Massachusetts State and Local Tax Update—Third Quarter 2023

The most significant tax development in Massachusetts for the third quarter, and perhaps in all of 2023, may be the adoption of single sales tax apportionment, which reduces tax burdens for businesses that have most of their property and payroll—but only a small part of their national sales—in a given state.

Previously, only manufacturers and mutual fund service corporations could exclude the property and payroll factors from the calculation of their Massachusetts apportionment percentage.

The change is effective for tax years beginning Jan. 1, 2025. Corporations no longer will have to prove they’re conducting substantial manufacturing activities, as defined in the Commissioner of Revenue’s regulations, to qualify for single sales treatment.

Manufacturers will still enjoy sales tax and local property tax exemptions, as well as the investment tax credit, to the extent they’re conducting manufacturing activities in Massachusetts.

Standardized Software

The Department of Revenue’s Technical Information Release 23-8, released in July, attempts to narrow the scope of a 2021 decision, effectively restating its long-held view that whether a corporation is selling services or standardized software will depend on the circumstances of each case.

Some companies doing business in Massachusetts have struggled to figure out whether they’re selling taxable pre-written software or providing a non-taxable service where the principal object of the purchaser is the professional and personal services provided, rather than software itself.

The distinction was important before the 2021 law change because the development of pre-written software was considered manufacturing. Certain taxpayers would have to weigh the corporate excise benefits of single sales apportionment (and manufacturing status) versus the tax savings from sales of non-taxable services. Because single sales apportionment will be available to all corporations, taxpayers may be more inclined to argue they’re selling a non-taxable service.

In 2021, the Appellate Tax Board held that Akamai Technologies Inc. should have been classified as a manufacturing corporation for purposes of local property taxation and treated as engaged in manufacturing for purposes of the corporate excise. The applicable statute provides that the development and sale of standardized computer software was considered a manufacturing activity.

The Commissioner of Revenue had unsuccessfully argued that Akamai sold a content delivery service rather than a software product.

Urban Redevelopment

Another technical information release is connected to the Supreme Judicial Court’s decision earlier this year in Reagan v. Commissioner of Revenue.

The capital gain from the sale of an urban redevelopment project, under Massachusetts General Law Chapter 121A, Section 18C, was declared tax exempt because, while realized upon a sale of the project, it was held to be “on account of the project.”

Technical Information Release 23-9 states that when a taxpayer’s capital gain on the sale of a project is causally connected to the project, that gain is exempt from tax under Chapter 121A if the sale is within the statutory exemption period.

Tax Abatement

In Bernard Kamiri v. Commissioner of Revenue, the Appellate Tax Board dismissed the appeal of a taxpayer who failed to bring the action within the statutory time limits, following the denial of his application for abatement of tax.

General Law Chapter 62C, Section 39 provides that any person aggrieved by the refusal of the commissioner to abate a tax may appeal within 60 days after the notice of the decision of the commissioner by filing a petition with the Appellate Tax Board. The abatement remedy is created by statute, and the board has no jurisdiction to hear an appeal filed later than authorized by Section 39.

In this case, the taxpayer waited more than 500 days after receiving notice that the abatement application had been denied before filing his appeal. If a taxpayer misses a deadline, the appeal will be dismissed. Neither the courts nor the board has the authority to make an exception to the time limits that are specified by statute.

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 Davis Malm, focused on state and local tax consulting and litigation, with over 25 years litigating and resolving major tax controversies before courts and administrative boards.

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