June 8, 1982
You inquire as to the manner in which the income of the ********** Company ("Company") is to be measured for purposes of the Massachusetts corporate excise.
The Company is a Delaware corporation registered to do business in Massachusetts. It has no offices, equipment or personnel permanently within Massachusetts. The Company provides the following types of services:
(1) Engineering and design work which result in the production of drawings and plans. Such services are performed outside Massachusetts but the designs and plans are delivered to clients within Massachusetts or relate to projects within Massachusetts;
(2) Procurement services in which the Company procures for a client equipment, materials and supplies. The Company purchases the items as agent for the client or purchases the items in its own name with reimbursement therefor. The procurement services are performed either within or without Massachusetts and relate to projects within or without Massachusetts;
(3) Construction management services in which the Company supervises construction projects in Massachusetts;
(4) Full service construction in which the Company acts as prime contractor or subcontractor for the construction of a facility located in Massachusetts; and
(5) Total project responsibility in which the Company has responsibility for the engineering, procurement and construction activities for a project within Massachusetts.
You ask whether the Company must determine its Massachusetts income using an apportionment formula, separate accounting, or both.
General Laws Chapter 63, Section 38(c) states that the taxable net income of a corporation having income from business activity which is taxable both within and without Massachusetts must be apportioned to Massachusetts by multiplying its taxable net income by a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four.
Paragraphs (d) through (f) of Chapter 63, Section 38, a copy of which is enclosed, define the property, payroll and sales factors, and set forth the criteria used in determining which property, payroll and sales are to be apportioned to Massachusetts.
A corporation which believes that the statutory apportionment factors do not fairly apportion its income may apply to the Commissioner of Revenue for a different method of determining its net income derived from business carried on in Massachusetts (G.L. c. 63, s. 42). Non-statutory methods are permitted only in exceptional cases.
Based on the foregoing it is ruled that:
1. Engineering and design services which are performed outside of Massachusetts and result in designs and plans delivered to clients in Massachusetts do not constitute sales in Massachusetts for purposes of the sales factor where the real object of the transaction is the rendition of engineering services.
2. Charges for procurement services performed within Massachusetts constitute sales in Massachusetts for purposes of the sales factor where an employee of the Company acts as an agent for a client in purchasing equipment, materials and supplies. Procurement services performed outside of Massachusetts do not constitute sales in Massachusetts for purposes of the sales factor.
3. Sales, to a purchaser in Massachusetts, of equipment, materials and supplies, constitute sales of tangible personal property in Massachusetts for purposes of the sales factor.
4. A contract for construction management services and other construction activities to be performed within Massachusetts constitutes a sale in Massachusetts for purposes of the sales factor. A contract under which such activities are to be performed both within and outside Massachusetts constitutes a sale in Massachusetts, if, based on cost of performance, a greater proportion of the income-producing activity is performed within Massachusetts than in any other state. A contract for construction management services and other construction activities to be performed entirely outside of Massachusetts is not a sale in Massachusetts for purposes of the sales factor.
5. Real and tangible personal property, owned or rented, and used by the Company in Massachusetts, is included in the numerator of the property factor.
We do not have sufficient information to determine whether amounts paid to employees of the Company for services performed within Massachusetts constitute compensation paid in Massachusetts for purposes of the payroll factor.
You also ask whether Massachusetts recognizes a corporation's election, under the Internal Revenue Code, to report its income using the completed contract or percentage of completion method. Since gross income under the corporate excise is gross income as defined under the Code, as amended and in effect for the taxable year (G.L. c. 63, s. 30(5)(a)); such an election is reflected in the income measure of the Massachusetts corporate excise.
We are presently developing a regulation which may modify the treatment of completed contract method of accounting for Massachusetts tax purposes. But we are also monitoring the pending federal legislative proposals to modify or abolish this method of accounting for tax purposes.
Very truly yours.
/s/L. Joyce Hampers
L. Joyce Hampers
Commissioner of Revenue