Introduction:

Each year, pursuant to G.L. c. 58, § 2, the Commissioner issues an Annual List of Corporations Subject to Taxation in Massachusetts (the “List”) as of January 1 of that year under G.L. c. 59, §§ 60A, and 63, which assists in the important determination as to which corporations are entitled to local property tax benefits.  Recently, the composition of the List has been incomplete or inaccurate due largely to information regarding tax classification of legal entities that has not been readily and currently available to the Commissioner.  Recent changes in state law regarding entity classification have also contributed to these inaccuracies.  Given these developments, this Directive announces a revised procedure that qualifying entities must fulfill in order to be included on the List.  This revised procedure is intended to reduce the potential for errors in the compilation of the List, which can have significant adverse consequences for individual taxpayers as well as for cities and towns.

Issue:

What are the requirements that must be met by (1) corporations and (2) other entities – including limited liability companies (LLCs), partnerships, business trusts, certain entities organized in foreign countries,[1] or other unincorporated entities – that are treated as corporations for federal income tax purposes (whether through affirmative “check-the-box” election or under a default rule, per se treatment, or otherwise [2]) to be included on the List?

Directive:

Effective January 1, 2013, any entity seeking to be included on the List must file an Annual Certification of Entity Tax Status through Webfile for Business by April 1st of the calendar year for which the inclusion on the List is sought (i.e., with respect to the entity’s status as a corporation as of January 1st of such year).

Failure to electronically file the certification by April 1st may result in that entity not appearing on the List for that year, potentially resulting in the loss of local property tax benefits that inure to corporations that are properly included on the List unless a timely appeal is filed. 

Any entity that is treated as a disregarded entity or a partnership or is otherwise not treated as a corporation for federal income tax purposes (other than a QSub, which has a special status)[3] is not entitled to appear on the List, and is consequently not entitled to tax exemptions afforded to corporations under G.L. c. 59, §5, cl. 16 (2 & 3).[4]  Any such entity that previously appeared on the List will be removed. 

The federal entity classification election must be effective as of January 1st for the entity to be included on the List that pertains to the fiscal year for property tax purposes beginning on the following July 1st.  Entities that are permitted to make or change their federal election after January 1st but effective retroactively back to January 1st must notify DOR and must correct any Annual Certification that has already been made. 

Any entity seeking to be included on the List that has not previously registered for Webfile for Business will need to register before it can make the filing referenced in this Directive.  The Department’s Webfile for Business application can be accessed at the following link:

https://wfb.dor.state.ma.us/WEBFILE/BUSINESS/Public/Webforms/Login/Login.aspx


Any entity that is registered for Webfile for Business that logs on to its account will be able to complete the filing required by this Directive by clicking on the designated link. 

Discussion:

Pursuant to G.L. c. 58, § 2, the Commissioner of Revenue is required to issue an annual list of Corporations Subject to Taxation in Massachusetts (the “List”) under G.L. c. 59, 60A, and 63 as of January 1 of the year in which the List is issued.  The List assists in the determination as to which corporations are entitled to local property tax benefits.  The List is generally informational in nature and does not represent a binding determination with regard to whether an entity is taxable as a corporation.[5] Omission from the List or any particular classification may be appealed.[6]  The List also specifies all entities treated as business corporations for Massachusetts tax purposes that have been granted “manufacturing corporation” classification[7] or whose manufacturing corporation classification has been revoked.  This classification further assists local boards of assessors in the assessment of property taxes.

In the past the Commissioner compiled the List using a variety of sources, including an entity’s tax filing history with DOR. However, certain LLCs treated as disregarded entities or partnerships for federal and Massachusetts income tax purposes have sometimes been erroneously included on the List, because of DOR’s not having current information relating to the LLCs’ entity classification for tax purposes.  Such entities are not entitled to the property tax exemptions afforded to corporations, and consequently should not be included in the List.  The inclusion of such entities on the List could potentially have a negative revenue impact on local property taxes, even though the List is informational only and not binding on cities and towns.  Conversely, certain LLCs treated federally as corporations have sometimes not been included on the List.  Again, these errors or omissions have frequently resulted from the lack of current information on entity classification available to DOR, e.g., filed Massachusetts corporate excise, partnership, or other income tax returns as of the date for issuing the List, or changes in an entity’s federal tax classification subsequent to the filing of Massachusetts return information that was used in compiling the List. 

Beginning with the 2009 calendar year, the same elective entity classification treatment that has applied to LLCs for many years – i.e., the Massachusetts tax classification of an entity generally following the federal income tax classification – now applies as well to partnerships, business trusts, certain entities organized in foreign countries, and certain other unincorporated entities.  See St. 2008, c. 173 (generally conforming the Massachusetts tax classification of entities to their federal tax classification, as of the close of 2008).  This law change has resulted in additional inaccuracies with respect to the composition of the List as it relates more broadly to various types of unincorporated entities.

The List is published electronically on the DOR’s website on or about April 1, or, if necessary to verify the data, at some later date prior to the commencement of the fiscal year to which the property tax relates.  To find the List go to www.mass.gov/dor and search for “Corporations Book.”

 

/s/Amy Pitter
Amy Pitter
Commissioner of Revenue

 

AP:MTF:ecl

October 4, 2012

DD 12-5



[1]  It is noted that various types of entities organized in foreign countries, i.e., those organized in foreign countries and not included on a list of “per se corporations,” see Treas. Reg. § 301.7701-2(b)(8), are subject to elective classification for U.S. federal income tax purposes in a similar manner as unincorporated entities.  See Treas. Reg. § 301.7701-3.  In particular, these entities may be treated either as corporations or as partnerships or disregarded entities for federal income tax purposes (and thus generally for Massachusetts tax purposes as well), depending on a taxpayer election or application of a default rule.  Those foreign entities that are included on the list of “per se corporations” are automatically classified as corporations.  All foreign entities that are treated as corporations for federal income tax purposes, whether by elective classification (including application of a default rule) or by treatment as per se corporations, must meet the requirements described in this Directive in order to be included on the List.
[2]  See generally Treas. Reg. § 301.7701-3.
[3]  In order for an entity to qualify for treatment as a QSub (i.e., a Qualified Subchapter S Subsidiary), the entity must first be treated as a corporation for federal income tax purposes.  As a QSub, however, the entity is then disregarded as an entity separate from its S Corporation parent.  Pursuant to this Directive, a QSub must file the annual certification for inclusion on the List in order that the assets of the QSub may be considered as corporate assets for purposes of property tax exemption.  However, whether such assets may qualify for a property tax exemption as property of a manufacturing corporation will depend on whether the QSub’s parent qualifies as a manufacturing corporation under G.L. c. 63, §42B, taking into account the attributes of the QSub.  Because a QSub’s income, assets, and other attributes are deemed to be those of its parent for federal income tax purposes and Massachusetts corporate excise purposes and the QSub itself is disregarded as an entity separate from its S corporation parent for such purposes, see 830 CMR 63.30.3(3)(b), the QSub may not be separately considered  as a manufacturing corporation.  See also footnote 7 below regarding classification as a manufacturing corporation.   The QSub’s S corporation parent, if not previously classified as a manufacturing corporation, must apply under the procedures set out in the Manufacturing Corporations Regulation, 830 CMR 58.2.1(7) in order to obtain such classification, and must detail the extent to which it owns QSubs (and the assets and other attributes thereof).  If such classification is granted, the parent S corporation and each QSub will be listed as manufacturing corporations on the List.  A QSub will not be identified as a manufacturer on the List unless the parent S Corporation has been classified as a manufacturer.
[4]  However, see G.L. c. 59, §5, cl. 16(3) as amended by Sections 108 and 200 of Chapter 240 of the Acts of 2010, which provides a local option property tax exemption for certain federally-disregarded LLCs with manufacturing corporation or research and development corporation sole members, beginning in Fiscal Year 2012. 
[5]  However, the classification by the Commissioner of Revenue or, after appeal, by the Appellate Tax Board as to whether or not an entity qualifies as a manufacturing corporation must be followed in the assessment of property tax of machinery used in the conduct of business.  See G.L. c. 58, § 2, G.L. c. 59, § 5, cl. 16(5); 830 CMR 58.2.1, (4)(5) & (7).  See also footnote 7 below.
[6]  See G.L. c. 58, § 2.  See also MASSPCSCO v Commissioner of Revenue, Appellate Tax Board Docket Nos. C278479, C284149, and C288621 (May 7, 2010) (regarding a Delaware statutory trust that was determined, on appeal to the Appellate Tax Board, to be an entity treated, under prior Massachusetts law, as a corporation for Massachusetts tax purposes that was erroneously excluded from the List).

[7]  Pursuant to the Department’s Manufacturing Corporations Regulation, 830 CMR 58.2.1(3), “[a] corporation may be classified as a manufacturing corporation for any calendar year under G.L. c. 58, § 2, in which it is in existence and is engaged in manufacturing as defined in 830 CMR 58.2.1(6), as of January 1 of that year.”  830 CMR 58.2.1(7)(a) provides that “[a]ny corporation seeking manufacturing corporation classification must file a completed application with the Commissioner.”  G.L. c. 63, §§ 38C, 42B; 830 CMR 58.2.1.  An LLC or other unincorporated entity that is treated as a business corporation for Massachusetts tax purposes may be considered for manufacturing corporation classification.  See, e.g., DOR Directive 00-4 (relating to, inter alia, manufacturing corporation status of LLCs treated as business corporations for Massachusetts tax purposes).  Pursuant to the law changes effected by St. 2008, c. 173 (discussed in text below, and generally conforming the Massachusetts tax classification of entities to their federal tax classification), other unincorporated entities that are treated as corporations for federal income tax purposes and as business corporations for Massachusetts tax purposes may also be considered for manufacturing corporation classification.  See generally 830 CMR 63.30.3(1)(a)2, 830 CMR 63.30.3(4)(a)3.