Massachusetts State and Local Tax Update: Winter 2021

After a relatively quiet year on the state tax litigation front, 2021 closed with the Appellate Tax Board issuing two significant state tax decisions. The first case discussed the Department of Revenue’s efforts to tax online sales prior to the Wayfair decision, while the second discussed manufacturing tax benefits for developers of computer software. The board focused on local property tax appeals for most of the year, so guidance on these important state tax issues was welcomed by practitioners.

Appellate Tax Board Decisions

On Dec. 7, 2021, the Massachusetts Appellate Tax Board 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. In U.S. Auto Parts Network Inc. v. Commissioner of Revenue, the taxpayer was a California-based online automobile parts and accessories retailer. It was assessed use tax for tax periods preceding the U.S. Supreme Court’s Wayfair decision based upon a pre-Wayfair regulation enacted by the Department of Revenue. The board acknowledged the “complexities of defining physical presence” but ruled that U.S. Auto Parts’ use of cookies and apps did not constitute physical presence in Massachusetts. The board further ruled that the Supreme Court’s decision in Wayfair could not be applied retroactively to the tax period at issue.

On Dec. 10, 2021, in Akamai Technologies, Inc. v. Commissioner of Revenue, the Appellate Tax Board ruled that the appellant was engaged in manufacturing because it developed and sold standardized computer software which was accessed remotely by its customers. In Massachusetts, a corporation properly classified as a manufacturing corporation may be entitled to sales, corporate, and local property tax benefits. The traditional concept of manufacturing has been expanded by case law and statute to include the development and sale of standardized computer software without regard to its manner of delivery to customers. The pivotal question before the board in Akamai was whether the company was providing a service rather than selling software. The board looked to the substance of the transaction and the processes used by Akamai to bring its product to market to determine that the purchasers of Akamai’s software products intended to buy standardized computer software rather than a service.

This decision comes as no surprise after the Supreme Judicial Court’s recent decision in Citrix Systems, Inc. v. Commissioner of Revenue. That case addressed both the issue of delivery and whether the company was providing a service rather than selling software. It is worth noting that in Citrix, the Commissioner of Revenue successfully argued that the sales of the online software products were sales of tangible personal property, and that remote access of the software was an acceptable form of delivery. In Akamai, the Commissioner took an opposite approach, and the board could not resist citing prior rulings from the Department of Revenue to support the conclusion that the transactions at issue were indeed taxable sales of pre-written software rather than non-taxable sales of services.

Supreme Judicial Court

On Jan. 5, 2022, the Supreme Judicial Court heard arguments in VAS Holdings & Investments LLC v. Commissioner of Revenue. The question presented was whether Massachusetts can apportion a non-domiciliary investor’s capital gain on its interest in a Massachusetts LLC absent a unitary business relationship and where the investor has no other connections with the Commonwealth. The taxpayer argued that apportionment depended on the existence of a unitary business relationship between the taxpayer investor and the Massachusetts LLC. The Appellate Tax Board held that the Commissioner’s use of the “investee apportionment” concept was permissible. “Investee apportionment” apportions a corporate taxpayer’s income derived from an in-state entity solely referring to that entity’s in-state property and activities.

Legislative & Administrative Moves

On Sep. 30, 2021, the Massachusetts Legislature adopted an elective pass-through entity (PTE) excise in response to the $10,000 cap on the federal state and local tax deduction added in the 2017 tax law . An eligible pass-through entity may elect to pay an excise on its qualified income taxable in Massachusetts at a rate of 5%. A qualified member of an electing eligible pass-through entity shall be allowed a refundable credit against the tax. The credit will be 90% of each qualified member’s proportionate share of the tax due and paid. The credit shall be available for the member’s taxable year in which the electing eligible pass-through entity’s taxable year ends. On Dec. 30, 2021, the Department of Revenue issued a working draft technical information release that explains how to make an election, the computation of the excise, and filing and payment requirements. The Department’s website also contains a page devoted to frequently asked questions regarding the PTE.

On Oct. 29, 2021, the Massachusetts Department of Revenue issued a working draft technical information release on the impact of the American Rescue Plan Act of 2021 and the Consolidated Appropriations Act of 2021 on the state’s individual income and corporate income taxes. The release is not intended to be an exhaustive list of the Massachusetts tax implications of the Acts, but those most likely to interest taxpayers and their advisers. The draft includes information about: the earned income tax credit; retirement plans, medical expense deduction floor; the exclusion of unemployment compensation; student loan forgiveness; and employer-provided dependent care assistance from gross income amounts. It also covers Paycheck Protection Program loan forgiveness and other qualified disaster relief.

On Dec. 13, 2021, Governor Charlie Baker (R) approved legislation that provides a safe harbor for vendors subject to the advance payment requirement for sales and use, meals, rooms, or marijuana tax. If the vendor does not remit the actual tax collected during the first 21 days of the month, they can submit an amount that is “not less than 80 percent of the tax collected on the gross receipts from taxable sales during the immediately preceding filing period” to satisfy the advance payment requirement.

Finally, in October 2021, the Department of Revenue issued Informational Guideline Release No. 21-24 to provide assessors, local officials, and energy system owners with information about property tax exemptions for solar-powered systems, wind-powered systems, fuel cell-powered systems, and energy storage systems, including those under a negotiated tax agreement.

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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