Massachusetts State and Local Tax Update—First Quarter 2023

The most significant Massachusetts tax decision for the first quarter of 2023 came from the Massachusetts Supreme Judicial Court and dealt with an urban renewal tax exemption. The Appeals Court and the Appellate Tax Board each discussed property tax exemption requirements for charitable organizations. And the Department of Revenue issued a couple of helpful releases addressing a code update and the application of the use tax to truck fleets.

In Reagan v. Commissioner of Revenue, the Supreme Judicial Court addressed the scope of a tax concession granted to projects undertaken in urban renewal zones. Massachusetts General Laws Chapter 121A provides a tax exemption for up to 40 years as an incentive for private entities to invest in constructing, operating, and maintaining urban redevelopment projects in areas that have become deteriorated, unsightly, and often dangerous. The relevant statutory language provides that investors are exempt from the payment of any tax “on account of a project.”

The appellant was the sole beneficiary of a nominee trust that owned minority limited partnership interests in three partnerships. Each partnership undertook an urban redevelopment project that qualified for the exemption.

Prior to the end of the 40-year exemption period, the partnership interests were sold to unrelated buyers resulting in capital gains for the appellant. The appellant disclosed his distributive share of the capital gains in his Massachusetts income tax return but took the position that the gains were not taxable because they were “on account of” the Chapter 121A projects.

The Appellate Tax Board determined that once the appellant sold his interests in the partnerships, the projects ceased to exist within the meaning of the statute and the exemption was no longer available to the appellant. The Supreme Judicial Court disagreed, reversing the board’s decision.

The legislative purpose behind the exemption was to encourage private entities to invest in blighted areas. The possibility of realizing a capital gain undeniably is a consideration for real estate developers deciding whether to invest in such areas. A restrictive interpretation of the statute to exclude capital gain income would only serve to defeat the legislative goal of spurring private investment. Accordingly, the court construed the words “on account of” to include the capital gain from the sale of a project.

The appellants in Unquity House Corporation v. Board of Assessors of Milton were organized to provide nonprofit housing for needy elderly persons. They argued that they were entitled to a local property tax exemption because they operated as a traditional public charity and their occupancy of the properties advanced the good, lessened the burden on government, and benefited a sufficiently large and fluid segment of the population.

In Massachusetts, real estate owned by a charitable organization and occupied by the organization to serve its charitable purposes is exempt from taxation. The Massachusetts Appeals Court affirmed the decision of the Appellate Tax Board that the appellants failed to demonstrate they were entitled to the exemption because their relationship with their residents was essentially that of landlord to tenant.

All residents qualified for and received federal rental subsidies and if a resident’s subsidy ceased, the lease automatically terminated. Moreover, the appellants didn’t demonstrate that they regularly performed charitable services for the benefit of their residents, or even whether most residents required such services.

In Westfield Museum, Inc. v. Board of Assessors of Westfield, the appellant was a nonprofit organization that purchased an old whip manufacturing factory building that it planned to convert into a public museum.

The Appellate Tax Board found that the appellant wasn’t eligible for tax-exempt status because it didn’t occupy the subject property for charitable purposes during the tax year at issue. It didn’t open a museum or use the subject property to offer educational programs to the public as intended. To hold otherwise, according to the board, might result in exemption for any taxpayer with a storage facility and indefinite plans to use stored items in a charitable endeavor at some future date.

Technical Information Release 23-5 explains the implications of recent legislation conforming Massachusetts General Laws Chapter 62 to the tax code as amended on Jan. 1, 2022. Chapter 62 defines Massachusetts gross income based on the definition of federal gross income under the tax code. Similarly, many of the deductions and exemptions allowed to offset Massachusetts gross income are determined by reference to the tax code.

Department Directive 23-1 sets forth a de minimis standard for the application of the use tax to the sale of rolling stock. The retail sale of tangible personal property in Massachusetts is, in general, subject to tax. (See Massachusetts General Laws Chapter 64H, Section 2.)

The Massachusetts use tax complements the Massachusetts sales tax and is imposed on the purchase of tangible personal property for use, storage, or other consumption in Massachusetts. (See Massachusetts General Laws Chapter 64I, Section 2.) The sale of so-called “rolling stock,” like the sale of other tangible personal property, is taxable in Massachusetts. Rolling stock generally consists of trucks, commonly referred to as tractors, and the storage trailers attached to the tractors.

Rolling stock purchased or leased in another state is generally subject to the Massachusetts use tax when stored or used in Massachusetts, regardless of whether such rolling stock was registered in the other state. A taxpayer is allowed a credit against this tax if the taxpayer has paid tax to the other state and that state allows a corresponding credit with respect to Massachusetts sales tax paid on property brought into that other state.

Where a taxpayer demonstrates that rolling stock owned or leased for at least 12 months was used or stored in Massachusetts for no more than six days during a 12-month period, the Commissioner of Revenue will consider the in-state use to be de minimis and won’t impose use tax on the use or storage of the rolling stock in Massachusetts for that period.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, 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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