Editor’s Note: The following article is written by Michael Jacobs and Robert Weyman, both attorneys with AIM-member law firm Reed Smith LLP. Jacobs and Weyman are members of Reed Smith’s State Tax Group and focus their practices on corporate state tax controversy and planning matters.
New rules that change the way numerous multi-state businesses will determine their Massachusetts corporate taxes go into effect for tax returns filed in 2015.
The rules require that many sales, for example sales of services, be sourced to a taxpayer’s “market.” Under the old rules, these sales were sourced to the location where the taxpayer incurred its costs in making the sale. Combined with a “throwout” rule, this new tax regime can dramatically change the formula a multi-state business uses to determine the portion of its income Massachusetts can subject to tax.
Over the past year, the Massachusetts Department of Revenue (DOR) has been drafting revised regulations that interpret the new rules and guide taxpayers attempting to implement them. DOR issued a first draft in March and then a revised draft in October. The draft regulations now include more than seventy pages of complex rules that taxpayers will have to apply in short order.
At each stage of the drafting process AIM has solicited feedback from its Tax Committee and the AIM membership at-large. The association pushed DOR to consider and incorporate AIM member concerns into the revised regulations. AIM has also presented member concerns to the Department of Revenue in written comments.
AIM’s most recent written comments, submitted on December 4, range from broad tax policy suggestions to technical critiques of specific regulatory provisions. Three overarching themes run throughout the comments.
AIM has fought for fair application of the new taxing rules, challenging the DOR to craft rules that put taxpayers and the department on equal footing. For example, a proposed provision would prevent some taxpayers from filing amended returns that adjust how they determine their “market,” while permitting the Department to audit the taxpayer and adjust its return. AIM has strongly objected to the inequity of this provision.
AIM is rightly concerned that regulations that provide multiple potential sourcing options governed by subjective tiered rules will result in audit disputes and litigation. AIM urged the commonwealth to create a tax system that results in certainty for taxpayers, so that taxpayers are not hit with surprise tax assessments years down the road.
Minimizing Regulatory Burdens
AIM objected to the voluminous and complex nature of the regulations, and the regulatory compliance burden they will create. AIM requested that the DOR incorporate clear and easily applied “safe harbors” into the regulations. For example, AIM has questioned the necessity of certain rules that could require taxpayers to conduct granular analysis of where its services are delivered to specific customers. AIM rightly points out that such provisions would result in a tax regime that is more complex and difficult to administer than almost any other state in the country.
The DOR is expected to issue its final regulations by the end of the year. While the Department has already implemented some of AIM’s comments in its December revised draft, it is hoped that state officials take the opportunity to review AIM’s detailed critiques and to implement suggested changes that would help to ensure that the final regulations are fair, give taxpayers certainty, and minimize regulatory burdens to the extent possible.
For a copy of AIM’s comments, contact Brad MacDougall, Vice President of Government Affairs, email@example.com.