idea of imposing corporate income tax on companies based on an economic connection is not new in Massachusetts, but the “presumption” language in the rule is reason for concern.
“A $500,000 receipts threshold is arguably too low for income tax purposes when the amount of tax at issue is compared to the burden of filing a return for the very reason that income taxes are based on net amounts rather than gross amounts like a sales tax,” he said.
And, he said, any presumption of taxability puts the taxpayer at an improper disadvantage from a burden of proof perspective.
“You’re guilty until proven innocent,” he said. “That’s not a good position for the taxpayer to be in.”
Massachusetts joins four states—Hawaii, Pennsylvania, Texas and Washington—that have changed or proposed changes to their corporate, gross receipts, or franchise tax laws or rules to apply Wayfair‘s economic nexus standard to out-of-state companies. Pennsylvania was perhaps most direct about it.
In a bulletin issued Sept. 30, Pennsylvania’s department of revenue said the Wayfair decision “confirmed that out-of-state corporations are considered to be doing business in the state if they take advantage of the economic marketplace in the state regardless of whether they are physically present.”
Under theories of due process, states must provide notice to taxpayers before asserting their economic nexus jurisdiction over corporate income taxes, said Shirley K. Sicilian, national director of state and local tax controversy in KPMG LLP’s Washington office. More states are expected to do so, she said.