DISCUSSION AND DIRECTIVE: The potential for double taxation of corporations doing business within and outside of Massachusetts is reduced through a statutory apportionment formula that produces an appropriate fraction of net income subject to Massachusetts corporate tax. G.L. c. 63, § 38. In determining the net income subject to this formula, some state taxes paid by a corporation may be deducted; others must be added back. According to the statute, state tax deductions allowed for federal purposes, but not for Massachusetts purposes, are "taxes on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes . . .." G.L. c. 63, § 30.4(iii).
The effect of a deduction for these types of state taxes would be to reduce the income of a multi-state business. In effect, certain amounts of income (equal to the deduction for an individual state's tax) would be allocated to the state imposing the tax. Viewed in this light, the purpose of the state tax add-back appears to be to eliminate an income attribution method that is inconsistent with formulary apportionment. As a result of the add-back, income is attributed to the various states only in proportion to the apportionment factors (generally property, payroll and sales) and without consideration of the tax rates imposed by those states on the taxpayer's business.
The legislature has not statutorily identified specific taxes of other states that must be added back. Instead, it has chosen broad language to describe the types of state tax that must be added back in calculating Massachusetts corporate net income. The types of state taxes that must be added back are those that tax
(1) a corporation's income, whether net or gross, or are imposed directly on or measured by income;
(2) a corporation's business activity (the privilege of doing business); or
(3) a corporation's business wealth (capital stock taxes).
These taxes that are added back are imposed on a corporation's business as a whole. They differ from transactional taxes that are intermittently imposed on separate business activities. Taken together, they show that the legislature intended to disallow certain state tax deductions in arriving at corporate net income, i.e., those taxes of other states that are substantially similar to the Massachusetts corporate excise or which otherwise tax the business enterprise in its entirety. In deciding whether the deduction for a particular state's tax is disallowed, the Department of Revenue ("Department") will ask whether that tax falls within these boundaries.
The Department has determined that the following state taxes are disallowed as deductions by Massachusetts in arriving at corporate net income:
• Delaware Gross Receipts Tax (Merchants' and Manufacturers' License Taxes)
• Indiana Gross Income Tax
• Los Angeles City Tax
• Louisiana Franchise Tax
• Michigan Single Business Tax
• New Hampshire Business Profits Tax
• New Hampshire Insurance Premiums Tax
• Ohio Franchise Tax
• Pennsylvania Franchise Tax
• San Francisco Business Tax (including the San Francisco Payroll Expense Tax)
• Texas Franchise Tax
• Washington Business and Occupation Tax
• West Virginia Business and Occupation Tax
This list is illustrative only, and the absence of a particular state tax does not imply its acceptance as a Massachusetts state tax deduction.
A complementary analysis to one that assesses which state taxes cannot be deducted for Massachusetts purposes is one that determines whether a state tax is outside of the boundaries described above and, therefore, deductible. In making this determination, the Department will ask whether a tax is imposed on discrete events or parts of the corporation's activities or ownership within a state.
For instance, Massachusetts allows a state tax deduction for the New York City Commercial Rent or Occupancy Tax (NYCOT). This tax is imposed on every tenant's "base rent" for any premise in the city occupied or used for the purpose of carrying on or exercising any trade, business, profession, vocation or commercial activity. New York City Administrative Code Sections 11-702, 701(5). The deduction is allowed because the NYCOT is not a franchise tax for the privilege of doing business; it is a transaction tax on the rental activity by businesses, not the privilege of doing business itself. 
Other examples of taxes that may be deducted (i.e., not be added back) include sales, local property, payroll, occupancy and other types of transaction taxes. These types of taxes are not intended to tax the corporation's activities or presence in the state as a whole.
SUMMARY A deduction for state taxes paid by a corporation will generally be disallowed and added back in arriving at corporate net income if the tax sought to be deducted is intended to tax the corporation's activities or presence in the state as a whole. The deduction will generally be allowed where the tax to be deducted is imposed on discrete events or parts of the corporation's activities or ownership within a state.
/s/Bernard F. Crowley
Bernard F. Crowley
Acting Commissioner of Revenue
August 10, 1999
 The definition of "state" includes cities which are "political subdivision[s]." G.L. c. 63, § 30.13.
 This Directive also applies to financial institutions under G.L. c. 63, §1, and public utility corporations under G.L. c. 63, § 52A(1)(b)(iii), both of which contain state tax addback provisions.
 This is illustrated by the fact that the NYCOT does not apply to persons conducting business within New York City if they own the premises. Further, New York City has other taxes, measured by income, which are imposed for the privilege of doing business.
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