Welcome to the heart of New England, where history and innovation coalesce, and the vibrant culture of Massachusetts unfolds. In this blog post, we delve into the intricacies of Massachusetts taxes, exploring topics ranging from its complex corporate tax landscape to the nuances of sales tax regulations. Whether you’re a local business owner navigating the corporate excise tax or a curious resident seeking insights into the state’s economic intricacies, join us on a journey through the unique facets of Massachusetts. Discover the latest updates, insights, and essential information that define the dynamic intersection of history, commerce, and daily life in the Commonwealth.

What is the Massachusetts Corporate Income Tax Rate?

Massachusetts features a complex corporate tax code with varying rates and bases for different industries. The corporate excise tax is generally calculated based on both income and net worth. For traditional corporations, it comprises an 8.00% tax on Massachusetts-attributable income and a tax of $2.60 per $1,000 of the greater of taxable Massachusetts tangible personal property or taxable net worth. 

The business structure, whether a traditional C Corporation, Subchapter S Corporation, Limited Liability Company, Partnership, or Sole Proprietorship, also influences the type and amount of tax. Multistate businesses face additional complexities, determining nexus for various taxes, and mandatory unitary combined reporting applies to multistate tax filers. MTF reviews proposed changes to the corporate tax policies in Massachusetts, considering competitiveness, code complexity, compliance ease, and other factors affecting tax burdens.

If a business corporation earns income taxable in both Massachusetts and another state, the portion of its net income attributed to business conducted in Massachusetts is calculated by multiplying its taxable net income by the three-factor apportionment percentage. This percentage is a fraction, with the numerator typically comprising a property factor, payroll factor, and sales factor, and the denominator being the total factors used in the numerator. The payroll factor is another fraction, where the numerator is the total compensation paid in Massachusetts during the taxable year, and the denominator is the total compensation paid globally during the taxable year.

Is There a Corporate Minimum Tax in Massachusetts?

There exists a minimum excise tax of $456 for corporations, and separate taxing regimes apply to manufacturers, securities corporations, and financial institutions.

When is the State Corporate Income Tax Return Due?

Massachusetts C corporations must now submit their tax returns by the 15th day of the fourth month after the end of each taxable year, aligning with April 15th for calendar year filers. This adjustment doesn’t affect the filing deadline for S corporation tax returns, which remains the 15th day of the third month after the close of each taxable year. The regulations regarding estimated tax payment obligations for corporations remain unchanged.

How is State Income Tax Nexus Triggered?

Conducting business in Massachusetts involves various criteria for establishing nexus, including:

• Physical Presence: Having a business location in Massachusetts.
• Solicitation: Regularly soliciting orders for services or tangible personal property sales within the state through various means.
• Retail Market Exploitation: Utilizing different channels like salespeople, catalogs, advertising, or online platforms to exploit the retail sales market in Massachusetts.
• Delivery or Services: Regularly engaging in property delivery or service performance within the state.
• Business Privilege: Availing oneself of the substantial privilege of conducting business within Massachusetts, considering virtual or economic contacts.

Activities creating income tax nexus in Massachusetts encompass:

• Incorporation or Organization: Being incorporated or organized in the state.
• Headquarters or Commercial Domicile: Having headquarters or commercial domicile in Massachusetts.
• Property Ownership: Owning real or tangible personal property in the state.
• Property Use: Using real or tangible personal property owned by others in the state.
• Employee Presence: Employing full or part-time personnel in the state.
• Representation: Having non-employee representatives operating in the state for various purposes.
• Intangible Property: Owning or using intangible property in the state that generates gross receipts.
• Sales Threshold: Achieving in-state sales exceeding $500,000 through economic or virtual contacts.

Does Having an Employee or Contractor Trigger Nexus?

A business corporation is typically liable for an excise under M.G.L. c. 63 when conducting business in Massachusetts, often triggered by having employees engaged in business activities in the state. While the general rule considers the presence of employees as indicative of doing business, it is subject to the constitutional principle that mere physical presence. This was outlined during the COVID-19 pandemic that just having an employee in Massachusetts may not establish nexus on it’s own.

GILTI Tax in Massachusetts

GILTI, or Global Intangible Low-Taxed Income, is a newly defined category of foreign income incorporated into a company’s annual taxable income. It primarily targets foreign earnings exceeding a 10 percent return on foreign tangible assets, taxed in a foreign country at a rate lower than 13.125 percent after federal credits. In Massachusetts, where a foreign tax credit isn’t allowed, GILTI includes income taxed at a higher rate, contrary to federal policy. Originally designed to generate revenue and serve as a minimum tax to discourage base erosion, GILTI subjects certain foreign income to tax, regardless of distribution to shareholders.

Presently, GILTI in Massachusetts is treated as a dividend, eligible for a 95% deduction with 5% subject to tax. If the proposed expansion from 5% to 50% is adopted, the income in question would shift from a dividend to ordinary income, requiring apportionment to Massachusetts using a formula that considers foreign activity. However, constitutional issues arise, as excluding foreign factors in the apportionment formula could violate the Foreign Commerce Clause of the U.S. Constitution by treating foreign income differently than domestic income.

Are There Massachusetts Income Tax Credits Available?

Massachusetts offers various corporate income tax credits to eligible businesses. These credits are designed to incentivize specific activities, investments, and behaviors that contribute to the state’s economic development. Some of the commonly available corporate income tax credits in Massachusetts include:

Research Credit:

This credit encourages businesses to invest in research and development activities within the state. Eligible expenses may include wages, supplies, and contract research expenses.

Investment Tax Credit:

Businesses making qualifying investments in tangible depreciable property, such as machinery or equipment, may be eligible for this credit. It aims to stimulate capital investment and job creation.

Brownfields Credit:

Businesses involved in the environmental cleanup and redevelopment of contaminated properties may qualify for the Brownfields Credit. This credit helps offset the costs associated with cleaning up and revitalizing such sites.

Low-Income Housing Credit:

This credit supports businesses that invest in the development of affordable housing projects. It helps address the state’s housing needs by providing incentives for the construction and renovation of low-income housing.

Film Production Credit:

Massachusetts offers tax credits to encourage film and television production within the state. Eligible productions can receive credits based on qualified expenditures.

Economic Opportunity Area Credit:

Businesses located in designated Economic Opportunity Areas may qualify for this credit, which aims to stimulate economic development in specific regions of the state.

Life Sciences Credit:

Companies engaged in life sciences activities, including research, development, and manufacturing, may be eligible for this credit. It supports the growth of the life sciences industry in Massachusetts.

Work Opportunity Credit:

This federal credit is available to businesses hiring employees from certain targeted groups facing barriers to employment, such as veterans and individuals receiving government assistance.

Massachusetts Excise Tax

In Massachusetts, corporations engaged in business are subject to a corporate excise tax, which combines net income and either tangible property or net worth. The net income component is based on federal gross income with specific additions and deductions allowed by the Internal Revenue Code. Deductions like straight-line depreciation are considered part of the basic structure, while accelerated depreciation deductions are treated as tax expenditures. Corporations meeting certain criteria are taxed on tangible property value, while others are taxed based on net worth.

Banks, security corporations, utility corporations, and insurance companies have distinct tax methods. However, tax expenditures applicable to them are included in this context if they benefit from federal and state tax expenditures based on net income. Each corporation is treated as a separate taxpayer, and the effective excise rate is 9.5% of net income apportioned to Massachusetts, with additional taxation on tangible property or net worth. The minimum tax is $456.

Corporations follow either the calendar year or fiscal year as the taxable period, making estimated payments every three months. They adopt federal accounting periods and methods, allowing net operating loss carry-forwards for up to five years. Domestic and foreign corporations conducting business or owning property in Massachusetts are subject to the corporate excise. Corporations with both in-state and out-of-state operations can apportion net income based on a formula involving property, payroll, and sales proportions in Massachusetts. Alternate accounting methods may be considered under certain circumstances.

How is the Massachusetts excise tax calculated?

Similar to personal income tax, the corporate excise undergoes various modifications leading to tax expenditures. Gross income, the starting point for corporate excise calculation, may exclude certain income permanently, creating tax expenditures. Deferring gross income to a later year results in an interest-free loan from the state, constituting a tax expenditure. Deductions from gross income, representing business expenses, are not tax expenditures, but other deductions allowing income to escape taxation permanently qualify as such.

Accelerated deductions enable corporations to deduct expenses earlier than standard accounting principles, deferring taxes and acting as an interest-free loan. Adjusting the apportionment formula for businesses earning income both inside and outside the Commonwealth leads to tax expenditures, excluding a portion of income from taxation. Exclusions from the property component of the excise, based on property value, also generate tax expenditures.

Credits against tax allow corporations to subtract specific credit amounts from their basic tax liability, resulting in direct tax savings. In cases where a business or entity is entirely exempt from taxation, untaxed business or investment income constitutes tax expenditures.

What is the Massachusetts Sales Tax Rate?

The Massachusetts sales tax, set at 6.25%, applies to the sales price or rental charge of tangible personal property, telecommunications services, gas, electricity, and steam sold or rented in the state. Buyers pay the sales tax directly to vendors at the time of purchase, and vendors subsequently remit the tax to Massachusetts. For motor vehicle and trailer sales, the buyer pays the sales tax directly to the state.

Telecommunications services encompass various transmissions of information, excluding cable television and Internet access, which are exempt. The use tax, also at 6.25%, applies to tangible personal property or certain telecommunications services when no or a lower sales tax was paid, and the items are intended for use, storage, or consumption in Massachusetts.

Vendors, including those engaged in sales, leases, or rentals of tangible personal property or telecommunications services, are responsible for registering with the Department of Revenue (DOR) to collect sales/use tax. Vendors must collect and separately state the sales/use tax on invoices, bills, displays, or contracts and remit it to the DOR with the appropriate returns. Out-of-state vendors with defined criteria share similar responsibilities to in-state vendors.

Records must be maintained for at least three years, including gross receipts, sales/use tax returns, exempt certificates, and supporting information. Vendors must also file for bad debt reimbursement annually. Occasional out-of-state purchasers, not registered to collect sales/use tax, may file Business Use Tax Return (Form ST-10) or Individual Use Tax Return (Form ST-11) to pay use tax on occasional out-of-state purchases for business or personal use. The use tax credit applies for sales tax paid to another state with a reciprocal agreement, up to the Massachusetts rate. If the other state’s rate is lower, the Massachusetts use tax is the difference between the rates. No credit applies for states without a reciprocal agreement.

How is Sales Tax Nexus Triggered for Massachusetts?

In Massachusetts, sellers establish sales tax nexus if they have:

• An office, place of business, or owned property
• An employee present for more than two days per year
• Goods stored in a warehouse
• Ownership of real or personal property
• A sample or display area
• Delivery of property or performance of service
• Economic nexus (vendors with over $500,000 in sales and more than 100 transactions in the preceding calendar year)

Regarding taxable items, tangible products are generally taxable, while most services are not unless the service creates or manufactures a product. Exceptions include clothing under $175, most non-restaurant food and groceries, specific healthcare and sanitation items, prescribed medical devices, and periodicals.

What Transactions are Included or Excluded from Sales Tax?

In Massachusetts, sales tax generally applies to retail sales of tangible personal property and certain services. Here’s an overview of what transactions are included or excluded from sales tax:

Included (Taxable):

• Tangible Personal Property: Most retail sales of tangible personal property are subject to sales tax. This includes items like electronics, furniture, clothing (if over $175), and other physical goods.
• Services that Create or Manufacture Products: Services that result in the creation or manufacturing of a product are generally taxable. For example, if a service involves creating a custom item for a customer, it may be subject to sales tax.

Excluded (Non-Taxable):

• Clothing under $175: Clothing items with a value of $175 or less per item are generally exempt from sales tax.
• Most Non-Restaurant Food and Groceries: Sales of most food products for human consumption in grocery stores are not subject to sales tax. However, prepared meals from restaurants are taxable.
• Specific Healthcare and Sanitation Items: Certain healthcare and sanitation items may be exempt from sales tax. This can include items like prescription drugs, medical supplies, and hygiene products.
• Prescribed Medical Devices: Sales of prescribed medical devices are generally exempt from sales tax.
• Periodicals: Sales of newspapers and magazines are generally exempt from sales tax.

Are Services Taxed for Sales Tax?

In general, services are not taxed in Massachusetts, but certain service transactions in Massachusetts is governed by specific rules. Here’s a breakdown:

Non-Taxable Service Transactions:

• Service Itself with No Transfer of Property: If the primary focus of the transaction is the service itself, without any transfer of tangible personal property, it is not subject to sales tax.
• Inconsequential Transfer of Property: If the service transaction involves an inconsequential transfer of property, and the service enterprise doesn’t separately state the property’s purchase price on the customer’s bill, it is not subject to sales tax. Instead, the service enterprise pays the tax when purchasing the property.

Taxable Service Transactions:

• Separately Stated Charge for Tangible Personal Property: If the service transaction includes a separately stated charge for tangible personal property, it is subject to sales tax.
• Inconsequential Value of Property: If the transfer of tangible personal property occurs, and the value of the property is not inconsequential in relation to the total charge, and the charge for the property is not separately stated, the entire combined charge is taxable.

Examples:

• Inconsequential Transfer: A sewing machine repair service charges $21.00 for cleaning and overhauling, including a worn belt worth $1.00. Since the value of the belt is inconsequential, and it’s not separately stated, no tax is collected from the customer. The service enterprise pays the sales tax when purchasing the belt.
• Separately Stated Charge: A plumber replaces a faucet for $35.00, stating $15.00 for the faucet and $20.00 for labor. The sales tax applies to the charge for the faucet, and the plumbing enterprise collects the tax from the customer.

Fabrication:

Any substantial alteration in the form or substance of tangible personal property, where materials are furnished by either party, is considered fabrication and is subject to sales tax.

Use of Resale Certificates:

• A service enterprise that sells tangible personal property in the regular course of business collects sales tax.
• If a resale certificate is used when purchasing property for resale, and it’s later used in a service transaction without a separately stated charge, the service enterprise pays the sales tax.
• If a service enterprise pays sales tax on purchased property and resells it, the enterprise collects the tax from the customer. The service enterprise may seek a refund from its vendor using a resale certificate.

Specific Applications:

• Different rules apply to specific service providers (e.g., repairers, barbers, linen services).
• Service contracts for repairs are generally not subject to sales tax, but tangible personal property provided under a service contract may be taxable.
• Service enterprises that sell property separately must collect sales tax even if they paid tax on the purchase.

These rules ensure clarity and fairness in the taxation of service transactions in Massachusetts.

Is SaaS Taxable for Sales Tax?

Massachusetts maintains that even when a software vendor provides the user with the option to securely access the software on the vendor’s server via the Internet, the functionality of the software remains unchanged. Consequently, the essence of the transaction is the utilization of the software. Requirements for prewritten software are still subject to sales and use tax, irrespective of the delivery method (physical medium, downloadable, or accessed online) or the transfer of possession or control.

Exemption for Sales of Custom Software:

Sales of custom software are generally exempt from sales tax, treated as professional service transactions, regardless of the delivery method.

Professional Service Transactions:

A professional service transaction for custom software occurs when the purchaser’s primary objective is the professional and personal services of a programmer or systems analyst. The cost of the magnetic media used is inconsequential to the overall transaction cost. The medium’s cost is the price paid by the programmer, without considering any improvements made.

Definition of “Inconsequential Element”:

The term “inconsequential element” typically refers to a cost of less than ten percent of the total contract price. This definition serves as a guideline, subject to variations based on the specific circumstances of each transaction.

Custom Modifications to Prewritten Software:

Sales of custom modifications to prewritten software are generally not taxable if the sales price of the prewritten software and the custom modification charges are separately stated. Charges must be reasonably allocated and determined in good faith. Separately stated charges should be evident on the bill or invoice presented to the customer and in the vendor’s records. The sales price of the original prewritten software is subject to tax.

Documentation Regarding Costs of Tangible Personal Property:

The vendor or purchaser may declare in transaction documents that the estimated cost of tangible personal property related to a custom modification transaction is an inconsequential element of the entire transaction. This statement does not constitute a separate statement of the property’s cost. The estimated cost of tangible personal property, as declared, is not taxable solely based on this statement.

Custom Software Sold to Subsequent Purchasers:

If custom software sold to a single purchaser is later sold to others, the subsequent sales are treated as sales of prewritten software. However, the sale of custom software to a subsequent purchaser meeting the requirements for a custom modification is not taxable under these regulations.

Frequently Asked Questions (FAQ’s) – Massachusetts Taxes

What is the Massachusetts Corporate Income Tax Rate?

Massachusetts imposes a corporate excise tax on businesses, and the rates vary based on income and net worth. For traditional corporations, it includes an 8.00% tax on Massachusetts-attributable income and a tax on tangible personal property or net worth.

Is there a Corporate Minimum Tax in Massachusetts?

Yes, there is a minimum excise tax of $456 for corporations, with separate tax regimes for manufacturers, securities corporations, and financial institutions.

When is the State Corporate Income Tax Return Due?

C corporations in Massachusetts must file their tax returns by the 15th day of the fourth month after the end of each taxable year. The deadline for S corporation tax returns is the 15th day of the third month after the close of each taxable year.

How is State Income Tax Nexus Triggered?

Nexus, or a business’s connection to Massachusetts, can be established through various criteria, including physical presence, solicitation, retail market exploitation, property ownership, employee presence, and achieving in-state sales thresholds.

What is GILTI Tax in Massachusetts?

GILTI (Global Intangible Low-Taxed Income) is a category of foreign income included in a company’s taxable income. In Massachusetts, GILTI is treated as a dividend, eligible for a 95% deduction, with 5% subject to tax.

Are There Massachusetts Income Tax Credits Available?

Yes, there are income tax credits available in Massachusetts. These credits allow corporations to subtract specific amounts from their basic tax liability, resulting in direct tax savings.

What is the Massachusetts Sales Tax Rate?

The Massachusetts sales tax rate is 6.25%, applying to the sales price or rental charge of tangible personal property, telecommunications services, gas, electricity, and steam. Specific rules and exemptions apply to different transactions.

Is SaaS Taxable for Sales Tax in Massachusetts?

Yes, even if a software vendor provides users with the option to access the software via the Internet, the functionality remains the same. Prewritten software is subject to sales and use tax, with exemptions for sales of custom software considered professional service transactions.