The Massachusetts House and Senate have successfully overridden a gubernatorial veto of a bill that changes Massachusetts’s income-sourcing methodology to a market-based approach. Before the law change, Massachusetts taxpayers followed a cost-of-performance sourcing methodology to determine sales factor. Under cost-of-performance rules, sales (other than sales of tangible personal property) are deemed to be in Massachusetts if a greater proportion of the income-producing activity, based on costs of performance, is performed in Massachusetts. For example, a Massachusetts taxpayer who designs kitchen appliances may perform 60 of their work in Massachusetts and 40 percent in a neighboring state, and deliver designs to customers in a third state. Under the cost-of-performance methodology, 100 percent of sales are reported in the numerator of the Massachusetts sales factor.
Under the market-based methodology, sales other than those of tangible personal property are deemed to be in Massachusetts if the taxpayer’s market for the sale is in Massachusetts. In the case of a service, the service is considered a Massachusetts sale for sales factor purposes if it is delivered to a location within Massachusetts, regardless of where the taxpayer’s sales-generating activities took place. Under this methodology, the design company in the example above will not include in its numerator any sales to customers in another state.
The change in methodology may significantly affect Massachusetts taxpayers who have substantial income-producing activities in one state and many customers in another state. Careful analysis of a taxpayer’s income-producing activities and customer base may be necessary to properly calculate the sales factor. Diligent tax planning may help minimize overall tax liability after this rule change.
The bill also incorporated a “throw-out” provision in which certain sales are excluded from both the numerator and denominator of the sales factor if the sales are to a state where the taxpayer is not taxed or where the location of the sale is indeterminable. This has the effect of increasing the sales factor percentage by “throwing out” certain sales from the denominator.
The bill also contained changes to other tax laws, including increases in the cigarette and motor fuel taxes.
The views expressed in this article are those of the authors and do not necessarily reflect the position or policy of Berkeley Research Group, LLC.
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