ISSUE: Is the use tax exemption for sales upon which tax was paid to another state determined using effective or nominal tax rates?

DIRECTIVE: The use tax exemption for sales upon which tax was paid to another state is determined using effective tax rates. Therefore, the Massachusetts use tax is determined by subtracting sales or use taxes paid to another state.

DISCUSSION OF LAW:

Under G.L. c. 64I, § 7(c), sales upon which tax was paid to another state are exempt from the use tax under the following conditions:

. . . such tax was legally due without any right to a refund or credit thereof and that such other state or territory [of the United States] allows a corresponding exemption with respect to the sale or use of tangible personal property or services upon which such a sales or use tax was paid to this state.

A full exemption does not apply if "the tax imposed by this chapter is at a higher rate than the rate of tax in the first taxing jurisdiction." G.L. c. 64I, § 7(c). However, a reduction of the use tax is allowed. The reduced use tax is determined according to the following statutory language:

. . . the tax imposed by this chapter shall apply to the extent of the difference in such rates.

G.L. c. 64I, § 7(c).

The reduced rate is then applied against the Massachusetts use tax base to determine the Massachusetts use tax. Massachusetts and other states differ regarding use tax exemptions and deductions. As a result, the nominal rate imposed by another taxing jurisdiction may not equal its effective tax rate as applied to the Massachusetts use tax base. For example:

State X has a nominal rate of 3% and taxes $100 of the $125 purchase price, while Massachusetts taxes the full $125 purchase price. The $3 tax paid to State X represents a 2.4% effective tax rate on the $125 Massachusetts tax base.

In this example, the Massachusetts use tax is $3.25, determined by subtracting the sales tax paid to State X ($3) from the $6.25 use tax payable to Massachusetts (5% x $125). The result is the same using effective tax rates. State X's effective tax rate of 2.4% subtracted from the Massachusetts use tax rate of 5% equals 2.6%. The 2.6% rate applied to the $125 Massachusetts use tax base equals $3.25.

The Massachusetts use tax exemption is applied against the use tax payable on a Massachusetts use tax base. Therefore, in determining the reduced rate for the exemption, effective tax rates are utilized because they represent the rate applied to the Massachusetts use tax base. As a result, the Massachusetts use tax is determined by subtracting the sales or use taxes paid to another state, because the taxes paid represent the effective tax rate applied against the Massachusetts use tax base.

/s/Mitchell Adams
Mitchell Adams
Commissioner of Revenue

MA:HMP:jmw

April 12, 1994

DOR-D 94-6