October 5, 2023
Massachusetts governor signs bill that adopts single sales factor apportionment, reduces short-term capital gains tax rate, makes other tax changes
On October 4, 2023, Massachusetts Governor Maura Healey signed into law H. 4104,1 a $951 million tax package containing various tax changes affecting businesses and individuals. Key changes include (1) adopting a single sales factor apportionment formula for all industries; (2) changing how financial institutions source receipts from investment and trading activity for sales factor purposes; and (3) reducing the short-term capital gains rate for personal income tax purposes from 12% to 8.5%.
Single sales factor apportionment
Massachusetts currently requires manufacturing companies, qualifying defense contractors and qualifying mutual fund service corporations to use a single sales factor apportionment formula for Corporate Excise Tax purposes. Beginning January 1, 2025, a single sales factor apportionment formula applies to all industries, with express application to financial institutions. If both the numerator and the denominator are zero, then the corporation's net income will be fully taxable in the state.
Financial institutions' calculation of receipts from investments and trading
Starting in 2025, H. 4104 changes how financial institutions source receipts from interest, dividends, net gains, other income from investment assets and activities, and income from trading assets.2 Currently, those receipts are sourced to the taxpayer's regular place of business. H. 4104 changes this to a fraction that is based on other receipts — which generally follow the location of the property, customer or borrower. Specifically, Section 2A(d)(xii)(B) will require financial institutions to determine income from assets and activities attributable to Massachusetts and included in the numerator of the receipts factor by multiplying that income by a fraction. The numerator of this fraction equals the total receipts described in Mass. G.L. ch. 63, Section 2A(d)(i) through (x), inclusive, and (xii). The denominator equals the taxpayer's total receipts excluding (1) interest, dividends, net gains (but not less than zero), (2) other income from investment assets and activities, and (3) other income from trading assets and activities.
If the statute's application does not reasonably approximate a financial institution's net income from business carried on in Massachusetts, the financial institution can apply to the commissioner to use, or the commissioner may require use of, an alternative method to determine net income.
Short-term capital gains rate
For individual income tax purposes, H. 4104 reduces the short-term capital gains tax rate, which applies to capital assets held for one year or less, to 8.5% (from 12%). This change is effective for tax years beginning on or after January 1, 2023.
Other tax changes
H. 4104 enhances various tax credits as follow:
Among other changes, H. 4104:
Before Massachusetts adopted "market-based sourcing" for sales "other than sales of tangible personal property" in 2014, it applied a "cost of performance" method. With its adoption of a single sales factor apportionment, coupled with its prior switch in sourcing methods, Massachusetts has now joined many other states that have adopted both a single sales factor apportionment formula and market-based sourcing. As a general matter, single sales factor apportionment favors companies that have physical capital or employees located in Massachusetts. Conversely, those companies whose activities in Massachusetts are limited to sales could experience a tax increase to the extent such sales are disproportionately focused on Massachusetts customers. To enhance the impact for financial institutions, the law also changes the sales factor sourcing rule for receipts from investments and trading and purports to implement an approach more consistent with market-based sourcing. Affected taxpayers should evaluate these changes to determine their impact.
With the move to single sales factor apportionment for all industries, corporations that manufacture in Massachusetts need to keep in mind that they must continue to qualify as a manufacturing corporation under M.G.L ch. 62 s. 42B to claim certain property and sales/use tax exemptions and the investment tax credit.
The reduction to the short-term capital gains rate is a welcome development for individual taxpayers subject to the 4% surtax on individual income over $1 million — but does not go as far as the original proposals, which would have reduced the rate to 5%. The surtax3 was established as a change to the Massachusetts Constitution via a ballot measure approved by voters in November 2022, and it was codified by the budget bill (HB 4040), enacted on August 9, 2023.
The Massachusetts Department of Revenue recently issued draft guidance on the surtax. While addressing the application of the tax for Ch. 62 resident and nonresident taxpayers, the draft guidance does not address partnership nonresident withholding tax under Ch. 62B or the elective pass-through entity excise tax under Ch. 63D. Interested parties should consider submitting comments on the draft guidance.
Finally, requiring couples to file a Massachusetts personal income tax return on a joint basis when they filed a joint return for federal income tax purposes will reduce potential planning by taxpayers that could mitigate some of the impact of the 4% millionaire surcharge.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor
1 Reported on a part of H. 3370.
2 Current Section 2A(d)(xii)(A) was not changed, but Section 2A(d)(xii)(C) through (E) will be eliminated.
3 The surtax was established via a ballot measure approved by voters in November 2022. See Tax Alert 2022-1750.