Massachusetts Department of Revenue adopts apportionment regulation changes to address market-based sourcing principles required by statute

The Massachusetts Department of Revenue has released a final version of the regulation addressing the apportionment of income, which is effective for tax years beginning on or after Jan. 1, 2014. Primarily, the regulation has been updated to address the statutory adoption of market-based sourcing for sales of intangibles and services (i.e., items other than tangible personal property). Prior to the change, sales of some intangibles and services were sourced to the location of a taxpayer’s income-producing activity, based on costs of performance. Under the prior regulations, Massachusetts-based services companies with clients in other states often allocated significant amounts of sales and taxable income to Massachusetts. Under the new regulations, Massachusetts-based services companies with clients in other states may see a reduction in the amount of sales and taxable income allocated to Massachusetts.

Massachusetts taxpayers should understand how the new sourcing rules might impact their annual income tax return filings, as well as their income tax provisions for financial statement purposes. While some Massachusetts-based companies could benefit from the imposition of the new provisions, many taxpayers based outside the state could see a significant increase in their Massachusetts corporate excise tax liability. Because the new law also contains a throwout provision for sales that are sourced to states in which taxpayers are not taxable, additional negative consequences could result for many.  

The final regulation is voluminous and complex, containing various sourcing rules that require classification of taxpayers’ specific revenue streams. Also, the regulation imposes due diligence requirements upon taxpayers that must be met. Grant Thornton LLP will be issuing an in-depth publication analyzing the new regulation that will address many of the nuances and identify potential issues that are likely to arise.

If you have any questions regarding this regulation, or specifically regarding its potential impact on your business, please contact us.