This Directive restates the Department's long-standing interpretation of the interrelationship between local property tax on leasehold improvements and the calculation of the non-income measure of the corporate excise, focusing on the meaning of the term "subject to local taxation" as originally discussed in Corporate Excise Ruling 1960-1.
Must a corporation that is a lessee of real property be the party responsible for paying the local property tax due with respect to any leasehold improvements in order for those improvements to be considered "subject to local taxation" and thus exempt from the non-income measure of the corporate excise?
No. General Laws c. 63, § 30.7 does not stipulate who must pay the local property tax, only that such improvements be subject to local taxation in order to be exempt from the non-income measure of the corporate excise.
Discussion of Law:
The corporate excise imposed upon domestic and foreign corporations doing business in the Commonwealth contains both an income measure and a non-income measure. With respect to a tangible property corporation as defined in G.L. c. 63, § 30.10, the non-income measure of the excise is levied on the value of the corporation's tangible property as determined to be taxable under G.L. c. 63, § 30.7.
General Laws c. 63, § 30.7 provides in pertinent part that:
The value of a corporation's tangible property taxable under clause (1) of subsection (a) of section thirty-two or thirty-nine shall be the book value of such of its tangible property situated in the commonwealth on the last day of the taxable year as is not subject to local taxation. . . .
Unless specifically exempted from taxation, all tangible property owned by a corporation and located within the Commonwealth is either subject to local taxation under the provision of G.L. c. 59 or state taxation under provisions of G.L. c. 63.
The exclusion of leasehold improvements from taxation under G.L. c. 63 is contemplated where such leasehold improvements are subject to local taxation whether due from the corporation as lessee or from the lessor.
The statute, G.L. c. 63, § 30.7, provides only that tangible property not subject to local taxation must be included in the non-income measure. It does not stipulate that the corporate taxpayer itself must pay the applicable local tax in order that tangible property such as leasehold improvements may escape inclusion. Where either the corporation or its lessor is liable for the applicable local tax, the corporation is not required to include the value of leasehold improvements in the non-income measure.
Commissioner of Revenue
June 29, 2007
The term leasehold improvements as used in this Directive refers to any buildings or other improvements to real property or affixed thereto which are constructed at the expense of the corporate lessee.