Massachusetts State and Local Tax Update—First Quarter 2022

While Massachusetts has not yet returned to in-person tax hearings, the Massachusetts Appellate Tax Board has continued to rely on remote hearings, motions, pretrial conferences, and mediations to keep matters moving forward. On the administrative side, the Department of Revenue has kept pace by issuing several releases addressing legislative and case law developments.

The case of VAS Holdings & Investments, LLC v. Commissioner of Revenue has been working its way through the Massachusetts tax appeal system since it was initially decided in favor of the Commissioner of Revenue in October 2020. It is now pending before the state Supreme Judicial Court. The issue is whether Massachusetts can tax a gain realized by a nonresident corporate taxpayer on the sale of its 50% interest in an LLC that conducted business activities in Massachusetts. At trial, the taxpayer argued that Massachusetts could not tax the gain because the taxpayer did not have a unitary relationship with the LLC.

The Commissioner of Revenue claimed that taxation of the gain was constitutional because of the LLC’s in-state payroll and property. Further, the increase in the value of the LLC was inextricably connected to and derived from its business activities in Massachusetts. The board agreed with the commissioner and his use of the investee apportionment method. This approach allows taxation of income derived from another entity, via investment or otherwise, based on the other entity’s property and activities in the taxing state. It differs from investor apportionment, which looks to the in-state activities of the taxpayer/investor. This is the more familiar methodology generally applicable through the unitary business principle.

The Supreme Judicial Court is now questioning the authority of the commissioner to use the investee apportionment principle. On March 23, 2022, months after briefing and oral arguments, the court posed several questions to the parties. Most importantly, the court asked the Commissioner of Revenue to identify the specific statutory provisions that authorized the use of the investee apportionment method.

In Dillon Chevrolet, Inc. v. Commissioner, the appellant operated a Chevrolet dealership and loaned vehicles to customers who were having their vehicles serviced. The loan period on these vehicles was limited to keep the mileage low so that the vehicles could be sold at retail. The Appellate Tax Board held that the loaned vehicles were not exempt from sales or use tax as items purchased or held for resale. Because the cars were removed from Dillon’s sale inventory and used as loaner vehicles, they were no longer items purchased for resale by Dillon. Instead, Dillon used them for other business purposes—to provide courtesy loaners to customers while Dillon repaired their vehicles.

In RCN BecoCom LLC v. Commissioner of Revenue, the Massachusetts Appeals Court determined that the proper method to determine the fair cash value of the telephone company’s personal property was the depreciated reproduction cost method. This approach determines the current cost of reproducing a property less depreciation from deterioration and functional and economic obsolescence. The court rejected the appellant’s argument that a market approach, using an actual sale of the enterprise between a willing buyer and a willing seller, provided the most direct proof of what the relevant assets were worth. The court saw this method as imprecise and unreliable due to the difficulties associated with separating the physical assets from the ongoing telecommunications business.

The Department of Revenue has, on occasion, responded to adverse decisions by issuing releases designed to narrow the scope of the decision. A good example of this is Technical Information Release 22-4, which addressed the Massachusetts Appeals Court decision in Bay State Gas Company & Affiliates v. Commissioner. In that case, the court ruled that the taxpayer was entitled to a deduction for amounts remitted to Indiana as payment of the Indiana Utility Receipts Tax, or URT. According to the court, the URT was deductible because it was more like a transaction tax imposed on the receipts of the retail sales of gas and electricity in Indiana than a franchise tax for the privilege of doing business in the state. Citing Department Directives 1999-9 and 2008-7, the commissioner claimed the URT was similar to other gross receipts taxes, which are nondeductible because they are imposed on the corporate enterprise as a whole for the privilege of doing business. The court rejected this argument, stating that the URT was imposed on the receipts received from retail sales and not on the business in its entirety.

Undeterred, the release announces that state tax statutes are unique and, therefore, must be analyzed independently to determine whether the Bay State Gas analysis should apply.

According to the Commissioner of Revenue, the directives referenced in the Bay State Gas case will continue to apply, and the case does not change the commissioner’s position that taxes imposed on a business for the privilege of doing business are not deductible.

Technical Information Release 22-1 explains the state’s new reporting rules relative to centralized federal partnership audits. Newly enacted General Law Chapter 62C Section 30B, coordinates state tax administrative processes with federal audits conducted under the Centralized Federal Partnership Audit, or CFPA, regime. The CFPA generally seeks to streamline federal partnership audits by including both the partnership and the partners in the same review, assessment, and payment process.

The release explains the new Massachusetts partnership tax audit provisions and describes the Massachusetts reporting and payment obligations of partnerships and partners that are subject to a centralized federal partnership audit. Partnerships are subject to Section 30B—including the notice requirements described in the release—in any instance where, as a result of a federal audit, there is a difference in the Massachusetts tax liability of any partner from that previously reported. The Department of Revenue has developed a process that will allow partnerships to report federal audit adjustments and report and pay audit assessments on behalf of their partners through the Department’s electronic tax system, MassTaxConnect.

In closing, two important cases decided by the Appellate Tax Board in late 2021 have been appealed to the state Appeals Court. On Dec. 7, 2021, the Massachusetts Appellate Tax Board in U.S. Auto Parts Network Inc. v. Commissioner of Revenue held that a taxpayer’s use of “cookies” and “apps” did not constitute a physical presence in the state for sales and use tax purposes and that the U.S. Supreme Court’s decision in Wayfair could not be applied retroactively. On December 10, 2021, the Appellate Tax Board in Akamai Technologies, Inc. v. Commissioner of Revenue ruled that the appellant was engaged in manufacturing because it developed and sold standardized computer software that its customers accessed remotely. Both cases have yet to be briefed or argued, so a final resolution is not expected until late 2022 at the earliest.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, 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.

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