Q: My business has provided services for Massachusetts clients for years without paying much Massachusetts tax. I've heard that Massachusetts laws have changed and may result in a heavier tax burden this year. What should I know about these new laws?
A: Massachusetts has changed the way it determines whether revenue from the performance of services and certain property is subject to tax by the Commonwealth. This change will increase taxes for some businesses and decrease it for others, depending on the way they do business.
Massachusetts and New Hampshire have historically used similar methods for apportioning revenue from services with the result that it was typically taxed in one state and not the other. They both used a three factor formula based on the location of the business's payroll, property and sales, with the sales component double-weighted. The more that these factors occur in Massachusetts, the more the Commonwealth taxes the business. Until this year, the sales factor was calculated for both states by assuming sales took place where activity to produce the sales was performed. Under this formula, a New Hampshire business that performed most of its work in New Hampshire and then sold the services to Massachusetts customers could be assured that it would be treated as having sales in New Hampshire, but not in Massachusetts.
The new Massachusetts law, however, changes the way Massachusetts determines where the sales took place. For tax years beginning in this calendar year or later, a sale of services or property (other than tangible personal property) is deemed to take place in Massachusetts if the business's market for the sale is in Massachusetts. In the case of a service, the market for a sale is the location to which it is delivered. Remember that the New Hampshire rules still determine the location of sales based on where the work to generate the sale was performed. This means that an income tax may be due in both states on the same revenue for a service that was performed in New Hampshire for a client in Massachusetts. Conversely, no tax would be paid to either state if the relevant work is performed in Massachusetts and delivered to a New Hampshire customer. Similarly, Massachusetts market-based rules now apply to sales and rental of real estate, leases of tangible personal property, licenses of intangible property such as know-how, trade secrets, patents, trademarks, copyrights, franchises, and other intellectual property, and certain sales of intangible property.
The same apportionment scheme applies whether you conduct your business as a corporation, partnership or LLC. Your business may have opportunities to mitigate the effect of this change by adjusting operations.
Published in the Manchester Union Leader, August 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
