April 18, 2008

You have requested a ruling on behalf of ********************************** ("employer"), which employs non-resident personnel in operating its corporate aircraft. The issue is whether, and to what extent, wages paid these employees are subject to Massachusetts taxation and withholding.

I. Facts

Employer is a Massachusetts company. Employer is the registered owner of [several] company aircraft that are hangared ******************* in Massachusetts. Employer operates its aircraft pursuant to Federal Aviation Regulations Part 91.

In general, Employer is required to withhold taxes on wages paid to its employees, under G.L. c. 62B. Employer employs thirteen pilots and four flight attendants for the purpose of staffing its aircraft. Seven of the pilots and one of the flight attendants are non-residents, as that term is defined at G.L. c. 62, § 1(f). Employer currently withholds Massachusetts income taxes from the wages of these non-residents.

The non-resident employees are salaried, with irregular work schedules determined by the travel needs of employer's executives. On average, the non-residents spend approximately fifteen days per month traveling. A typical work pattern for the non-resident employees is for each of them to arrive at the hangar up to two hours prior to a flight departure; this time presumably includes work duties. The employee then performs in-flight services aboard the aircraft and remains on-call at the destination location in order to provide in-flight services for the return trip. Each round-trip is known as a "flight assignment." Upon return to [the airfield], the non-resident employees typically spend one-half to one hour of office time attending to post-flight responsibilities.

Flight assignments range from a period of a single day to more than a week. Employees are provided a locker for personal items and office space at [the airfield] for use during their flight assignments. Employees are usually not present at [the airfield] unless they have a flight assignment, although they are sometimes present to perform administrative duties unrelated to a specific flight assignment. Non-residents are generally at home between flight assignments, and may perform some minimal work at home.

II. Rulings requested

1. Whether the income non-residents receive in connection with their employment on Employer's aircraft is subject to the Massachusetts personal income tax, particularly with respect to the rules in the Federal Aviation Act.

2. If the income is subject to the Massachusetts income tax for non-residents, whether the income is subject to income tax withholding by the employer.

3. If the income is subject to Massachusetts income tax, how the non-residents should apportion their income.

III. Rulings

1. Employer is not an "air carrier" whose non-resident employees could be eligible for exemptions from state taxation under the Federal Aviation Act, and thus the employees are taxable on their Massachusetts source income from Employer.

2. Employer is responsible for withholding taxes for its non-resident employees.

3. Non-resident employees eligible to apportion income must do so on their non-resident income tax returns, using the methods described in Directive 08-02.

IV. Discussion

In general, a non-resident is taxable in Massachusetts on income derived from or effectively connected with sources within the state. See G.L. c. 62, § 5A. In this case, employer and the non-resident employees argue that despite employment in Massachusetts, the non-residents are not subject to tax because there is a preemption under the Federal Aviation Act.

The Department has recently issued Directive 08-02, Taxation of Non-resident Flight Crew Members. This Directive explains the rules for state taxation of flight crew members in light of certain federal limitations. The Directive also sets forth rules for apportioning income for those non-resident flight crew members who are subject to taxation in Massachusetts.

a. The Federal Aviation Act

As a preliminary matter, the Federal Aviation Administration (FAA) is the federal agency responsible for enforcing general aviation law under Title 49 of the United States Code (The Federal Aviation Act), and is also the agency responsible for drafting and enforcing applicable regulations. See 49 USC § 106(f). See generally 49 USC § 106. There are different levels of regulatory supervision under the FAA statutes and regulations. At issue in the current matter is the difference between operators of aircraft that are subject to the general operating and flight rules, at 14 CFR § 91, and the more specific rules that apply to commercial air carriers and operators of larger craft, at 14 CFR §§ 119 - 139. You state in your facts that Employer's aircraft are subject to the general regulatory provisions at 14 CFR § 91, but are not subject to the certification requirements for commercial and larger aircraft under 14 CFR §§ 119 -139.

b. The Federal preemption on state taxation of air carrier employees does not apply to Employer

At issue is a federal limitation on state taxation of the pay of a non-resident air carrier employee that has regularly assigned duties on aircraft in more than one state. 49 USC § 40116(f)(2). Under these rules, the only state that can tax the income of such an employee is the employee's state of residence, or the state in which the employee earns more than 50% of his or her pay. 49 USC § 40116(f)(2). You ask us to rule that this preemption applies to the non-resident employees of employer.

The federal preemption does not apply to all employees who work on aircraft. Rather it applies to employees of "air carriers." The term "air carrier" is broadly defined to mean a "citizen of the United States undertaking by any means, directly or indirectly, to provide air transportation." 49 USC § 40102(a)(2). By this broad definition, the term might appear to apply to anyone who flies in the air, including Employer. The requirements of an air carrier are more specifically defined, however, at 49 USC § 41101, which states that all air carriers must receive air carrier certification. 49 USC 41101(a). See also 14 CFR 121, 135.

You state that Employer is not required to obtain an air carrier certificate under 49 USC § 41101 and has not done so. Rather, Employer is subject to the general operating flight rules described in 14 CFR Part 91. Because employer is not an air carrier, the federal preemption on state taxation of air carrier employees does not apply to it. Aircraft employees that fly in or out of Massachusetts are subject to Massachusetts income tax, whether residents or non-residents.

c. The income to non-residents is subject to withholding

You also ask us to rule that even if the income earned by aircraft employees is not subject to the federal preemption on state taxation, that their limited presence in Massachusetts is insufficient to justify their taxation in Massachusetts. Employers are required to withhold an amount from wages or payments that is substantially equivalent to the tax amount reasonably anticipated to be due, according to tables promulgated by the Commissioner. 830 CMR 62B.2.1(3)(a). See G.L. c. 62B, § 2. There is no exception to this withholding requirement for employers of non-residents, and both the statute and the regulation anticipate that non-residents are subject to withholding. See G.L. c. 62B, § 2. The withholding tables referred to in the statute and regulation appear in the Department of Regulation publication, Circular M; there is no provision in this circular to calculate the withholding rates on the wages of non-residents any differently than those on residents. Wages are defined with reference to the Internal Revenue Code. 830 CMR 62B.2.1(2).

In your request you acknowledge that Massachusetts source income is generally taxable to non-residents, as explained at 830 CMR 62.5A.1(1), but that an exception applies to a non-resident whose presence for business is casual, isolated, or inconsequential. 830 CMR 62.5A.1(3)(h). This exception exists only, however, where a non-resident's presence in Massachusetts is ancillary to his or her primary business or employment duties performed at a base of operations outside of Massachusetts, as with occasional presence in Massachusetts for management reporting or planning, training, or attendance at conferences or symposia. 830 CMR 62.5A.1(3)(h). The employees of Employer do not meet this exception for two reasons. Foremost, an essential element of the exception is that the employee's base of operations be outside of the state. There is no reasonable way to conclude that the non-resident employees' base of operations is anywhere other than the Massachusetts airfield from which they regularly take off and to which they return. Second, while you argue that only the in-flight services are the primary business of these employees, and much of that is conducted out of state, the facts suggest otherwise. Employees appear at the Massachusetts airfield some time before takeoff; the takeoff itself and the flight time in Massachusetts are surely part of the primary duties of these employees. Employees have on-ground duties at the Massachusetts airfield that is part of their employment duties. These activities are not of the character of occasional presence for management reporting or planning. Rather, they are regular, job related duties that take place in Massachusetts. Employees do not meet the casual, isolated, or inconsequential exception to the taxation of non-residents.

d. How to apportion a non-resident's Massachusetts income

The rules for apportioning income for taxable non-resident flight crew members are found in Directive 08-02, at Directive 2. A non-resident flight crew member who departs from a Massachusetts airfield and flies in and out of more than one state should allocate, when possible, his or her income to Massachusetts according to the general rules at 830 CMR 62.5A.1. When a flight crew member is unable to establish the exact amount of pay received for services performed in Massachusetts, the employee should apportion his or her income to Massachusetts by multiplying the gross income related to his or her employment, wherever earned, by an apportionment factor, that is, a fraction, the numerator of which is Massachusetts workdays and the denominator of which is total workdays. For purposes of Directive 08-02, a Massachusetts workday is any workday that a flight crew member flies out of Massachusetts. For workdays on which a flight crew member does not fly out of Massachusetts, the general rule at 830 CMR 62.5A.1(5)(a) applies, and any day part of which is spent in Massachusetts will be treated as a Massachusetts workday, unless the taxpayer can prove that he or she worked outside of Massachusetts for more than half the day. The term "total work days" is the sum of all days that an employee is either flying or is required to be on duty (non-flight workdays). See DD 08-02.

You request that the Department rule, based on the expected apportionment percentages of the non-resident employees, that their income will be below the no tax status amount. The no tax status amount is $8,000 of gross income, whether derived from Massachusetts sources or not. G.L. c. 62C, § 6(a). See G.L. c. 62, § 5. See also G.L. c. 62, § 2(a)(defining Massachusetts gross income as federal gross income subject to certain adjustments, generally unrelated to state sourcing or apportionment rules). For a non-resident, Massachusetts adjusted gross income is determined as if he or she were a resident of the Commonwealth throughout the entire taxable year. G.L. c. 62, § 5(a). You have not suggested that employees earn below the $8,000 threshold, so it is unlikely this argument could apply in any case.

You also argue that each employee's apportionment percentage, as calculated under the provisions Directive 08-02, would reduce the employee's Massachusetts source income to an insignificant amount, thus exempting the employer from the withholding amount. Again, the statutory scheme does not anticipate that employers will use an employee's apportionment percentage as a means of changing the employer's withholding obligation. Rather, the employee, who has actual knowledge of all sources of income, and of all time spent in Massachusetts, is allowed to calculate the apportionment percentage at the time of filing a return, using the Form 1-NR/PY.

V. Conclusion

While a federal preemption on state taxation does exist under the Federal Aviation Act, it applies only to the employees of "air carriers." The term "air carrier" is a specific statutory category that applies to commercial carriers and operators of larger craft. Employer is not an air carrier and its employees are ineligible for the preemption.

Since Employer must be treated as any other employer that has a duty to withhold on wages, Employer must continue its current practice of withholding on wages of all employees that have Massachusetts source income. An employer's withholding obligation exists irrespective of an employee's no tax status or a non-resident's possibly low apportionment percentage as calculated under state law, including regulations.

Very truly yours,

/s/ Navjeet K. Bal

Navjeet K. Bal
Commissioner of Revenue

NKB:MTF:dt

238032

LR 08-8