Massachusetts court rules on excise tax apportionment


Rob Michaelis 
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Patrick Drennen
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Erin Shea
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Jamie C. Yesnowitz
Washington D.C. 
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Chuck Jones
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Lori Stolly
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The Massachusetts Court of Appeals recently affirmed a decision of the Appellate Tax Board finding that subsidiaries of a cable and Internet provider were not engaged in a national operation for purposes of determining apportionment of corporate excise taxes.1 At issue in the appeal was the proper determination of the income-producing activity of the subsidiaries and application of the Massachusetts “cost of performance” sales factor apportionment regime that was used for tax years beginning before Jan. 1, 2014.

Background In 2002, Comcast Corporation (Comcast) acquired a number of entities (“Franchise Subsidiaries”) through its purchase of AT&T Broadband. Each Franchise Subsidiary held one or more licenses granting the right to offer cable television services in specific Massachusetts cities and towns. The decentralization of the licenses across many separate legal entities resulted from the development of the cable industry through consolidations and acquisitions. Despite the fact that specific Franchise Subsidiaries held the right to offer services in specific cities or towns, these entities subcontracted the provision of video, Internet, and telephone services to other Comcast affiliates which utilized a single national network.

The Franchise Subsidiaries filed combined Massachusetts corporate excise tax returns for the 2003-2008 tax years.2 On such returns, the Franchise Subsidiaries included all receipts from subscribers located in Massachusetts in the sales factor numerator for apportionment purposes. Comcast determined that this approach was in error because the cost of performance for the services was greater outside Massachusetts.3 On Nov. 29, 2010, Comcast and the Franchise Subsidiaries filed amended returns for the 2003-2008 tax years claiming refunds totalling more than $93 million. After the Massachusetts Commissioner of Revenue denied the refund requests, Comcast filed an appeal with the Massachusetts Appellate Tax Board.

Appellate Tax Board hearing At the Appellate Tax Board hearing, Comcast argued that the income-producing activity of the Franchise Subsidiaries was the operation of a national enterprise and that the costs of performance for the operation were greater outside Massachusetts.4 Supporting this argument, Comcast presented evidence that:

  • National leadership of the cable operations, including the determination of national strategy, was located in Pennsylvania
  • The Franchise Subsidiaries relied on a complicated national network to provide the cable and Internet services to Massachusetts subscribers
  • The acquisition of the content provided to Massachusetts subscribers occurred in Pennsylvania
  • The officers of the Franchise Subsidiaries and the leadership of the division under which the Franchise Subsidiaries was included were located in New Hampshire
  • The Massachusetts localities granting licenses to the Franchise Subsidiaries considered the operations of the entire Comcast affiliated group when making determinations regarding the licenses
  • The Franchise Subsidiaries participated in shared personnel/facilities agreements under which Comcast affiliates provided services to customers under a cost-sharing arrangement
  • The Franchise Subsidiaries also participated in management service agreements under which Comcast affiliates provided services to Franchise Subsidiaries based upon a revenue sharing arrangement
  • Comcast management took a national approach to its business and generally did not view the Franchise Subsidiaries as separate entities when making decisions about how to run the business.

In fact, Comcast commissioned a cost of performance study which concluded that the costs of performance of the income-producing activities for most of the Franchise Subsidiaries were greater outside Massachusetts than in Massachusetts for most of the years at issue. 

The Commissioner argued that the income-producing activity of the Franchise Subsidiaries was the provision of video and Internet services to Massachusetts subscribers. However, the Commissioner asserted that the Franchise Subsidiaries had no direct costs of providing such services other than the costs incurred under the individual license agreements with the Massachusetts cities and towns. Further, the Commissioner contended that despite the arguments presented by Comcast with respect to the provision of video services, Comcast provided no substantiation that any costs to provide Internet services occurred outside Massachusetts. 

The Board ultimately concluded that Comcast failed to establish that the sales factors as originally filed by the Franchise Subsidiaries were in error. In fact, the Board ruled that neither Comcast nor the Commissioner correctly identified the income-producing activity of the Franchise Subsidiaries. According to the Board, the only activity directly engaged in by the Franchise Subsidiaries that resulted in income was operating as a licensee with the Massachusetts cities and towns. Specifically, the Board determined that each license agreement was an individual transaction. The provision of any services to Massachusetts subscribers was contracted out to other affiliates of Comcast. Given these facts, the Board explained that even if the income-producing activity of the Franchise Subsidiaries was a procedure or operation, such procedure or operation was entirely performed in Massachusetts and Comcast would not have the right to apportion. Further, if the income-producing activity was performed within and outside the state, the Board found that the cost allocation methodology presented by Comcast was too arbitrary to be respected. Therefore, the Board was not convinced that any allocated costs were directly incurred by the Franchise Subsidiaries. After the Board affirmed the Commissioner’s decision, Comcast filed an appeal with the Massachusetts Court of Appeals. 

Appeals Court decision In a summary decision, the Massachusetts Court of Appeals ruled that the Board did not err in using a transactional approach to determine the income-producing activity of the Franchise Subsidiaries. As the regulations detailed that the income-producing activity could be a transaction or operation,5 the Court noted that an operational approach is not guaranteed. Further, the Court determined that the Board provided adequate reasoning for using a transactional approach. Given the facts of the case, Comcast could not support an operational approach for determining the income-producing activity because the Franchise Subsidiaries did not engage in operations according to the Court. Instead, the only transaction of the Franchise Subsidiaries was the entering into of the license agreements with the Massachusetts cities and towns. Because such income-producing activity only occurred in Massachusetts, the Court ruled that the there was no improper application of the law or unreasonable application by the Board based on the facts presented. 

Commentary The finding in this case highlights how the determination of an income-producing activity under either a “transactional” or “operational” approach under Massachusetts law is dependent on the facts of each individual case. A determinative element of this case was the fact that Comcast did not merge the Franchise Subsidiaries into the entities providing services to Massachusetts subscribers, but rather chose to operate the Franchise Subsidiaries as separate legal entities. If Comcast had merged the entities when acquired, the costs of providing the services for the national network might have been considered and the operational method for determining the income-producing activity might have been appropriate. In a similar case previously decided by the Massachusetts Court of Appeals, Commissioner of Revenue v. AT&T Corp., the operational method was deemed appropriate for sourcing the receipts from telephone services provided using a national network.6 In fact, representatives for Comcast testified that the holding in the AT&T case prompted the amended returns filed in the instant case. However, the Board noted that AT&T was distinguished from the facts in this case as the taxpayer in AT&T was actually providing the services to Massachusetts customers. 

It is also interesting that the Court ruled that the income-producing activity of the Franchise Subsidiaries was the act of entering into franchise license arrangements with Massachusetts cities and towns. Although such arrangements granted the right to deliver the cable service, it did not appear that such licensees guaranteed any individual was required to subscribe to Comcast services to ultimately generate income for the company. Tax years for which the cost of performance regime was in effect are likely quickly closing under the statute of limitations, but taxpayers with open tax years should be aware that the legal form of their business may have a significant impact on the application of the cost of performance rules in Massachusetts. 

Comcast has pursued sales sourcing litigation in several states, with recent decisions not going their way. In 2018, the Oregon Supreme Court affirmed a decision holding that Comcast was required to apportion all of its revenue using an audience or subscriber factor in accordance with the state’s specific broadcaster apportionment statutes, rather than bifurcating its revenue streams for state apportionment purposes.7 In April 2019, the Tennessee Court of Appeals held that Comcast failed to correctly identify its income-producing activity and prove that a greater portion of its activity occurred in a state other than Tennessee for the 2006-2008 tax years.8 The Court of Appeals agreed that Comcast could use the operational approach to identify different categories of income-producing activity and then analyze each category separately. However, in affirming the trial court, the Court of Appeals held that Comcast had improperly identified five separate categories of activities “in an attempt to circumvent its tax liability.” The Court of Appeals did not suggest “an ideal list of categories,” but rejected the five categories that Comcast had used. Because Comcast did not meet its burden of proof, the Department’s assessment was presumed to be correct.

1 Comcast of Mass. I, Inc. v. Commissioner of Revenue, Mass. Ct. App., Dkt. No. 18-P-561, April 26, 2019 (summary decision).
2 During the tax years at issue, Massachusetts allowed taxpayers to file a combined corporation excise return pursuant to Mass. Gen. Laws ch. 63, § 32B. Under such a “combined” filing, each includable entity determined taxable net income separately before adding each entity’s taxable net income together to arrive at the combined net income of the group taxable under Mass. Gen. Laws ch. 63. This separate-entity calculation contrasts with the unitary-combined filing that was enacted by Massachusetts for tax years beginning on or after Jan. 1, 2009. 
3 For tax years beginning before Jan. 1, 2014, Massachusetts required service revenue to be sourced under a cost of performance methodology for purposes of determining the corporate excise tax apportionment sales factor. Under Mass. Gen. Laws ch. 63, § 38 (f), if the income-producing activity of the taxpayer was performed both within and without Massachusetts, the sale was deemed to be a Massachusetts sale for apportionment purposes if the greater proportion of the income-producing activity was performed in Massachusetts. For tax years beginning on after January 1, 2014, Massachusetts uses market-based sourcing.
4 Comcast of Massachusetts I, Inc. v. Massachusetts Commissioner of Revenue, Massachusetts Appellate Tax Board, Nos. C321986 - C321994, C322268, Nov. 10, 2017.
5 Former MASS. REGS. CODE tit. 830, § 63.38.1(9)(d). 
6 970 N.E.2d 814 (Mass. App. Ct.  2012). Following the AT&T decision, the Massachusetts Department of Revenue issued administrative guidance explaining that “[i]n general, the appropriateness of the transactional approach will depend on the nature of a taxpayer’s activity the performance of which creates an obligation of a particular customer to pay a specific consideration.” Technical Information Release 13-12: Commissioner of Revenue v. AT&T Corporation, Massachusetts Department of Revenue, Aug. 20, 2013.    
7 Comcast Corp. v. Department of Revenue, 423 P.3d 706 (Or. 2018). For further discussion of this case, see GT SALT Alert: Oregon Supreme Court Affirms Substantial Nexus and Subscriber-Based Sourcing Provisions. Oregon has adopted market-based sourcing for tax years beginning on or after January 1, 2018.   
8 Comcast Holdings Corp. v. Tennessee Department of Revenue, Tennessee of Court of Appeals, No. M2017-02250-COA-R3-CV, April 25, 2019. Note that Tennessee has adopted market-based sourcing for tax years beginning on or after July 1, 2016. 


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