The summer was relatively slow in Massachusetts for state and local tax developments. There were a few cases of interest and a new regulation providing guidance on the Brownfields Tax Credit. The Massachusetts Department of Revenue wound down the Covid-19 telecommuting rules that nearly caused a border war with New Hampshire and implemented an accelerated sales tax reporting system.
Taxation of Digital Advertising
One issue that has emerged in several states, including Massachusetts, is the taxation of digital advertising. Several bills have been proposed that would tax such advertising. The most recent, House Bill 4179, was introduced on Sept. 30, 2021, and would establish a tax for “Online Advertising.” The tax would be imposed on the annual gross revenues of a person derived from digital advertising services conducted in Massachusetts. “Digital advertising services” are defined as advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.
The tax rate would be 6.25% and apply to annual gross revenue from digital advertising services provided within the state. The first $1 million in revenue from digital advertising services provided within Massachusetts annually would be exempt from the excise. Digital advertising services would be considered sourced to Massachusetts if an advertisement is received on a user’s device having an IP address located within the state. There are already revolts taking place in several states against similar taxing efforts. If some form of the proposed legislation is passed in Massachusetts, it will certainly face legal challenges. These could include arguments that it is an unconstitutional burden on interstate commerce and that it violates the Internet Tax Freedom Act.
Brownfields Tax Credit
On July 23, 2021, the state department of revenue promulgated a regulation to explain the provisions of the brownfields tax credit for environmental response actions (Code of Massachusetts Regulations Title 830, Section 63.38Q.1: Massachusetts brownfields tax credit). A person who remediates certain contaminated properties may be eligible for a credit against that person’s Massachusetts personal income tax or corporate excise liability equal to a percentage of the net response and removal costs incurred for such remediation in compliance with Massachusetts General Laws Chapter 21E, the “Massachusetts Oil and Hazardous Material Release Prevention Act.”
The regulation explains who is eligible for the credit, the eligible costs for purposes of the credit, and how much credit may be claimed in any tax year. Additionally, it sets out rules pertaining to the carryforward of unused credits; the procedure to transfer, sell, or assign unused credits; the circumstances under which a credit will be recaptured; and the appeals process in instances where the credit is fully or partially denied. While the department has recently increased audit activity in connection with brownfields credit applications, it remains a generous credit that should be considered when remediating contaminated property.
Contemporaneous with the promulgation of this regulation, the department released Administrative Procedure 636, which describes in further detail the application and appeal process for the brownfields tax credit. It is effective for credit applications received by the department on or after July 9, 2021.
Advance Payments of Sales and Use Tax and Room Occupancy Excise
On Aug. 5, 2021, the department circulated a draft regulation (Mass. Code Regs. Title 830, Section 62C.16B.1: Advance Payments of Sales and Use Tax and Room Occupancy Excise) explaining new accelerated tax payment procedures. Beginning April 2021, Massachusetts required certain vendors and operators, depending on their amount of tax or excise liability from the previous year, to make an advance payment before the related tax return is due.
The department originally advised that starting in 2022, taxpayers subject to the new advance payment rules would be asked to report additional information on their returns. This would include any advance payment made and the amount of any calculated penalty. Meals tax filers would be asked to break down cash sales versus credit card sales. The most controversial item was the requirement that sales tax filers break down online sales versus in-store sales.
The department received immediate feedback from industry and tax practitioners. Reporting online sales versus in-store sales can be challenging, as vendors make this distinction differently, and the information may not be available or accurate at the time the return is filed. On Sept. 30, 2021, the department announced that “at this time taxpayers will not be asked to break down sales by in-store versus online on their sales tax returns.”
Manufacturing Corporations
On Sept. 22, 2021, the Massachusetts Appellate Tax Board ruled that a taxpayer was not entitled to a manufacturing classification for the calendar year because it was not engaged in any manufacturing activities in Massachusetts as of Jan. 1. In Zero Waste Solutions, LLC v. Commissioner of Revenue, the taxpayer applied for manufacturing classification but stated on its application that its manufacturing activities were “to be performed” later in the year and after Jan. 1. In Massachusetts, a corporation engaged in manufacturing as of Jan. 1 of that year may be classified as a manufacturing corporation and may be entitled to an investment tax credit and exemptions from sales and use tax (Mass. Gen. Laws Chapter 58, Section 2).
Formal classification from the Commissioner of Revenue is necessary to obtain local property tax exemptions under machinery and equipment used in manufacturing. The fact that such activity would take place later in the year was irrelevant. The board stated that the test is whether manufacturing activity was being conducted on Jan. 1 of the year at issue, and the taxpayer acknowledged that such was not the case.
Capital Gains on Urban Redevelopment Properties
On August 8, 2021, the Appellate Tax Board found that the distributive share of capital gain realized from the sale of urban redevelopment properties was taxable in full to the limited partners for individual income tax purposes. In Reagan v. Commissioner of Revenue, the taxpayers held limited partnership interests in an urban renewal project. The project was undertaken pursuant to Massachusetts General Laws Chapter 121A, rules enacted to stimulate the investment of private capital in blighted open, decadent, or sub-standard areas. Because projects commenced under the statute serve a public purpose, they are subsidized by tax concessions.
Corporations or partnerships that undertake these projects may be exempt from taxation, betterments, excises, and special assessments for an exemption period of up to 40 years. In return, they pay a separate excise as well as negotiated payments to the city or town in which the projects are located. The question presented was whether profits from the sale of the taxpayers’ limited partnership interests in the urban renewal project continued to be exempt from taxation.
During the exemption period, project income earned by the limited partnerships passed through to the partners and retained its tax-exempt character in their hands. However, when the limited partnerships sold their interests in the project, their agreements with the city of Boston terminated and they ceased to be subject to the benefits and burdens of Chapter 121A. Accordingly, the gain realized by the partnerships when they disposed of the properties passed through to the partners without the benefit of the tax-exempt status afforded by the statute.
Wages and Compensation for Remote Workers Due to Covid-19
From March 10, 2020, through Sept. 13, 2021, Massachusetts applied emergency pandemic income-sourcing rules to wages or other compensation paid to employees who worked remotely due to the Covid-19 crisis. For the period beginning after Sept. 13, 2021, wages paid to a non-resident employee will no longer be sourced based on where the employee worked prior to the Covid-19 state of emergency. Instead, the wages for such period will generally be sourced based on where the employee’s work is performed.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Author Information
Philip S. Olsen is a tax attorney at the Boston law firm of Davis Malm, where he focuses on state and local tax consulting and litigation. He has over 25 years of experience litigating and resolving major tax controversies before courts and administrative boards. He can be contacted at polsen@davismalm.com.
We’d love to hear your smart, original take: Write for Us
To contact the reporter on this story: