General Rules

Generally, all of a corporation's taxable net income is allocated to Massachusetts if the corporation does not have income from business activity that is taxable in another state. If a corporation has income from business activity which is taxable both in Massachusetts and in another state, then its net income derived from business carried on in Massachusetts is determined by multiplying all of its taxable net income by the three factor apportionment percentage as provided in G.L. c. 63, s. 38(c)-(g) and 830 CMR 63.38.1.

Three Factor Apportionment Percentage:
Taxable income determined under G.L. c. 63, s. 38(a), which is taxable both within and without the Commonwealth, is apportioned to Massachusetts by multiplying such taxable net income by a fraction, the numerator of which is the property factor plus the payroll factor plus two times the sales factor, and the denominator of which is four. In the case of a taxpayer subject to tax under G.L. c. 62, ss. 5A or 17 (nonresident or partner in a partnership), or G.L. c. 63, s. 52A (certain utility corporations), the numerator of the fraction is the property factor plus the payroll factor plus the sales factor, and the denominator of the fraction is three.

  • Property Factor Percentage:
    The property factor is the average value of the taxpayer's real and tangible personal property owned and/or rented and used in Massachusetts during the taxable year, divided by the average value of all of its real and tangible personal property owned and/or rented and used during the taxable year.
  • Payroll Factor Percentage:
    The payroll factor is the total amount paid for compensation in Massachusetts during the taxable year by the corporation divided by the total amount paid for compensation everywhere during the taxable year by the corporation.
  • Sales Factor Percentage:
    The sales factor is the total sales of the corporation in Massachusetts during the taxable year divided by the total sales of the corporation everywhere during the taxable year. A corporation's total sales are its gross receipts with the exception of interest, dividends, and gross receipts from the maturity, redemption, sale, exchange or other disposition of securities.

Corporations that do not use the three factor apportionment percentage but are required to apportion using some other formula are:

Corporations that use a modified three factor apportionment percentage formula:

  • airlines;
  • motor carriers; and
  • courier and package delivery services.

Mutual Fund Service Corporations

A qualified mutual fund service corporation (MFSC) is required to apportion its taxable net income from mutual fund sales to Massachusetts using a single sales factor apportionment percentage. A MFSC must annually report certain information relating to its business operations and must maintain general ledger trial balances or other suitable records that identify its income producing activities and the costs associated with them. The appropriate place to report this information is on Massachusetts Form 355, Schedule F-2.

The following information should be read in conjunction with Regulation 830 CMR 63.38.7: Apportionment of Income of Mutual Fund Service Corporations. (See below)

Mutual Fund Service Corporation (MFSC):
A MFSC is any domestic or foreign corporation, corporate trust, or limited liability company doing business in Massachusetts, which derives more than fifty percent of its gross income from providing, directly or indirectly, management, distribution or administration services to or on behalf of a regulated investment company (RIC), and from trustees, sponsors and participants of employee benefit plans which have accounts in a regulated investment company.

Mutual Fund Sales:
Mutual fund sales consist of all amounts derived directly or indirectly from the performance of the management, distribution or administrative services to regulated investment companies.

Taxable Net Income from Mutual Fund Sales:
Taxable income from mutual fund sales equals gross income derived from mutual fund sales less any deductions directly traceable to its mutual fund sales and less a portion of other allowable deductions. To calculate:

  1. separate gross income into two categories: mutual fund sales and non-mutual fund sales;
  2. separate allowable deductions into three categories: (i) deductions directly traceable to mutual fund sales, (ii) deductions directly traceable to non mutual fund sales, (iii) other allowable deductions which are not directly traceable to either type of sale.

Note: to determine the correct portion of "other allowable deductions" use the following formula:

sum of other allowable deductions
x (sum of gross income from mutual fund sales/ sum of gross income for the taxable year.)

A MFSC determines its sales factor as follows:

  • mutual fund sales are determined separately for each RIC;
  • mutual fund sales for each RIC are then multiplied by the average number of shares owned by the RIC's shareholders domiciled in Massachusetts at the beginning and end of the RIC's taxable year that ends with or within the MFSC's taxable year divided by the average number of shares owned by all of the RIC's shareholders for the same period. Notwithstanding the above, a MFSC may use the year end of the RIC's fund advisor for this calculation so long as it consistently use this method from year to year. For a definition of a RIC fund advisor, see 830 CMR 63.38.7(4)(c)(2);
  • the resulting amounts for each RIC are then added together and constitute mutual fund sales assigned to Massachusetts;
  • the sales factor is a fraction, the numerator of which is the amount of mutual fund sales assigned to Massachusetts and the denominator of which is the total amount of mutual fund sales.

Calculation of the Non-income Measure of the Excise:
A MFSC that has taxable net income from mutual fund sales as well as other taxable net income in the same tax year will have two income apportionment percentages for that year. If a MFSC is subject to the non-income measure of the corporate excise, it must use a weighted average of the two apportionment percentages to calculate the non-income measure of the corporate excise.

Qualifying MFSC Uses Single Sales Factor:

To qualify to use the single sales factor apportionment formula, a MFSC must meet its jobs growth requirement, which mandates that a MFSC increase its qualified employees by five percent over its base period employment level. The base period employment level is the number of qualified employees of the MFSC in Massachusetts on January 1, 1996. In the case of a MFSC participating in the filing of a combined return, the base period employment level is computed for the combined group as a whole, based upon the number of qualified employees in Massachusetts as of January 1, 1996 of all members of the combined group. The percentage increase requirement starts for taxable years beginning on or after January 1, 1997 and ends before January 1, 2003. All MFSCs are deemed to have met their job growth requirements for all years ending after January 1, 2003.

A MFSC that meets the job growth criteria must apportion its taxable net income from mutual fund sales to Massachusetts by multiplying its total taxable net income from mutual fund sales by the MFSC's single sales factor apportionment percentage.

Base Period Employment Level-Special Rules:

  • New Mutual Fund Service Corporations:
    If a MFSC was not engaged in business in Massachusetts on January 1, 1996, then its base period employment level shall be its average employment level for the first two years that it was engaged in business in Massachusetts. Its jobs commitment level shall be its base period employment level increased by five percent for every taxable year after the base period year, until January 1, 2003.
  • Special Rule for Corporate Restructuring:
    When the acquisition of a business or some other corporate restructuring results in an increase in the number of qualified employees, the base period employment level of the MFSC shall be increased by the base period employment level of the acquired business.

    When a corporation's divestiture of a line of business or other corporate restructuring results in a decrease in the number of qualified employees, the base period employment level of a MFSC shall be decreased by the base period employment level of the divested line of business only if the MFSC can demonstrate that the corporate restructure will not result in a reduction in the number of jobs in Massachusetts.

Exception for Adverse Economic Conditions:
A MFSC that fails to meet the job growth requirement for any taxable year may still apportion its taxable net income derived from mutual fund sales using the single sales factor apportionment formula, if it can demonstrate that its failure to meet the jobs commitment level was the direct result of adverse economic conditions.

  • Adverse economic conditions are measured at the end of a twelve month period. The occurrence of one of the following constitutes "adverse economic conditions:"
    • the Standard and Poor's 500 Stock Index decreases ten percent or more,
    • the average daily trading volume on the New York Stock Exchange decreases fifteen percent or more, or
    • during the taxable year, the total assets under management of the mutual funds served by the MFSC decreases twelve and one-half percent or more.
  • Effect on one taxable year. If a MFSC experiences adverse economic conditions for any one taxable year, it may decrease its jobs commitment level for all subsequent taxable years beginning before January 1, 2002 by five percent of its base period employment level.
  • Effect on more than one taxable year. If a MFSC experiences adverse economic conditions for more than one taxable year, it may decrease its jobs commitment level for all taxable years by five percent of the base period employment level multiplied by the number of years during which adverse economic conditions exist for all taxable years beginning before January 1, 2002. The Jobs commitment level for taxable years beginning on or after January 1, 2002 and before January 1, 2004 shall not be less than the sum of the jobs commitment level for the most recent taxable year unaffected by adverse economic conditions plus five percent of the base period employment level.

Qualified Defense Corporations

For Tax Years beginning on or after January 1, 2000, the Election to Be Treated as a Qualified Defense Corporation Is No Longer Available:
 
A corporation that otherwise meets the definition of a defense corporation is now treated as either a Section 38 manufacturer or a corporation other than a Section 38 manufacturer.

For tax years prior to 2000, a corporation that elects qualified defense corporation status must:

  1. be classified as a Section 38 manufacturer; and
  2. meet certain sales, payroll, and property level requirements. The election to be treated as a qualified defense corporation applies only to the taxable year in which the election is made and has no effect on subsequent taxable years. A defense corporation that wants to make the election must do so on its corporation excise return for the taxable year and should attach to its return such additional information as the Commissioner prescribes.

Apportionment Factor Requirements:

  • Sales Factor:
    The denominator of the defense corporation's sales factor for the taxable year must equal or exceed ten percent of the corporation's taxable net income for the taxable year and the corporation's sales factor must not otherwise be insignificant in producing income.
  • Property Level Requirement:
    The numerator of the defense corporation's property factor for the taxable year must equal or exceed ninety percent of the numerator of the corporation's property factor for the corporation's taxable year immediately preceding its first 365 days taxable year beginning on or after January 1, 1996, provided that the base period numerator must be adjusted to include only real and tangible property actively used by the defense corporation in the conduct of a trade or business on the first day of the immediately succeeding taxable year.
  • Payroll Level Requirement:
    The numerator of the defense corporation's payroll factor of the taxable year, determined without regard to any amounts paid or attributable to the corporation's ten most highly compensated officers or employees, must equal or exceed ninety percent of the numerator of the corporation's payroll factor for the corporation's taxable year immediately preceding its first 365 day taxable year beginning on or after January 1, 1996, provided that the base period numerator must be adjusted to include only compensation paid during the taxable year to individuals who are actively employed by the defense corporation on the first day of the immediately succeeding taxable year, and both numerators must be adjusted to exclude any amounts paid or attributable to the corporation's ten most highly compensated officers or employees.

Failure to Meet the Factor Requirements:

  • if the corporation fails to meet the sales factor requirement, it cannot make the election;
  • if the corporation fails to meet the property or payroll level requirement, or both, it will be deemed to qualify as a Qualified Defense Corporation if it can demonstrate to the Commissioner's satisfaction and in a manner approved by the Commissioner that its failure to meet such requirements is attributable to a net reduction of the corporation's defense related business, and is not attributable to the transfer of defense related business from Massachusetts to any other state or foreign country.

The corporation is required to attach to its corporation excise returns an affidavit and schedules, sworn to by an officer of the corporation, supporting the corporation's assertion that it is eligible to make the election under the foregoing exception to the property and payroll level requirements.


Section 38 Manufacturers

If a corporation engaged in substantial manufacturing (Section 38 Corporations) has income from business activity which is taxable both in Massachusetts and in another state, then the part of its net income derived from business carried on in Massachusetts is determined by multiplying all of its taxable net income, other than taxable net income derived from mutual fund sales received by a mutual fund service corporation, by the apportionment formula stated below.

For tax years beginning on or after January 1, 1996, this apportionment formula has been adjusted yearly over a five-year period to gradually increase the weight of the sales factor relative to the property and payroll factors. Each year, the weight of the sales factor has been increased by 10% until it reaches 100% in the year 2000. All Section 38 Manufacturers must use this adjusted apportionment formula noted below.

Five-year period adjustment apportionment formula for tax years beginning on or after January 1, 1996:

1996: Sales Factor-60%, Property Factor-20% and Payroll Factor-20%;
1997: Sales Factor-70%, Property Factor-15% and Payroll Factor-15%;
1998: Sales Factor-80%, Property Factor-10% and Payroll Factor-10%;
1999: Sales Factor-90%, Property Factor-5% and Payroll Factor-5%;
2000: Sales Factor-100%.

Section 38 Manufacturer Defined:
Generally, a corporation other than a utility corporation, is a Section 38 Manufacturer for any taxable year if the following two criteria are met:

  1. it is engaged in manufacturing during the taxable year; and
  2. its manufacturing activity during the taxable year is substantial. A corporation that is so engaged in manufacturing and whose manufacturing activities are substantial is a Section 38 manufacturer for the taxable year regardless of whether, or to what extent, it conducts its manufacturing activities in Massachusetts.

Substantial Manufacturing:
A corporation's manufacturing activity is substantial for any taxable year if the corporation meets any one of the following tests: 

  • the corporation derives twenty-five percent or more of its receipts for the taxable year from the sale of manufactured goods that the corporation manufactures;
  • the corporation pays twenty-five percent or more of its payroll for the taxable year to employees working in manufacturing operations and derives fifteen percent or more of its receipts for the taxable year from the sale of manufactured goods that the corporation manufactures;
  • the corporation uses twenty-five percent or more of its tangible property in manufacturing during the taxable year and derives fifteen percent or more of its receipts for the taxable year from the sale of manufactured goods that the corporation manufactures;
  • the corporation uses thirty-five percent or more of its tangible property in manufacturing during the taxable year.

Section 42 Alternative Method

If the allocation and apportionment provisions of M.G.L c. 63 are not reasonably adapted to approximate the net income derived from business carried on within Massachusetts, a corporation may apply to the Commissioner to have its income derived from business carried on within Massachusetts determined by a method other than that provided in G.L. c. 63, s. 38.

When to apply for Alternative Apportionment of Income:
An application must be attached to a duly-filed return and received by the Commissioner on or before the original return due date or the due date under a valid extension. If the application is received late, the alternative apportionment application will not be considered.

Application for use of alternative method of apportionment:

  1. attach Massachusetts Form AA-1, Application for § 42 Method of Apportionment, to the first page of the corporation's tax return with the appropriate box checked on the heading of the return;
  2. provide a written summary justifying the proposed alternative apportionment method. Attach sufficient documentation to justify the figures used, their origin, nature and relation to the overall result reached;
  3. provide a statement of reasons, supported by detailed facts, as to why the statutory allocation and apportionment provisions are not reasonably adapted to approximate the corporation's Massachusetts income;
  4. show the computation of tax using both statutory apportionment and the proposed alternative apportionment method. Full payment of the tax due, based on the statutory apportionment method, must accompany the
    return;
  5. if applicable, submit a Form 2848, Power of Attorney

Effective Date:
Permission to use § 42 alternative apportionment is effective only for the year for which permission is granted. Permission to use § 42 alternative apportionment is granted exclusively through the application process.

If the Commissioner does not act upon an application before the expiration of nine months from the date of filing, the application is deemed denied. The Commissioner and the applicant may agree in writing to extend the time for decision on the application.

Abatement:
Permission to use the alternative apportionment is not effective retroactively and therefore will not be considered the basis for granting an abatement for any year earlier than the year which the application was submitted. If an applicant is aggrieved by the denial or modifications of this application, an abatement claim can be considered. No tax will be abated on the grounds that the Section 42 alternative apportionment method should have been used unless the corporation properly applied for permission to use alternative apportionment.


Change in Sales Factor

Sales of tangible personal property are deemed taxable by the Commonwealth if:

  • the property is delivered or shipped to the purchaser within the Commonwealth regardless of the f.o.b. (freight on board) point or other conditions of the sale; or
  • the corporation is not taxable in the state where the property is delivered to the purchaser and; the property is not sold by an agent of the taxpayer who is chiefly associated with the taxpayer's owned or rented business premises outside Massachusetts.

Documentation to Submit with Abatement/Amended Tax Return:

  • Amended Massachusetts Schedule F, Income Apportionment;
  • Breakdown of sales, payroll and property for each non-Massachusetts jurisdiction including an explanation for those activities or conditions that create nexus to each of the non-Massachusetts jurisdictions;
  • Copies of returns filed to those jurisdictions (if available).

Mutual Fund Service Corporation:

  • Corrected Form 355C, Corporation Excise Return.

Qualified Defense Corporations:

  • Amended Massachusetts Schedule F, Income Apportionment;
  • Amended Massachusetts Form 355, Business or Manufacturing Corporation Excise Return, showing that the taxpayer has made the qualified defense corporation election;
  • Copy of the written notice sent by the Commissioner showing that the taxpayer has been granted manufacturing corporation status, or documentation (appropriate schedules) showing that the taxpayer has met one of the four tests which shows that the taxpayer is a "substantial manufacturer" as required of a Section 38 Manufacturer;
  • Documentation (appropriate schedules) showing that the taxpayer has met the sales, payroll and property apportionment factor requirements to be a qualified defense corporation.

Section 38 Manufacturers:

  • Amended Massachusetts Schedule F, Income Apportionment;
  • Specific detail to support the substantial manufacturing activities now claimed (refer to substantial manufacturer tests);
  • Copy of the Massachusetts manufacturing classification issued by DOR, or the date the corporation received DOR classification.

Change in Sales Factor:

  • Copy of other state(s) return, including gross receipts and other state's apportionment;
  • Amended Massachusetts Schedule F, Income Apportionment;
  • Explanation of changes and any other documentation, such as federal returns, schedules or audits that may support the change;
  • If the change in the apportionment percentage is due to a federal audit, any information requested under Federal Change Abatement Resulting from IRS Audit.

Massachusetts References:

Mutual Fund Service Corporation

Qualified Defense Corporations

Section 38 Manufacturers

Section 42 Alternative Method

Change in Sales Factor