Massachusetts State and Local Tax Update—Winter 2021

This article briefly summarizes judicial and administrative developments occurring in Massachusetts during the first quarter of 2021. The explanations call attention to the particular subject or case rather than provide lengthy substantive analysis. All cases and administrative releases are readily available on public websites.

Starting off, in South Dakota v. Wayfair, the U.S. Supreme Court finally abrogated the Commerce Clause “physical presence” rule articulated in Quill v. North Dakota. Prior to Wayfair, the Department of Revenue issued a regulation explaining how Massachusetts general sales and use tax jurisdictional standards applied to vendors making Internet sales. The department surmised that Internet vendors with a large volume of Massachusetts sales (greater than $500,000) invariably have one or more state contacts that function to facilitate or enhance in-state sales and satisfy the Quill physical presence test. These contacts included apps and data stored on a customer’s computer or smartphone.

In U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, the Appellate Tax Board ruled against the department’s attempt to retroactively enforce the regulation for tax periods preceding the Wayfair decision. The rationale for the decision is not yet public, although it is likely that the board did not see apps and data as Quill envisioned physical presence. In Massachusetts, the Appellate Tax Board usually issues a one-line decision simply stating which party prevailed. Either party can then request Findings of Fact and Report (findings) for a detailed opinion by the board. The department has requested findings to evaluate whether a further appeal is warranted.

In SynQor, Inc. v. Commissioner of Revenue, the Massachusetts Appeals Court confirmed that the taxpayer’s litigation damages from a successful patent infringement lawsuit outside Massachusetts were attributable to the state for sales factor purposes. At the time, the department’s apportionment regulation provided that “gross receipts from the enforcement of legal rights by taxpayers domiciled in Massachusetts were presumed attributable to Massachusetts” regardless of the forum in which the taxpayer sought to enforce its legal rights. Because SynQor was commercially domiciled in Massachusetts, the regulatory presumption applied, and the receipts at issue were sourced to Massachusetts. The case illustrates court deference to the department’s regulations and discusses regulatory presumptions and what taxpayers must do to rebut presumptions.

On Feb. 1, 2021, the Massachusetts Supreme Judicial Court heard oral arguments in Oracle USA, Inc. v. Commissioner of Revenue. The issue presented in this case is whether the taxpayers may apportion sales tax on their purchases of software downloaded onto servers in Massachusetts for later use by employees both within and outside Massachusetts. The Appellate Tax Board previously ruled the taxpayers were entitled to relief despite failure to comply with additional procedural requirements imposed by the department’s software regulation. The board noted the tax abatement process was created by statute, and the department cannot unilaterally impose additional regulatory hurdles unless specifically authorized by the legislature.

On Oct. 20, 2020, the State of New Hampshire requested leave from the U.S. Supreme Court to file a bill of complaint against the Commonwealth of Massachusetts. New Hampshire claims Massachusetts is unconstitutionally attempting to tax New Hampshire residents. By order dated Jan. 25, 2021, the Supreme Court invited the acting solicitor general to file a brief expressing the views of the U.S. The solicitor general is expected to file his/her brief in late May or early June, in time for the court to consider whether to take the case before the current term ends. If the court takes the case, it would likely be heard later in the year.

Property taxes account for the largest percentage of state and local tax paid by businesses in the U.S. In Massachusetts, the number of local property tax appeals far exceeds appeals of state-imposed taxes. In Kali Family LP v. Town of Milton, the Massachusetts Appeals Court confirmed that the exclusive remedy for property owners challenging their real or personal property’s valuation or taxability is the administrative abatement process. Judicial relief is only available if it is demonstrated that the administrative remedy is seriously inadequate, or the case involves novel questions, repetitive problems, or the public interest. In addition to routine valuation cases addressed during the first quarter of 2021, the Appellate Tax Board issued decisions regarding property tax exemptions for religious and charitable organizations (Atlantic Union College, Unquity House Corporation, Winter Valley Residences and Springfield Rescue Mission).

On the administrative front, the Department of Revenue recently promulgated a final regulation (Code of Massachusetts Regulations, Title 830 Section 62.5A.3) setting forth the sourcing rules that apply to income earned by a non-resident employee who telecommutes from a location outside the state due to the Covid-19 state of emergency. It also explains the parallel treatment accorded to resident employees with income tax liabilities in other states that have adopted similar sourcing rules. The objective of this regulation (taxing Massachusetts employees working from home in New Hampshire during the pandemic) was first addressed via an emergency regulation issued in April 2020. It gave rise to the pending New Hampshire v. Massachusetts case in the Supreme Court.

Under the regulation, all compensation received for services performed by a non-resident who, immediately prior to the Massachusetts Covid-19 state of emergency, was an employee engaged in performing such services in Massachusetts, and who is performing services from a location outside Massachusetts due to the pandemic, will continue to be treated as Massachusetts source income subject to personal income tax under Massachusetts General Laws Chapter 62, Section 5A.

Proposed Mass. Code Regs., Title 830 Section 63.38Q.1 explains the provisions of the brownfields tax credit for environmental response actions, as set out in Mass. Gen. Laws Chapter 62, Section 6(j) and Chapter 63, Section 38Q. Under these statutes, an eligible 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 Mass. Gen. Laws Chapter 21E. While the Department of Revenue has recently increased audit activity for brownfields credit applications, it remains a generous credit that should be considered when remediating contaminated property.

Finally, Technical Information Release 21-4 (Tax Provisions in the Fiscal Year 2021 Budget) explains certain provisions included in the Massachusetts Fiscal Year 2021 Budget. Certain vendors and operators are now required to remit advance payments of room occupancy, sales, and use taxes.

Partnerships audited by the Internal Revenue Service must submit a detailed report to the Department of Revenue within 90 days of receipt of a final determination in the federal partnership audit. The statute further calls for payment of any additional state tax resulting from the determination within an additional 90 days, either directly by the partner or by the partnership on the partner’s behalf.

New Mass. Gen. Laws Chapter 62C, Section 35F imposes a tax penalty for illegally falsifying or manipulating electronic cash register records through automated sales suppression devices or phantom-ware. Those who sell or purchase these devices or similarly designed software will be subject to severe penalties.

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’ experience litigating and resolving major tax controversies before courts and administrative boards. He can be contacted at polsen@davismalm.com.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.