Massachusetts State and Local Tax Update—Fourth Quarter 2023

There was greater activity from the Massachusetts Appellate Tax Board as the year closed and the volume of board hearings increased. In addition, the state legislature enacted, and the governor approved, an important change to the corporate apportionment formula.

CEO’s Stock Sale Gains

In Welch v. Commissioner of Revenue, the board ruled that gain realized by a nonresident on the sale of stock in a Delaware corporation was subject to personal income tax in Massachusetts pursuant to Massachusetts General Law Chapter 62, Section 5A.

Welch founded, and was the sole shareholder of, a Massachusetts corporation that developed and marketed derivatives and collateral management solutions for institutional investors. Over time, his stock interest was reduced as the company reorganized and later obtained institutional financing.

The corporation ultimately merged into a Delaware corporation but continued to be headquartered in Massachusetts. Welsh held various executive positions at the corporation until he resigned. By the time he sold his stock shares, he no longer lived in Massachusetts.

For Massachusetts to tax a nonresident’s income, it must be derived from or effectively connected with a trade or business, including any employment carried on by the taxpayer in state. It doesn’t matter if the nonresident isn’t actively engaged in a trade or business or employment in the commonwealth in the year in which the income is received.

The board found that Welch wasn’t a passive investor in the company as he claimed but was a founder whose continued employment—in prominent, powerful, and crucial roles—was key to the company’s success. His contribution was so valued that the company wanted him to retain the title of CEO until he resigned.

The stock gain was the payout for his contributions to the corporation and was determined by the board to be compensation for his years of service. It was attributable to employment carried on by Welch in Massachusetts and therefore taxable in Massachusetts.

Massport Tenant Property Taxes

The appellant in 480 McClellan LLC v. Board of Assessors of the City of Boston was a tenant of the Massachusetts Port Authority, or Massport, that agreed to build and operate a cargo facility in connection with Boston’s Logan Airport, according to its lease.

Real estate owned by Massport generally is exempt from local property taxation. However, a tenant may be subject to taxation as if it were the owner of the property if that property is leased to the tenant for business purposes.

The assessors claimed the statute must be interpreted to mean that a lease to a for-profit entity was by default a lease for business purposes. The board agreed, stating that if it weren’t for the opportunity to generate a profit, no for-profit entity would enter such a lease.

The appellant argued that this conclusion ignored the specific language of the statute and that it was bound by the lease to use the property in furtherance of Massport’s mandate to increase commerce for the people of Massachusetts.

Included in Massport’s statutory powers was the power to add or develop airport freight facilities. The board didn’t address the use provisions mandated by the lease and sided with the assessors. The decision could affect numerous tenants of Massport properties, and an appeal is expected.

Tobacco Enforcement

The Massachusetts Department of Revenue is stepping up tax avoidance enforcement efforts. One example is the department’s allocation of resources to enforce the excise due on tobacco product sales.

Under General Law Chapter 64C, purchases and sales of tobacco products are subject to a state excise tax, as well as strict licensing and record keeping requirements. Retailers who purchase from unlicensed manufacturers or wholesalers are unclassified acquirers and subject to the excise.

Typically, individuals buy tobacco products in bulk from states with no or exceptionally low tobacco taxes and transport those products to Massachusetts to sell themselves or to tobacco retailers. Those retailers in turn sell them without charging the applicable tobacco excise. Because of the perceived abuses, the department aggressively pursues civil and criminal penalties against offenders.

In Skaff Petroleum, Inc. v. Commissioner of Revenue, the appellant owned and operated a Mobil gas station and convenience store and was licensed as a retailer to sell tobacco products. He purchased tobacco products in New Hampshire and admitted that excises weren’t paid on them.

The commissioner suspended the appellant’s license to sell tobacco products for 60 days. On appeal, the appellant argued that the suspension would cause extreme hardship and loss of business.

Chapter 64C grants equitable authority to the Appellate Tax Board to reduce or negate license suspensions; the board found the appellant’s actions to be egregious and willful and declined to exercise its equitable powers.

Single Sales Factor Apportionment

Massachusetts adopted single sales factor apportionment for all corporate taxpayers on Oct. 4. Previously, only manufacturers and mutual fund service corporations excluded property and payroll factors from the calculation of their Massachusetts apportionment percentage.

The law change is effective for tax years beginning on or after Jan. 1, 2025. Manufacturers will still enjoy sales tax and local property tax exemptions, as well as the investment tax credit, if they conduct manufacturing activities in Massachusetts.

Practice and Procedure Rules

The Appellate Tax Board announced that its Rules of Practice and Procedure have been finalized and are effective as of Jan. 5.

The revisions aim to make litigation of tax appeals more transparent and understandable for taxpayers, attorneys, and boards of assessors who aren’t represented by counsel in board proceedings. The revisions also aim to encourage parties to confer at various stages of the litigation process to narrow contested issues and reach settlements of disputes.

The board says the revised rules will achieve these goals, particularly those addressing mediation conferences, status conferences, pre-motion conferences, stipulations and agreed statements of fact, exhibit exchanges, and the recording of hearings.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Philip S. Olsen is a tax attorney at Davis Malm, focused on state and local tax consulting and litigation, with over 25 years litigating and resolving major tax controversies before courts and administrative boards.

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