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On Oct. 18, 2019, the Massachusetts Department of Revenue promulgated updates to its corporate nexus regulation.1
Notably, the updated regulation formally adopts economic nexus for corporate excise tax purposes, including a presumption of nexus for corporations with Massachusetts sales exceeding $500,000 in a taxable year. The updated regulation also explains the circumstances where financial institutions, insurance companies and corporate partners will be subject to tax in Massachusetts.
Economic nexus updates
The most notable change to the Department’s longstanding regulation governing corporate nexus is the explicit adoption of economic or virtual nexus principles. The Department’s summary of the amended regulation provides that the “regulation has been updated to reflect statutory changes” and “decisions in both state and federal courts that have impacted the rules in this area since the regulation was promulgated in 1993.”2
Furthermore, the summary explains that the regulation also was updated to reflect South Dakota v. Wayfair, Inc
The Department has contended that nexus for corporate excise tax purposes can be created even without physical presence since at least 1996 when the Department’s Commissioner of Revenue issued Directive 96-2.4
This stance was upheld by the Massachusetts Supreme Judicial Court in two separate decisions in 2009.5
As noted above, the Commissioner has historically applied economic nexus principles, but the amended regulation marks the first time that such principles have been explicitly promulgated in a regulation. Activities specifically detailed as creating nexus now include: (1) generating receipts from the purposeful ownership or use of intangible property within the state; or (2) deriving considerable in-state sales through either economic or virtual contacts.6
Absent from a draft version of the regulation released in May, the promulgated version includes language indicating a presumption of nexus where the volume of a corporation’s in-state sales exceed $500,000 for a taxable year.7
Such change marks the first time the Department has instituted a “bright-line” economic nexus standard for the corporate excise tax. In-state sales in this context are defined as those attributable to Massachusetts under the sales factor calculated by taxpayers for apportionment purposes.8
With respect to the nexus presumption, it is important to note that the regulation indicates that the Commissioner will aggregate receipts of unitary entities in determining whether the threshold has been met.9
Finally, it does not appear that taxpayers have a method to rebut the Commissioner’s presumption regarding the “bright-line” test.
Employee, representative and independent contractor activities
The new regulation also provides clarification regarding how employee or representative visits create nexus for corporate excise tax purposes. Specifically, where such visits are “lengthy, continuous, regular or systematic,” the employing or directing corporation will be subject to tax.10
However, even if visits do not rise to such level, they can still create nexus for a corporation if employees provide management, technical oversight, or other business assistance to related entities.11
Despite this new guidance, the regulation indicates that the circumstances above are specific examples and do not necessarily represent all circumstances where visits may subject a corporation to corporate excise tax.12
Specifically, the regulation notes that the Commissioner will consider both the nature of the visits at issue as well as the benefits gained by a corporation from such visits when determining whether nexus exists.13
Noticeably absent from the updated regulation is an exception for the activities of independent contractors performed on behalf of corporations. Previously, the regulation indicated that corporations were not subject to the corporate excise tax if its activities in-state were limited to the outsourcing of activities to an independent contractor as stringently defined. The updated regulation specifically indicates that independent contractors conducting business in the state on behalf of a corporation will create nexus.14
Further, the definition of “representative” has been expanded to include independent contractors.15
Therefore, visits of independent contractors on behalf of corporations are subject to the previously discussed guidance on employee and representative visits.
Financial institution tax jurisdiction
While the historic Department corporate nexus regulation only addressed the circumstances where a corporation was subject to corporate excise tax, the updated regulation details the activities that will generally subject an eligible entity to the Massachusetts financial institution excise tax. Such activities include, without limitation, many of the same activities that would subject a corporation to tax such as employees or representatives conducting business on behalf of the financial institution.16
However, nexus-creating activities only applicable to financial institutions include: (1) regularly receiving interest income from loans secured by tangible personal or real property located in the state, or (2) regularly soliciting and receiving deposits from customers in the state.17
Similar to the new sales threshold imposed for corporate excise tax purposes, the Commissioner will presume the activities noted above are conducted regularly if a financial institution engaging in activities that do not require physical presence has more than $500,000 of receipts attributable to sources within the state.18
However, the following will also create a presumption that the activities referenced above of the financial institution are conducted regularly: (1) any such activities are conducted with 100 or more in-state residents, or (2) the financial institution has $10,000,000 or more of assets attributable to sources within the state.19
While it does not appear that corporate excise taxpayers may rebut the Commissioner’s presumption related to the previously discussed “bright-line” threshold, the regulation indicates that financial institutions may seek to rebut the Commissioner’s presumptions in this context.20
The regulation also now indicates that the Commissioner will construe statutory standards for insurance company premiums taxes to the fullest extent permitted by the U.S. Constitution and federal law.21
Additionally, now absent from the regulation are a number of exceptions for de minimis
limited partner interest and for non-Massachusetts corporations with limited partner interests in partnerships exclusively dealing in securities.22
Finally, the new regulation no longer indicates that the imputation of partnership activities to corporate partners will be done on a proportional basis.23
Taxpayers and practitioners alike will need to consider the issues raised by the updated language in the Department’s nexus regulation. One such issue is the application of the new nexus standard in determining whether a taxpayer is “taxable in another state(s)” for purposes of determining whether it has a requirement to apportion income on its Massachusetts return and whether “throwback” or “throwout” rules are applicable.
Additionally, the regulation contains no transition rules or clarity regarding taxable years to which it is applicable. While it is effective as of the Oct. 18, 2019, promulgation date, it is unclear whether the new standards may apply to taxable years ending prior to such date. The potential for retroactivity could be beneficial to some taxpayers, and lead to exposure for others. The state itself has noted that economic nexus is not a new concept in Massachusetts, but rather has just now been more clearly defined.
Finally, taxpayers should be aware that the regulation is only applicable to corporations. Although the regulation details how the activities of a partnership may be imputed to corporate partners, partnerships are subject to separate provisions governing when such entities must file tax returns in Massachusetts.
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