830 CMR: DEPARTMENT OF REVENUE
830 CMR 63:00: TAXATION OF CORPORATIONS
830 CMR 63.00 is repealed and replaced with the following:
830 CMR 63.38.1: Apportionment of Income
 
(1) Purpose, General Rule, Sham Transactions, and Outline.
 
(a) Purpose. The purpose of 830 CMR 63.38.1 is to explain the allocation and apportionment of income of domestic and foreign corporations, as provided in M.G.L. c. 63, § 38. The regulation also governs the calculation of an apportionment percentage by other taxable entities when such entities are permitted or required to use the income apportionment method set out in M.G.L. c. 63, § 38. For example, the regulation applies to domestic and foreign manufacturing corporations; to corporate trusts, as described under M.G.L. c. 62, § 8(a); to S corporation shareholders, as described under M.G.L. c. 62, § 17A; to utility corporations, as described under M.G.L. c. 63, § 52A; and to nonresident individuals when permitted or required by 830 CMR 62.5A.1. However, except as expressly stated, the regulation does not apply to income derived from mutual fund sales received by mutual fund service corporations within the meaning of M.G.L. c. 63, § 38(m).
 
(b) General Rule. All of a taxpayer's taxable net income is allocated to Massachusetts if the taxpayer does not have income from business activity which is taxable in another state. If a taxpayer has income from business activity which is taxable both in Massachusetts and in another state, then the part of its net income derived from business carried on in Massachusetts is determined by multiplying all of its taxable net income by the three factor apportionment percentage as provided in M.G.L. c. 63, § 38(c)-(g) and 830 CMR 63.38.1. If a taxpayer with a Massachusetts commercial domicile has income from business activity which is taxable both in Massachusetts and in another state but also has an income stream that is prohibited from being taxed in another non-domiciliary state by reason of the U.S. Constitution, that income stream shall be allocated in full to the commonwealth.
 
(c) Exceptions to the General Rule. Notwithstanding the provisions of 830 CMR 63.38.1(1)(b), above, the following taxpayers shall determine the part of their net income derived from business carried on in Massachusetts in the following manner:
 
1. Section 38 Manufacturers. If a section 38 manufacturer has income from business activity which is taxable both in Massachusetts and in another state, then the part of its net income derived from business carried on in Massachusetts is determined by multiplying all of its taxable net income, other than taxable net income derived from mutual fund sales received by a mutual fund service corporation, by the apportionment percentage provided in M.G.L. c. 63, § 38(l) and 830 CMR 63.38.1(10), below.
 
2. Mutual Fund Service Corporations. Regardless of whether it has income from business activity which is taxable both in Massachusetts and in another jurisdiction, a mutual fund service corporation shall apportion its taxable net income derived from mutual fund sales as provided in M.G.L. c. 63, § 38(m). Where a mutual fund service corporation has both taxable net income derived from mutual fund sales and other taxable net income, then the mutual fund service corporation shall allocate or apportion such other taxable net income as provided in this regulation, 830 CMR 63.38.1, provided that the mutual fund service corporation shall determine such other taxable net income by taking into account only those deductions that are attributable to income from sources other than mutual fund sales.
 
(d) Sham Transactions. All transactions that determine a taxpayer's ability to apportion or determine the composition of a taxpayer's apportionment percentage are subject to the sham transaction doctrine and the related tax doctrines as set forth in M.G.L. c. 62C, § 3A.
 
(e) Outline. 830 CMR 63.38.1, is organized as follows:
 
(1) Purpose, General Rule, Sham Transactions, and Outline
(2) Definitions
(3) Income Subject to Apportionment
(4) Related Business Activities
(5) Taxpayer and Taxpayer's Income Taxable in Another State
(6) Consistent Accounting Method
(7) Property Factor
(8) Payroll Factor
(9) Sales Factor
(10) Section 38 Manufacturers
(11) One or More Factors Inapplicable
(12) Corporate Partners
(13) Alternative Apportionment Methods
(14) Effective Date
 
(2) Definitions. For the purposes of 830 CMR 63.38.1 the following terms have the following meanings unless the context requires otherwise:
 
Allocable Item of Income, in the instance of a taxpayer with income from business activity taxable in more than one state, income from a transaction or activity that, consistent with the U.S. Constitution, can only be taxed in the state of the taxpayer's commercial domicile, because the item of income was not derived from a unitary business or from transactions that serve an operational function.
 
Agent, any person whose actions would be imputed to a taxpayer under the standards of 830 CMR 63.39.1 for purposes of determining whether the taxpayer is doing business in Massachusetts (or another state). In general, any taxpayer employee or other representative acting under the direction and control of the taxpayer is an agent, provided that bona fide independent contractors retained by a taxpayer are not agents of the taxpayer. However, for purposes of 830 CMR 63.38.1, one corporation will generally not be treated as an agent of an affiliated corporation.
 
Base of Operations, the taxpayer's place of business from which an employee customarily begins work or to which the employee customarily returns at some other time to receive instructions, direction, and supervision from the taxpayer or communications from customers or other persons, to replenish stock or other materials, to repair equipment, or to perform any other function necessary to the exercise of the employee's trade or profession.
 
Business Activity, all of a taxpayer's transactions and activities, regardless of classification or labels, occurring in the course of a taxpayer's trade or business, including, but not limited to "incidents" as described in M.G.L. c. 63, §§ 32(1)-(3), 39(1)-(3), and "doing business" as defined in M.G.L. c. 63, § 52A(1)(d). Business activities of an agent conducted on behalf of a principal are deemed to be the business activities of the principal.
 
Capital Asset, an asset as defined in Code § 1221, as modified by M.G.L. c. 62, § 1(m) and herein. For purposes of this regulation, this term includes property used in a trade or business within the meaning of Code § 1231(b) without regard to the holding period requirement in said section, and property held in connection with a trade or business entered into for profit within the meaning of Code § 1231(a)(3)(A)(ii)(II) without regard to the holding period requirement in said section.
 
Commissioner, the Commissioner of Revenue or the Commissioner's duly authorized representative.
Code, the Federal Internal Revenue Code, as amended and in effect for the taxable year.
 
Corporate Partner, any corporation that is a partner in a partnership.
 
Corporate Trust, any partnership, association or trust, the beneficial interest of which is represented by transferable shares.
 
Corporation, a domestic corporation as defined in M.G.L. c. 63, § 30.1, a domestic manufacturing corporation as defined in M.G.L. c. 63, § 38C, a foreign corporation as defined in M.G.L. c. 63, § 30.2, a foreign manufacturing corporation, as defined in M.G.L. c. 63, § 42B, or a utility corporation as defined in M.G.L. c. 63, § 52A(1).
 
Documentary Evidence, journals, books of account, invoices, expense reports, or other records that are maintained by the taxpayer in the regular course of its business. Generally, an affidavit or other document prepared in anticipation of, or in connection with, a tax audit, examination, or litigation is not documentary evidence.
 
Domicile (or commercial domicile), the principal place from which the business activities of a taxpayer are directed or managed. If it is not possible to determine the principal place from which the business activities of a taxpayer are directed or managed, the state of the taxpayer's incorporation shall be considered to be its state of domicile.
 
Employee, in general, any officer of a corporation, or any person who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee. Generally, a person will be presumed to be an employee if such person is included by the taxpayer as an employee for purposes of the payroll taxes imposed by the Federal Insurance Contributions Act. However, for purposes of this regulation, a leased employee is an employee of the client (lessee) organization, and not an employee of the employee leasing company.
 
Employee Leasing Company, a business that contracts with a client company to supply workers to perform services for the client company; provided that, the term "employee leasing company" does not include private employment agencies that provide workers to employers on a temporary help basis or entities such as driver-leasing companies which lease employees to another business to perform a specific service. See 430 CMR 5.07 et seq.
 
Income, taxable net income as defined in M.G.L. c. 63, § 38(a). The term 'income' encompasses both positive income and losses.
 
Independent Contractor, any person who performs services for a taxpayer but who is not an employee of the taxpayer, and who is not otherwise subject to the supervision or control of the taxpayer in the performance of the services. In general, a person is treated as an independent contractor with respect to a taxpayer if that person's actions would not be imputed to the taxpayer under the standards of 830 CMR 63.39.1 for purposes of determining whether the taxpayer is doing business in Massachusetts (or another state). A corporation may be treated as an independent contractor with respect to an affiliated corporation unless, under the particular facts, the affiliate is merely the corporation's alter ego.
 
Leased Employee, a person who performs services for a client company pursuant to a contract between the client company and an employee leasing company.
 
Manufacture, Manufacturing or Manufacturing Activity, the process of transforming raw or finished physical materials by hand or machinery, and through human skill and knowledge, into a new product possessing a new name, nature and adapted to a new use. In determining whether a process constitutes manufacture, manufacturing or manufacturing activity, the Commissioner will examine the facts and circumstances of each case in the manner set forth in the Manufacturing Corporation Regulation, 830 CMR 58.2.1(6)(b), (c).
 
Mobile Property, motor vehicles, construction equipment, or other tangible personal property that an owner or lessee regularly moves from place to place in the course of its business. Property normally used in a fixed location is not mobile property merely because it happens to be moved into or out of Massachusetts or another state during the taxable year.
 

Mutual Fund Service Corporation, a mutual fund service corporation within the meaning of M.G.L. c. 63, § 38(m)(1).

 

Mutual Fund Sales, a mutual fund sales within the meaning of M.G.L. c. 63, § 38(m)(1).
 
Partnership and Partner, as a general rule, the terms "partnership" and "partner" have the same meaning as in Code § 7701, provided that these terms shall also apply to other entities and their members treated as partnerships and partners for purposes of M.G.L. c. 62, § 17. The term "partnership" does not include any trust or estate subject to taxation under M.G.L. c. 62 or any entity taxed as a corporation under M.G.L. c. 63.
 
Person, a natural or legal person, including, but not limited to, an individual, corporation, corporate trust, partnership, or S corporation.
 
Presumption, a conclusion of law or fact that is assumed to apply to a taxpayer unless the Commissioner or the taxpayer affirmatively rebuts the presumption by presenting contrary evidence of the actual facts and circumstances applicable to the taxpayer.
 
Receipts, consideration or value of any kind received from a taxpayer's business activity, including but not limited to cash, cash equivalents, payments in kind, and boot, that the taxpayer obtains from selling or providing property or services to another party. Receipts are subject to the Commissioner's adjustments under M.G.L. c. 63, §§ 33, 39A.
 
Section 38 Manufacturer, for taxable years beginning on or after January 1, 1996, only, a corporation that is engaged in manufacturing during the taxable year, and whose manufacturing activities during the taxable year are substantial within the meaning of 830 CMR 63.38.1(10)(b)2., 3., below, regardless of whether the corporation is a domestic manufacturing corporation under M.G.L. c. 63, § 38C or a foreign manufacturing corporation under M.G.L. c. 63, § 42B, and regardless of whether the corporation is classified as a manufacturing corporation under M.G.L c. 58, § 2 and 830 CMR 58.2.1. As used in this regulation the term "section 38 manufacturer" refers to a corporation that is a manufacturing corporation within the meaning of M.G.L. c. 63, § 38(l)1.
 
Security, any interest or instrument commonly treated as a "security," as well as other instruments which are customarily sold in a public or secondary market or on a recognized exchange, including, but not limited to, transferable shares of beneficial interest in any corporation or other entity, bonds, debentures, notes, and other evidences of indebtedness, accounts receivable and notes receivable, cash and cash equivalents including foreign currencies, and futures contracts. A partnership interest will be treated as a security for purposes of 830 CMR 63.38.1 only in the case of a limited partnership whose activity is not attributed to its corporate limited partners under the provisions of 830 CMR 63.39.1(8) (Corporate Nexus). This definition of the term 'security' shall not be applied to the determination of security corporation classification under M.G.L. c. 63, § 38B.
 
State, any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or a political subdivision of any of the foregoing. M.G.L. c. 63, § 30.13.
 
State of the Purchaser, the state to which tangible personal property sold by a taxpayer is ultimately shipped or delivered. In the case of a third party recipient who receives the tangible personal property by direct shipment from the taxpayer at the direction of the purchaser, the "state of the purchaser" is the state of the third party recipient.
 
Tax or Taxes, with regard to Massachusetts, any tax or excise, including the corporate excise imposed under M.G.L. c. 63, §§ 32, 39, the corporate franchise tax imposed on utility corporations under M.G.L. c. 63, § 52A, or the personal income tax imposed under M.G.L. c. 62, § 4 as it applies under M.G.L. c. 62, § 5A for nonresidents, M.G.L. c. 62, § 8 for corporate trusts, and M.G.L. c. 62, § 17 for partners of partnerships, and M.G.L. c. 62, § 17A for shareholders of S corporations.
 
Taxable Net Income, the part of the net income of a taxpayer derived from the taxpayer's business activities carried on in Massachusetts and which is adjusted as required by the applicable provisions of M.G.L. c. 63, §§ 38(a), 52A(1)(b), or M.G.L. c. 62, §§ 5A, 8, or 17A, or by regulation, in order to determine the base amount of income to be multiplied by the apportionment percentage.
 
Taxpayer, any person as defined in 830 CMR 63.38.1(2) who is entitled or required to allocate or apportion income under M.G.L. c. 63, § 38 and 830 CMR 63.38.1.
 
Three Factor Apportionment Percentage, a fraction, the numerator of which consists of the property factor, payroll factor, and sales factor, and the denominator of which is the total number of factors utilized in the numerator. In the case of a taxpayer subject to tax under M.G.L. c. 63, § 38(c), or M.G.L. c. 62, §§ 5A, 8(a), 17 or 17A, the numerator of the fraction is the property factor plus the payroll factor plus twice the sales factor, and the denominator of the fraction is four. In the case of a taxpayer subject to tax under M.G.L. c. 63, § 52A, the numerator of the fraction is the property factor plus the payroll factor plus the sales factor, and the denominator of the fraction is three. The factors are computed in accordance with the provisions of 830 CMR 63.38.1.
 
Unrelated Business Activities, (or Unrelated Activities), two or more of a taxpayer's business activities that are not related business activities as defined in 830 CMR 63.38.1(4).
 
(3) Income Subject to Apportionment.
 
(a) General Rule. A taxpayer with income from business activity which is taxable both within and outside of Massachusetts must apportion its taxable net income to Massachusetts by multiplying its taxable net income, determined under M.G.L. c. 63, § 38(a), by the apportionment percentage determined under M.G.L. c. 63, § 38 and 830 CMR 63.38.1. For Massachusetts tax purposes, a taxpayer's income subject to apportionment is its entire income derived from its related business activities within and outside of Massachusetts not including any allocable items of income that either are or are not subject to the tax jurisdiction of Massachusetts.
 
(b) Separate Apportionment of Income of Affiliated Corporations. In the case of affiliated corporations, the income of each corporation is separately determined and apportioned unless, under the particular facts, one affiliate acts as the alter ego of another.
 
(c) Treatment of an Allocable Item of Income. An allocable item of income is allocated to Massachusetts and therefore not subject to apportionment if the taxpayer's commercial domicile is in the Commonwealth. Consequently, in such cases, any property or payroll utilized in, or sales that derive from, activity or transactions that generate an allocable item of income are excluded from the taxpayer's apportionment factors, in the case of property or payroll, to the extent that the property or payroll generated the item of income and, in the case of sales, to the extent that the sales derived from the item of income. An allocable item of income is not allocated to Massachusetts if the taxpayer's commercial domicile is outside the Commonwealth.
 
(d) Treatment of Income Derived from Unrelated Activities. If a taxpayer has one or more items of income derived from unrelated business activities, as determined under 830 CMR 63.38.1(4), the items of income will be excluded from the taxpayers taxable net income and will not be apportioned to Massachusetts if Massachusetts does not have jurisdiction to tax the items of income under the constitution of the United States. A taxpayer must disclose on its return the nature and amount of any item of income that is derived from unrelated business activities and is excluded from (or is excludable from) taxable net income. The taxpayer must also disclose and exclude expenses allocable in whole or part to such unrelated business activities. M.G.L. c. 63, § 30.4. Any property or payroll utilized in, or sales that derive from, unrelated business activity are excluded from the taxpayer's apportionment factors if the income from the unrelated activity is not subject to tax in Massachusetts, in the case of property or payroll, to the extent that the property or payroll generated the item of income and, in the case of sales, to the extent that the sales derived from the item of income.
 
Example 1. Famous Corporation is a foreign corporation doing business in Massachusetts but domiciled in another state. Famous acquires a minority interest in the shares of Unknown Corporation as a long-term investment. The operations of Famous and Unknown are not related business activities. Any gain or loss on the sale of the Unknown stock is excluded from Famous' taxable net income and is not apportioned to Massachusetts. Famous must disclose the nature and amount of the excluded gain or loss on its Massachusetts return.
 
Example 2. Local Corporation is a foreign corporation doing business and domiciled in Massachusetts. Local acquires a minority interest in the shares of Distant Corporation as a long-term investment. The operations of Local and Distant are not related business activities. Any gain or loss on the sale of Distant stock is included in Local's taxable net income and is allocated to Massachusetts.
 
(4) Related Business Activities.
 
(a) Definition.
 
1. General Rule. Related business activities are activities where there is a sharing or exchange of value between the segments of a single entity or multiple entities such that the activities are mutually beneficial, interdependent, integrated, or such that they otherwise contribute to one another. In general, any two segments or activities of a single corporation (or other taxpayer) are related business activities unless the two segments or activities are not unitary under U.S. constitutional principles. In addition, the following activities are related business activities notwithstanding the absence of a unitary relationship:
 
a. the short term investment of capital in a non-unitary business segment or activity; and
 
b. any other investment of capital that serves an operational function.
 
2. Income from Cash, Cash Equivalents, and Short-Term Securities. Interest or other income from cash deposits, cash equivalents, and short-term securities is considered related business income if such capital serves or performs an operational function. Without limitation, examples of operational functions include: the use or holding of funds as working capital or reserves; the use or holding of funds to maintain a favorable credit rating (e.g. by maintaining a strong current or quick asset ratio); the use or holding of funds to self-insure against business risks; and the interim investment of funds pending their future use in the taxpayer's business.
 
(b) Determination of Related Business Activities. The determination of whether business activities are related will turn on the facts and circumstances of each case. The presence of related business activities between two business entities may be demonstrated by the vertical or horizontal integration of the two entities, or by other indicia of related business activity including, but not limited to: sales, exchanges, or transfers between the entities; common marketing; transfer or pooling of technical information; common purchasing; other common operations or systems; or centralized management. In determining the presence of related business activities, a taxpayer's business activities, both within and outside of Massachusetts, its organizational structure, and the underlying economic realities applicable to its business, must be considered as a whole.
 
(c) Burden of Proof. Except as provided in 830 CMR 63.38.1(4)(d) (relating to corporate limited partners), all income of a single taxpayer (whether derived directly or through agents, partnerships, or other entities whose activities are attributed to the taxpayer) is presumed to be income from related business activities until the contrary is established. Either the taxpayer or the Commissioner may assert that an item of a taxpayer's income is derived from unrelated business activities. The party making such an assertion must prove by clear and cogent evidence that, in the aggregate, the related business factors at 830 CMR 63.38.1(4)(b), above, do not reasonably warrant a finding that the business activities are related. To demonstrate that income from cash, cash equivalents, or short-term securities is derived from unrelated business activities, a taxpayer must prove by clear and cogent evidence that the underlying assets and their acquisition, maintenance, and management were, in fact, unrelated to the taxpayer's business activities in the Commonwealth.
 
(d) Presumption of Unrelated Business Activity of Corporate Limited Partners. In cases where a corporate limited partner owns no more than fifty percent of either the capital or profit interests of a partnership and the business activity of the limited partnership is attributed to the corporate limited partner under 830 CMR 63.39.1(8), income that the corporate partner derives from the holding or disposition of its limited partnership interest is presumed to be unrelated to the corporation's other business activities unless the Commissioner or the taxpayer rebuts this presumption, as provided in 830 CMR 63.39.1(8)(f). If the business activities of the partnership and the corporate limited partner are unrelated, then the corporate limited partner must separately account for its limited partnership income and its other business income and must separately apportion to Massachusetts income from each unrelated activity (to the extent that Massachusetts has jurisdiction to tax income from each such activity), using only the apportionment factors applicable to that activity.
 
Example 1. Corporation A, which is domiciled outside of Massachusetts, owns a minority limited partnership interest in Partnership A. Partnership A conducts business in Massachusetts. Apart from this partnership holding, Corporation A does not conduct business in Massachusetts. Neither Corporation A nor the Commissioner rebuts the presumption that the business activities of Corporation A and Partnership A are unrelated. Corporation A must separately apportion to Massachusetts income from the holding or disposition of its interest in Partnership A, using the apportionment factors derived from the partnership's activity. Income from Corporation A's other activities is not subject to Massachusetts tax jurisdiction and is excluded from the Corporation's taxable net income.
 
Example 2. Corporation B, which is domiciled outside of Massachusetts, conducts business in Massachusetts and, in addition, owns a minority limited partnership interest in Partnership B. Partnership B does not conduct business in Massachusetts. Neither Corporation B nor the Commissioner rebut the presumption that the business activities of Corporation B and Partnership B are unrelated. Income from Corporation B's holding or disposition of its interest in Partnership B is not subject to Massachusetts tax jurisdiction and is excluded from the Corporation's taxable net income. Corporation B must apportion the balance of its income to Massachusetts using the apportionment factors derived from its non-partnership activities.
 
Example 3. Corporation C is domiciled in Massachusetts and holds a minority limited partnership interest in Partnership C. Partnership C may or may not be engaged in business in Massachusetts. Neither the taxpayer nor the Commissioner rebuts the presumption that the activities of Corporation C and Partnership C are unrelated. Corporation C must separately apportion to Massachusetts income derived from its interest in Partnership C, using the apportionment factors derived from the partnership's activity. Corporation C must apportion the balance of its income to Massachusetts using the apportionment factors derived from its non-partnership activities. The taxable net income of Corporation C is the sum of these separately apportioned amounts.
 
(e) Evidentiary Matters. In determining whether two business activities conducted by a taxpayer are related, the Commissioner will apply the following evidentiary rules.
 
1. Production of Evidence. Failure by the taxpayer to produce evidence that is in the control of either the taxpayer or an entity controlled by the taxpayer gives rise to an inference that the evidence is unfavorable.
 
2. Reporting Consistency. A taxpayer must assert claims of unrelated business activity consistently from year to year on its Massachusetts returns. A taxpayer must also consistently treat items of income as constitutionally apportionable or non-apportionable on returns filed in various states where the taxpayer is subject to tax unless such consistency is precluded by differences in the statutory allocation and apportionment rules of the various states in which the taxpayer is subject to tax. The provisions of 830 CMR 63.38.1(4)(b) notwithstanding, if a taxpayer claims on a return filed with Massachusetts or another state in any taxable year that income from a particular activity is apportionable income, such claims may be considered as evidence that the income is from a related business activity and is subject to apportionment in Massachusetts in the current taxable year.
 
3. Disallowance of Expenses. In each taxable year in which such expenses are incurred, the taxpayer must disclose and exclude expenses allocable in whole or part to unrelated business activities. M.G.L. c. 63, § 30.4. The Commissioner may consider a taxpayer's failure, in any taxable year, to disclose and exclude the expenses associated with specific business activities as evidence that those activities are not, in fact, unrelated business activities.
 
(5) Taxpayer or Taxpayer's Income Taxable in Another State.
A taxpayer is required to apportion its income when it is has income from business activity that is taxable both in Massachusetts and at least one other state. For purposes of this requirement, taxable has the meaning set forth in 830 CMR 63.38.1(5)(b) below. This standard is not satisfied as to such other state merely because the taxpayer is incorporated in such state or files a return in that state that relates to a capital stock tax or a franchise tax for the privilege of doing business.
 
 
For purposes of determining a taxpayer's apportionment percentage under 830 CMR 63.38.1(9)(c)2, pertaining to throwback sales, a taxpayer is taxable in another state if it meets either test set forth in 830 CMR 63.38.1(5)(a) or (5)(b) below for all or part of the taxable year.
 
The provisions set forth in this section also apply to corporate partners. See 830 CMR 63.38.1(12)(b).
 
(a) Subject to Tax. A taxpayer is considered taxable in another state if the taxpayer is "subject to" a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax imposed by that state. Whether or not a taxpayer is subject to any such tax depends upon the nature and substance of the tax and not upon its form or title.
 
1. Evidence That Corporation is Subject to Tax. Any taxpayer which claims it is subject to one of the taxes described in M.G.L. c. 63, § 38(b)(1) and 830 CMR 63.38.1(5)(a) in another state must furnish to the Commissioner upon request documentary evidence to support the claim. The documentary evidence should include proof that the taxpayer has filed the requisite tax return and has paid the tax due. A taxpayer that does not establish that it has filed a return and paid the tax due in a particular state is presumed not to be subject to tax in that state.
 
2. Voluntary Filing Insufficient. A voluntary filing in another state not required by the law of such other state does not cause the taxpayer to be subject to tax in that state.
 
3. Abatements. A taxpayer that has filed a return in another state and paid tax to that state nevertheless is presumed not to be subject to tax in that state if the taxpayer has filed an abatement application or similar claim in that state alleging that it is not subject to tax in such state.
 
(b) Jurisdiction to Tax. A taxpayer is considered taxable in another state if that other state has jurisdiction to subject the taxpayer to a net income tax, regardless of whether, in fact, the state does or does not impose such a tax on the taxpayer.
 
1. Standard Used. Another state has jurisdiction to subject the taxpayer to a tax with respect to a business activity if, under the Constitution and laws of the United States, the taxpayer's business activity could be taxed in Massachusetts under the same facts and circumstances that exist in the other state. A state does not have such jurisdiction where, inter alia, the state is prohibited from imposing the tax by reason of the provisions of P.L. 86-272, 15 U.S.C. §§ 381-384.
 
2. Evidence of Jurisdiction to Tax. The Commissioner will presume that any activities of a corporation in another state are protected from the other state's tax jurisdiction by federal law, including P.L. 86-272, if the corporation does not file returns in that jurisdiction. Any taxpayer that claims to be subject to the tax jurisdiction of another state must furnish evidence to the Commissioner upon request to substantiate the claim. Documentary evidence contemporaneous with the events in question will be given greater weight than affidavits or other evidence not contemporaneous with those events in determining whether the taxpayer's activities subject it to another state's jurisdiction.
 
In addition to documentary evidence, the Commissioner will generally recognize that another state has jurisdiction to subject a particular taxpayer to a net income tax if the state has issued a written opinion to the taxpayer to that effect, provided that: (1) the opinion is issued by a competent governmental authority in the other state; (2) the opinion identifies the particular taxpayer and tax period to which it applies; and (3) the opinion is based on an evaluation of the activities of the taxpayer viewed as a separate entity, rather than upon activities that may be conducted by unitary affiliates of the taxpayer in the other state.
 
The following examples illustrate the application of 830 CMR 63.38.1(5)(a) and (5)(b).
 
Example 1. In Year 1, a corporation that is incorporated in Massachusetts ("Corporation") and has business activities in Massachusetts is also engaged in the solicitation of sales of tangible personal property in Nevada, which does not impose a corporate income tax. In addition, if Nevada imposed a corporate income tax, the imposition of that tax would be proscribed by the provisions of the Federal law, Public Law 86-272. Although Corporation is engaged in business activity in both Massachusetts and one other state, it does not have income from business activity in a state other than Massachusetts that is taxable in such state. Therefore, all of Corporation's income from its business activities is allocated to Massachusetts. (Note that if Corporation were entitled to apportion its income by reason of its activities in an additional state, it would not be taxable in Nevada for purposes of determining its throwback sales under 830 CMR 63.38.1(9)(c)2. See 830 CMR 63.38.1(5)(a) and (5)(b).)
 
Example 2. Same facts as in Example 1, except that in Year 2, Corporation undergoes an F reorganization under the Internal Revenue Code and, as a result of this reorganization, is re-incorporated in Delaware. Merely as a result of this re-incorporation, Corporation is required to file a franchise tax return for the privilege of doing business in Delaware. Although Corporation is required to make a franchise tax filing in Delaware, Corporation is not engaged in business activity in that state. It continues to be the case that Corporation does not have income from business activity in a state other than Massachusetts that is taxable in such state. Therefore, all of Corporation's income from its business activities is allocated to Massachusetts. (Note that if Corporation were entitled to apportion its income by reason of its activities in an additional state, it would not be taxable in Nevada but would be taxable in Delaware for purposes of determining its throwback sales under 830 CMR 63.38.1(9)(c)2. See 830 CMR 63.38.1(5)(a) and (5)(b).)
 
Example 3. Same facts as in Example 2, except that in Year 3, apart from its Massachusetts business activities,
Corporation is also engaged in the solicitation of sales of tangible personal property in both Nevada and Pennsylvania. Although Pennsylvania imposes an income tax on corporations, Corporation is protected from the imposition of this tax by the application of the Federal law, Public Law 86-272. Pennsylvania also imposes a capital stock tax, which that state does impose upon Corporation. Although Corporation is subject to the Pennsylvania capital stock tax, this tax is not a tax on the Corporation's income from business activity in Pennsylvania. It continues to be the case that Corporation does not have income from business activity in a state other than Massachusetts that is taxable in such state. Therefore, all of Corporation's income from its business activities is allocated to Massachusetts. (Note that if Corporation were entitled to apportion its income by reason of its activities in an additional state, it would not be taxable in Nevada but would be taxable in Delaware and Pennsylvania for purposes of determining its throwback sales under 830 CMR 63.38.1(9)(c)2. See 830 CMR 63.38.1(5)(a) and (5)(b).)
 
Example 4. Same facts as in Example 3, except that in Year 4, apart from its Massachusetts business activities and its sales solicitation activities in Nevada and Pennsylvania, Corporation also opens a sales office in Nevada. Nevada does not impose a corporate income tax. However, if Nevada imposed a corporate income tax, Corporation would no longer be protected from the imposition of this tax by the application of the Federal law, Public Law 86-272. Therefore, Corporation has income from business activity that is taxable in one state other than Massachusetts, and is required to apportion its income. For purposes of determining Corporation's throwback sales under 830 CMR 63.38.1(9)(c)2, Corporation is taxable in Nevada and also Pennsylvania and Delaware. See 830 CMR 63.38.1(5)(a) and (5)(b).
 
3. "States" Outside the United States.
 
a. In the case of any foreign country or any other "state" as defined in M.G.L. c. 63, § 30.13 and 830 CMR 63.38.1(2), other than a state of the United States or political subdivision of a state of the United States, the determination of whether such state has jurisdiction to subject the taxpayer to a net income tax is made as though the federal jurisdictional standards of the United States applied in that state. If jurisdiction to tax is otherwise present, a foreign state is not considered to lack jurisdiction by reason of the provisions of a treaty between the foreign state and the United States or by reason of the provisions of P.L. 86-272, 15 U.S.C. §§ 381-384.
 
b. For purposes of determining whether a taxpayer must allocate its income to Massachusetts under M.G.L. c. 63, § 38(b), or apportion its income to Massachusetts under M.G.L. c. 63, § 38(c), a taxpayer is not subject to tax in a foreign state merely by virtue of the taxpayer's sales of tangible personal property to purchasers in the foreign state. However, if a taxpayer is otherwise entitled to apportion its income under M.G.L. c. 63, § 38(c), and must therefore calculate a sales factor under M.G.L. c. 63, § 38(f), then solely for purposes of calculating its sales factor, the taxpayer will be deemed to be taxable in a foreign state whenever it ships or delivers tangible personal property to a purchaser in that foreign state. See 830 CMR 63.38.1(9)(c)2.b.ii.
 
(c) Separate Company Determination. An individual corporation is subject to tax in another state or subject to the tax jurisdiction of another state for purposes of 830 CMR 63.38.1(5)(a) or (b) only on the basis of the separate activities of that individual corporation, including without limitation activities attributed to that corporation through partnerships engaged in related business activities with the corporate partner, as described in 830 CMR 63.39.1 (Corporate Nexus). A corporation is not subject to tax in another state or subject to the tax jurisdiction of another state for purposes of M.G.L. c. 63, § 38, merely because a corporate affiliate of the corporation conducts business activities in the other state that are unitary with the corporation's business activities.
 
(6) Consistent Accounting Method.
 
(a) To the extent not inconsistent with the provisions of M.G.L. c. 63, § 38, or 830 CMR 63.38.1, amounts included in the factors of the apportionment percentage must be determined by the same accounting method as the taxpayer uses in determining its federal taxable income for the same taxable period. If a taxpayer changes its accounting methods for Massachusetts tax purposes but does not simultaneously change its federal accounting methods, Code § 481(a) shall apply to the determination of the taxpayer's taxable net income and apportionment percentage.
 
(b) A taxpayer's taxable year for Massachusetts tax purposes is any fiscal or calendar year or period for which the taxpayer is required to file a federal return. A taxpayer that engages in business in Massachusetts for all or part of its taxable year must file a Massachusetts return for the full federal year or period, and the apportionment factors must reflect the full year or period. In the case of a "short" federal tax year for which a separate federal return is required, the taxpayer must file a Massachusetts return for the same short year, and the apportionment factors on the return shall reflect the taxpayer's activity during only the short year. The non-income measure of excise is prorated for short taxable years under M.G.L. c. 63, §§ 32, 39, but the excise attributable to income earned during a short taxable year is not prorated.
 
(7) Property Factor. The property factor is a fraction the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in Massachusetts during the taxable year and the denominator of which is the average value of all of its real and tangible personal property owned or rented and used during the taxable year.
 
(a) Real and Tangible Personal Property. The term "real and tangible personal property" includes land, buildings, machinery, stock of goods, equipment, and other real and tangible personal property, but does not include coin and currency unless held as a stock of goods for resale. Leaseholds and leasehold improvements, whether located within or without Massachusetts, are included within the meaning of "real and tangible personal property," regardless of whether the taxpayer is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. In general, any real or tangible property whose cost is not capitalized, but is directly expensed, for federal income tax purposes is excluded from the numerator and denominator of the property factor, provided that this exclusion shall not apply to otherwise depreciable property whose cost is expensed pursuant to an election under the Code, such as the election to expense under Code § 179.
 
(b) Property Used During the Taxable Year. Real or tangible personal property owned or leased by a taxpayer during the taxable year is included in the property factor if it is used directly or indirectly during the taxable year for the production of business income. Real or tangible personal property of a type that is depreciable under Code § 167 is considered to be used by the taxpayer for the production of business income when it has been placed in service within the meaning of Reg. § 1.167(a)-10(b), provided that the property has not been retired within the meaning of Reg. § 1.167(a)-8. Property or equipment under construction shall be included in the property factor of a construction contractor to the extent that the work completed exceeds progress payments received by the contractor. Real or tangible personal property of a type that is not depreciable under Code § 167 is presumed to be used directly or indirectly for the production of business income unless the taxpayer or the Commissioner rebuts this presumption under the facts of a particular case.
 
(c) Property in Transit. Property in transit between locations of the taxpayer to which it belongs shall be considered to be at its destination for purposes of the property factor. Property in transit between a buyer and seller which is included by a taxpayer in the denominator of its property factor in accordance with its regular accounting practices shall be included in the numerator according to the state of destination. If goods in transit to a buyer are included in the property factor of a seller, such state of destination for property factor purposes shall be the state in which the seller's possession and control of the property is transferred to the buyer. (830 CMR 63.38.1(9)(c)1.a.i-iv. shall not apply to the property factor).
 
(d) Mobile Property. If a taxpayer owns or rents mobile property, as defined in 830 CMR 63.38.1(2), and uses that property both within and outside of Massachusetts during the taxable year, the numerator of the taxpayer's property factor shall include the value of the property multiplied by a percentage which represents the use of the property in Massachusetts relative to its use everywhere during the taxable year. Except as otherwise required by special apportionment regulations promulgated under the authority of M.G.L. c. 63, § 38(j), a taxpayer may elect to use any reasonable method for determining the percentage of use of its mobile property in Massachusetts. The election is made by filing a return that employs the chosen method for the first tax year, ending on or after August 11, 1995 (the date on which the first version of 830 CMR 63.38.1 was promulgated), in which the taxpayer owns or rents mobile property and apportions income to Massachusetts. The taxpayer must attach a statement to its return describing the method chosen and must use the same method consistently from year to year. The taxpayer must maintain records adequate to substantiate its calculations. Once a taxpayer elects a particular method, it may supplement its election prospectively with respect to new types of mobile property that it may acquire in future years, but the Commissioner generally will not allow a change in any method, once elected, either upon application for abatement or upon filing of returns for future years, unless the former method does not reasonably reflect the taxpayer's use of mobile property in Massachusetts.
 
The Commissioner will presume that the methods stated in 830 CMR 63.38.1(7)(d)1.-4. reasonably approximate the use of mobile property in Massachusetts.
 
1. A taxpayer may determine the use of mobile property in Massachusetts based upon the proportion of time during the taxable year that the property is owned or rented by a taxpayer and in actual use in Massachusetts relative to the total time during the taxable year that the property is owned or rented by the taxpayer and in actual use in jurisdictions where the taxpayer is subject to tax.
 
2. A taxpayer may attribute the use of on-road vehicles owned or rented by the taxpayer to Massachusetts by a fraction, the numerator of which is the miles such vehicles were driven in Massachusetts during the taxable year, and the denominator of which is the number of miles that the vehicles were driven during the taxable year in jurisdictions where the taxpayer is subject to tax. A taxpayer may maintain mileage records on a per-vehicle basis or, if a taxpayer owns or rents a fleet of vehicles that is located both within and outside of Massachusetts, on a fleet basis, provided that all vehicles in a fleet must be of a substantially similar type and value.
 
3. A taxpayer may attribute the use of an automobile assigned to a traveling employee to the state in which the automobile is registered, provided that the taxpayer uses this method for all of its automobiles assigned to traveling employees.
 
4. A taxpayer may attribute the entire use of an item of mobile property owned or rented by the taxpayer to the state in which the property is located for eighty percent or more of the taxable year, provided that any taxpayer electing this method must use it with respect to all items of mobile property that it owns or rents during the taxable year and that are located in any one state for at least eighty percent of the taxable year.
 
(e) Valuation of Property Owned. Property owned by the taxpayer is valued at its original cost. Without limitation, property owned by a taxpayer includes property leased to another, provided that the transaction is treated as a lease, rather than as a conditional sale, for federal income tax purposes.
 
1. Original Cost. As a general rule, "original cost" means the basis of the property for federal income tax purposes (prior to any federal adjustments) at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements thereto and partial disposition thereof, as, for example, by reason of sale, exchange, or abandonment, but not adjusted for subsequent depreciation. However, the following special rules shall apply.
 
a. If the original cost of property is not ascertainable, the property is included in the factor at its fair market value on the date of acquisition by the taxpayer.
 
b. Generally, if a taxpayer acquires assets in a transaction in which the transferor does not recognize gain or loss under the Code, such as a reorganization, liquidation, gift, or contribution to capital, and if under the Code the acquiring taxpayer carries over the transferor's basis (or adjusted basis), then the original cost to the acquiring taxpayer is the same as the original cost to the transferor. However, if gain or loss is recognized for Massachusetts tax purposes under 830 CMR 63.32B.1(7) when property is transferred within a consolidated group of corporations, the transferor's basis does not carry over to the taxpayer.
 
c. If a taxpayer acquires assets in a transaction in which, under the Code, there is a step-up in basis, (e.g. a Code § 338 election), then the original cost to the acquiring taxpayer for purposes of valuation of property is the stepped-up basis.
 
d. The original cost of property acquired by a taxpayer in a like-kind exchange is the original cost of the property transferred by the taxpayer, plus any gain that the Code requires the taxpayer to recognize on account of the exchange.
 
2. Inventory or Stock of Goods. Inventory or stock of goods is included in the property factor in accordance with the valuation method used for federal income tax purposes. Consigned inventory owned by the taxpayer is included in the property factor.
 
3. Averaging Property Values. As a general rule, the average value of property owned by a taxpayer is determined by averaging the values at the beginning and end of the taxable year. However, the Commissioner may require averaging by monthly values if such method is required to reflect properly the average value of the taxpayer's property for the tax period. Averaging by monthly values will generally be applied if substantial changes or fluctuations in the values of the property occur during the taxable year or where property is acquired after the beginning of the taxable year or disposed of before the end of the taxable year. When a corporation makes a final disposition of its assets or liquidates, thus terminating its taxable year (and the last month of such year), the value of its items of property for such end of year (and month) shall be the value of such items at the commencement of business on such day of final disposition or liquidation.
 
(f) Valuation of Rented Property. Property rented by the taxpayer is valued at eight times its net annual rent, provided that such rate reflects the fair rental value of the property as of the date of the rental agreement.
 
1. Items Included in Rent. Rent is the actual sum in money or other consideration payable directly or indirectly by the taxpayer or for its benefit for the use of property, regardless of how such amounts may be designated. Rents include amounts that are calculated as a percentage of sales or profits, and amounts payable as additional rent or in lieu of rent, such as interest, taxes, insurance, repairs, or any other items which are required to be paid by the terms of the rental agreement. Rent does not include travel expenses such as hotel or motel accommodations, or amounts paid to a lessor as bona fide service charges, such as payments for separately metered utilities, janitorial services, or other bona fide services provided to a lessee that the lessee might, in regular commercial practice, obtain from a party other than the lessor. If a payment includes rent and bona fide service charges, and the amounts are not segregated, the amount of the rental shall be determined on the basis of the relative fair market values of the property and the services provided.
 
The following examples illustrate the application of 830 CMR 63.38.1(7)(f)1:
 
Example 1. Pursuant to the terms of a lease of real property, a taxpayer pays the lessor $12,000 a year rent, which includes a $1,200 fee for janitorial services. Additionally, the taxpayer pays taxes in the amount of $2,000 and interest in the amount of $1,000. The annual rent is $13,800.
 
Example 2. A taxpayer stores part of its inventory in a public warehouse. Under the terms of the contract, the total charge for the year is $1,000, of which $700 was for the exclusive use of a designated storage space and $300 for inventory insurance, handling and shipping charges, and C.O.D. collections. The annual rent is $700.
 
2. Annual Rent. As a general rule, the annual rental is the amount paid as rent for property for a 12-month period. Where property is rented for less than a 12-month period, the amount paid for the actual rental period shall be considered to be the annual rent for the tax period. However, in the case of a short taxable year, the rent paid for the short tax period shall be annualized.
 
3. Net Annual Rent. Net annual rent is the annual rental paid by the taxpayer, less the aggregate annual subrentals paid by subtenants of the taxpayer. The net annual rent may not be less than an amount which bears the same relation to the annual rent paid by the taxpayer as the property used by the taxpayer bears to the total property.
 
The following example illustrates the application of 830 CMR 63.38.1(7)(f)3:
 
A corporation rents a 10-story building at an annual rent of $1,000,000. It occupies two stories and sublets eight stories for $1,000,000 a year. The net annual rent of the corporation must not be less than two-tenths of the corporation's annual rent for the entire year, or $200,000.
 
4. Property Used at No Charge or Nominal Rent. If property owned by others is used by the taxpayer at no charge or rented by the taxpayer for a nominal amount, the net annual rent for such property shall be the fair market rental value for such property, as determined on the basis of rentals of substantially similar properties in the same market in transactions negotiated at arm's length. However, all rentals of property from federal or state governmental entities shall be deemed to be at fair value.
 
(g) Property Reporting Consistency. A taxpayer must use the same rules for valuing property or for including or excluding types of property in both the numerator and the denominator of the property factor. If a taxpayer changes its method of valuing property, or of excluding or including property in the property factor, from the method used in its return in the prior year, the taxpayer must disclose in the return for the current year the presence of such change, the nature and extent of the change, and the reason for the change. The Commissioner may disregard changes in the current year or in future tax years if they have not been adequately disclosed.
 
(8) Payroll Factor. The payroll factor is a fraction the numerator of which is the total amount paid for compensation in Massachusetts during the taxable year by the taxpayer and the denominator of which is the total amount paid for compensation everywhere during the taxable year.
 
(a) Effect of Method of Accounting.
 
1. General Rule. The total amount paid for compensation is computed on the cash basis, as reported for unemployment compensation purposes.
 
2. Alternative Accrual Method Election. Notwithstanding 830 CMR 63.38.1(8)(a)1., a taxpayer that uses the accrual method of accounting in computing its taxable net income may elect for purposes of 830 CMR 63.38.1(8) to use the accrual method in determining the total amount of compensation paid in Massachusetts during the taxable year.
 
a. Election. In order to elect the accrual method, a taxpayer must properly complete and file its return reporting the total compensation accrued during the taxable year along with an electing statement that "pursuant to 830 CMR 63.38.1(8)(a)2.a., the taxpayer is electing the accrual method of accounting for purposes of computing the payroll factor." An election by the taxpayer is binding for all subsequent taxable years except as provided at 830 CMR 63.38.1(8)(a)2.b., below. In the case of taxpayers that file combined returns of income under 830 CMR 63.32B.1, an election must be made by the principal reporting corporation and binds all members of the Massachusetts group that are or become subject to excise under M.G.L. c. 63, §§ 32, 39.
 
b. Revocation of Election. A taxpayer may not revoke an election under 830 CMR 63.38.1(8)(a)2. to use the accrual method of accounting for determining the payroll factor except with the prior written approval of the Commissioner. The Commissioner may grant such approval for any taxable year upon the written request of the taxpayer for a letter ruling, under 830 CMR 62C.3.2, if the request is submitted to the Commissioner on or before the due date, including extensions, for the filing of the taxpayer's return, as determined under General Laws Chapter 62, 62C, or 63, as applicable. Permission to change accounting methods under this subsection will be granted only for a valid business purpose other than a reduction.
 
(b) Compensation Paid in Massachusetts. Compensation is paid in Massachusetts if any one of the following tests is met:
 
1. The employee's service is performed entirely within Massachusetts;
 
2. The employee's service is performed both within and without Massachusetts, but the service performed outside Massachusetts is incidental to the employee's service within Massachusetts. Service is incidental if it is temporary or transitory in nature, or it is rendered in connection with an isolated transaction;
 
3. Some of the employee's service is performed in Massachusetts, and
 
a. the employee's base of operations is in Massachusetts, or
 
b. if there is no base of operations in any state, but the place from which the employee's service is directed or controlled is in Massachusetts, or
 
c. the base of operations or the place from which the employee's service is directed or controlled is not in any state in which some part of the service is performed, but the employee's residence is in Massachusetts.
 
(c) Items Included. Compensation included in the payroll factor includes wages, salaries, commissions, and any other form of remuneration paid to employees for personal services rendered. Amounts will generally be considered to be paid if they are treated as wages under M.G.L. c. 151A, § 1, as amended. However, in the event of any ambiguity in the treatment of a particular item under M.G.L. c. 151A, § 1, the amount shall be treated as paid to an employee if the amount constitutes income to the employee under the Code during the taxable year or if the amount would constitute income to the employee during the taxable year if the employee were subject to the Code.
 
Inclusion of items in the payroll factor depends upon the particular facts and circumstances. In determining whether compensation is includible in the payroll factor, the following guidelines will be employed:
 
1. Compensation is includible in the payroll factor if the compensation is paid for personal services rendered by the employee to the taxpayer during the taxable year. Compensation is not limited to payments described by the taxpayer as salary, wages, commissions, or bonuses. For example, compensation would generally include employee travel or other allowances in excess of expenses, or the value of board, housing, or the personal use of an automobile, provided that the Code includes these benefits in the gross income of the recipient.
 
2. Employer contributions under a qualified cash or deferred arrangement as defined in Code § 401(k) and employer contributions to nonqualified deferred compensation plans are generally included in the payroll factor. See M.G.L. c. 151A, § 1(s)(B).
 
(d) Items Excluded. For purposes of the payroll factor, compensation excludes payments that are not made by a taxpayer to its employees for personal services rendered, including any amount specifically excluded from the definition of "wages" under M.G.L. c. 151A, § 1(s)(A), as amended. The following items are excluded without limitation (subject to the amendment of M.G.L. c. 151A):
 
1. Payments to or on behalf of employees (including amounts paid for insurance or annuities) for sickness or accident disability, hospitalization, or death, as provided by M.G.L. c. 151A, § 1(s)(A).
 
2. Payments to or from qualified trusts under Code § 401(a) (other than employer contributions under qualified cash or deferred arrangements as defined in Code § 401(k)), payments to or from qualified annuity plans or contracts under Code § 403, and payments to or from simplified employee pensions under Code § 408(k).
 
3. Employer's payments of employee's FICA taxes.
 
4. Tips paid in any medium other than cash, and cash tips which are less than $20 a month and not reported to the employer pursuant to Code § 6053(a).
 
5. Non-cash payments to employees for services not in the course of the taxpayer's trade or business.
 
6. Payments made to independent contractors, retirees, or other persons not properly classified as employees.
 
(e) Treatment of Leased and Temporary Employees.
 
1. Leased Employees. Compensation paid for personal services rendered by leased employees is includible in the payroll factor of the taxpayer if the taxpayer is the recipient of the services of the leased employee. Compensation for personal services rendered by leased employees to client companies is excluded from the payroll factor of employee leasing companies.
 
2. Temporary Employees. Compensation paid for personal services rendered to client companies by employees of temporary help agencies is included in the payroll factor of the temporary agency and is generally excluded from the payroll factor of the client company. However, the Commissioner may require the inclusion of compensation paid to temporary employees that perform services under the direction and control of a client company in the payroll factor of that client company in any taxable year in which all compensation paid to temporary employees performing such services in Massachusetts for the client company exceeds fifty percent of the client company's Massachusetts payroll, as calculated without the inclusion of compensation paid to officers or shareholders of the client company. For purposes of 830 CMR 63.38.1(8)(e)2., if compensation paid to temporary employees is included in the payroll factor of a client company, such compensation shall be eighty-five percent of the payments during the taxable year by the client company to the temporary help agency or agencies providing the temporary employees. Any adjustment to the payroll factor of a client company shall not affect the payroll factor of the temporary help agency or agencies providing the temporary employees.
 
(f) Affiliated Corporations. In order to prevent distortions in the payroll factor, the Commissioner may require compensation paid to an employee of a corporation that is a member of an affiliated group, as defined in section 1504 of the Internal Revenue Code, as amended and in effect for the taxable year, to be included in the payroll factor of the group member for which the employee performed an amount of services greater than the amount of services the employee performed for any other group member, regardless of which group member actually paid the compensation.
 
(g) Payroll Consistency. A taxpayer must use the same rules for determining compensation paid in both the numerator and the denominator of the payroll factor. If a taxpayer changes its method of determining compensation paid, including, but not limited to, its method of accounting of such compensation, from the method used in its return for the prior year, the taxpayer must disclose in the return for the current year the presence of the change, the nature and extent of the change, and the reason for the change. The Commissioner may disregard changes in the current year or in future tax years if they have not been adequately disclosed.
 
(9) Sales Factor. The sales factor is a fraction whose numerator is total sales of the taxpayer in Massachusetts during the taxable year and whose denominator is total sales of the taxpayer everywhere during the taxable year. In general, a taxpayer's total sales are its gross receipts. However, certain items, as more particularly referenced in 830 CMR 63.38.1(9)(a), are specifically excluded from this computation. Also, in the case of the sale, exchange or other disposition of a capital asset used in a taxpayer's trade or business the sales to be included are measured by the gain from the transaction and not the gross receipts. In the case of a transaction that is deemed to be a sale or exchange under the provisions of the Code, the sales are the deemed receipts or gain from the transaction under the Code, as the case may be, depending upon whether the deemed transaction is a deemed sale or exchange of a capital asset.
 
(a) Items Excluded From Sales. Sales do not include the following items:
 
1. Interest.
2. Dividends.
3. Gross receipts from the maturity, redemption, sale, exchange, or other disposition of securities as defined at 830 CMR 63.38.1(2).
4. Gross receipts that result in an allocable item of income, irrespective as to whether that allocable item of income is allocated to Massachusetts.
 
(b) Items Included in Sales. Sales include (but are not limited to) the following items:
 
1. Manufacturing and Selling, Purchasing and Reselling, Goods or Products. Sales include gross sales, less returns and allowances, of goods or products (or other property of a kind which would properly be included in inventory if on hand at the close of the taxable year) which a taxpayer manufactures and sells or purchases and resells. Sales also include all service charges, carrying charges, and other non-interest charges incidental to sales. Federal excises and state excises are included as part of sales if the taxes are passed on to the buyer or included as part of the selling price of the product.
 
2. Cost-plus-fixed-fee Contracts. In the case of cost-plus-fixed-fee contracts, such as contracts for the operation of government-owned plants for a fee, sales include the entire reimbursed cost, plus the fee.
 
3. Providing Services. Sales include gross receipts from the performance of services including commissions, fees, management charges, and similar items. (See 830 CMR 63.38.1(9)(b)8. regarding proper amount of service fees in intercompany transactions.)
 
4. Lease or Rental of Real or Tangible Personal Property. Sales includes the gross receipts from renting, leasing, or licensing the use of real or tangible personal property except in cases in which the lease, rental, or license of the asset in question is treated, for purposes of M.G.L. c. 63, as a sale, exchange, or other disposition of a capital asset used in a taxpayer's trade or business, in which case sales include the gain from the disposition of the property in question.
 
5. Sale, Licensing, or Assignment of Intangible Property other than Securities. Sales include gross receipts from the sale, licensing, or assignment of intangible property other than securities except in cases in which the sale, licensing or assignment of the property in question is treated, for purposes of M.G.L. c. 63, as a sale, exchange, or other disposition of a capital asset used in a taxpayer's trade or business, in which case sales include the gain from the disposition of the property in question.
 
6. Capitalized Leases. Property subject to a capitalized lease for federal income tax purposes is treated as subject to a capitalized lease for purposes of the corporate excise, and sales include income or gain derived from a capitalized lease transaction to the extent that the income or gain from such transaction is included in the federal gross income of the taxpayer.
 
7. Sale, Exchange, or Other Disposition of Fixed Assets. In the case of the sale, exchange or other disposition of a fixed asset used in a taxpayer's trade or business, such as property, plant or equipment, sales are measured by the gain from such transaction. Gain from the disposition of a fixed asset shall include (but is not limited to) deemed gain from a transaction that is treated under the Code as a sale of a taxpayer's assets and that results in the taxpayer's recognition of income for Massachusetts purposes. For example, the deemed gain from the sale of assets (other than securities) by a target corporation under Code § 338 is included in a target's sales factor. Similarly, the gain that results from a payment of a dividend (other than securities) by a subsidiary corporation to its parent that is deemed to be a sale of assets by the subsidiary under Code § 311(b) is included in the subsidiary's sales factor.
 
8. Intercompany Sales. When a taxpayer participates in a consolidated return for federal income tax purposes, sales include its gross receipts from intercompany sales transactions included in income under Code § 61 except in cases in which the property sold is a capital asset used in a taxpayer's trade or business. See 830 CMR 63.32B.1. In the latter cases, the sales include the gain from the sale of the property in question. However, a payment from a subsidiary corporation to its parent will be excluded from the parent's sales factor if, in substance, the payment represents a dividend, regardless of how the transaction is characterized by the parties. The value of gross receipts or gain in intercompany sales transactions between affiliated taxpayers is the fair market value of the property or services provided in an arms-length transaction, subject to adjustments or rules adopted by the Commissioner pursuant to M.G.L. c. 63, §§ 33, 39A.
 
(c) When Sales of Tangible Personal Property are in Massachusetts. There are two rules for determining whether a sale of tangible personal property is in Massachusetts. Under the primary (destination) rule, a sale is in Massachusetts if the property is delivered or shipped to a purchaser, including the United States government, who takes possession within Massachusetts, regardless of the F.O.B. point or other conditions of sale. Under the secondary (throwback) rule, a sale is in Massachusetts if the selling taxpayer is not taxable in the state where the property sold is delivered to the purchaser, and the property is not sold by an agent of the taxpayer who is chiefly situated at, connected with, or sent out from the taxpayer's owned or rented business premises outside of Massachusetts.
 
1. Destination Sales. Sales are in Massachusetts if the property is delivered or shipped to a purchaser in Massachusetts regardless of the F.O.B. point or other condition of sale. Tangible property is deemed to have been shipped or delivered to a purchaser within Massachusetts if:
 
a. the property is delivered directly by the vendor to the possession and control of the purchaser or its agent within Massachusetts unless the vendor can substantiate that no use is made of the property in Massachusetts other than immediate transshipment;
 
or
 
b. the property is delivered to the possession and control of the purchaser by the vendor or by a carrier outside of Massachusetts, if the property is immediately transshipped to Massachusetts;
 
c. the property is diverted to a purchaser in Massachusetts while en route to a third-party consignee in another state; or
 
d. the third-party recipient of the tangible personal property is located in Massachusetts, even if the property is ordered from outside the state; or
 
e. the property is the subject of a rental, lease, license, or similar agreement and the property is located in Massachusetts during substantially all of the lease period. If leased mobile property is located both within and without Massachusetts during the lease period, the gross receipts attributable to Massachusetts shall be the gross receipts from the lease period multiplied by the fraction used by the taxpayer for property factor purposes under 830 CMR 63.38.1(7)(d) (as adjusted when necessary to reflect differences between usage during the lease period and usage during the taxable year).
 
The following example illustrates the application of 830 CMR 63.38.1(9)(c)1.:
 
Example. Office Objects, Inc. ("Objects") manufactures office furniture in Massachusetts. Objects will either ship furniture from its Massachusetts manufacturing facility to its customers by common carrier, or it will allow customers to pick up their purchase at its Massachusetts facility. Empty Environment, Inc., (Empty), a Rhode Island corporation, purchases some office furniture from Objects. If Objects hires a common carrier to ship the furniture to Rhode Island, the sale is not a Massachusetts sale under the destination rule of 830 CMR 63.38.1(9)(c)1. because Objects did not transfer possession and control of the furniture to Empty in Massachusetts. If Empty uses its own truck and driver or hires its own carrier to pick up the furniture from Object's Massachusetts facility and transport it to Rhode Island, the sale will not be a Massachusetts sale under the destination rule if the taxpayer substantiates that no use is made of the property in Massachusetts other than the immediate transshipment.
 
2. Throwback Sales. Where tangible personal property is delivered or shipped to a purchaser outside of Massachusetts, sales are in Massachusetts if the taxpayer is not taxable in the state where the property is delivered to the purchaser and the property is not sold by an agent of the taxpayer who is chiefly situated at, connected with, or sent out from the taxpayer's owned or rented business premises outside of Massachusetts.
 
a. Burden of Proof. If tangible personal property is delivered or shipped to a purchaser outside of Massachusetts, the taxpayer has the burden of proving either that the taxpayer is taxable in the state of the purchaser or that the tangible personal property was sold by an agent of the taxpayer who is chiefly situated at, connected with, or sent out from the taxpayer's owned or rented business premises outside of Massachusetts.
 
b. Taxable in the State of the Purchaser. For purposes of the sales factor, the following special rules apply in determining whether a taxpayer is considered taxable in the state of the purchaser.
 
i. Taxable in Another State. A taxpayer is taxable in the state of the purchaser if it meets either test set out in 830 CMR 63.38.1(5). See 830 CMR 63.38.1(5), Examples 1-4.
 
ii. Foreign Sales. A taxpayer is taxable in the state of the purchaser if tangible personal property is delivered or shipped to a purchaser in a foreign country.
 
c. Property not Sold by Agent Who is Chiefly Situated at, Connected with or Sent Out From Taxpayer's Owned or Rented Business Premises Outside of Massachusetts. Where the taxpayer is not taxable in the state of the purchaser, sales that are not the direct result of the efforts of an agent of the taxpayer who is chiefly situated at, connected with, or sent out from the taxpayer's owned or rented business premises outside of Massachusetts are sales in Massachusetts. For purposes of the sales factor, the following rules apply in determining whether tangible personal property is considered sold by an agent chiefly situated at, connected with or sent out from the taxpayer's owned or rented business premises outside of Massachusetts.
 
i. Independent Contractors. Independent contractors as defined at 830 CMR 63.38.1(2), above, control their own activities and, in general, are chiefly associated with their own offices. They are not agents chiefly situated at, connected with or sent out from a taxpayer's owned or rented business premises. In most cases, sales of a taxpayer's goods by independent contractors are therefore included in the numerator of the taxpayer's sales factor. However, if substantially all of a taxpayer's contacts with an independent contractor are conducted and controlled by an agent or employee of the taxpayer who is chiefly situated at, connected with or sent out from the taxpayer's owned or rented business premises outside of Massachusetts, then sales made by the independent contractor will be regarded as made by that employee.
 
ii. Determining Who "Sold" Property. The person who actually negotiates and effects an order is the person who sells the property. The person who sells the property is generally not the person who performs mere clerical approval acceptance, or processing, including a routine credit check of the purchaser. The taxpayer has the burden of proving who sold the property.
 
Reorders of property originating from the efforts of a person who negotiated and effected the original order are treated the same as the original order unless this treatment is not reasonable in light of material changes in the taxpayer's business operations after the time the original order was placed.
 
A taxpayer's catalog sales, made when a customer, who has received mail-order solicitations from the taxpayer, telephones or sends a written order to a Massachusetts location of the taxpayer, are not sales made by an agent from premises outside Massachusetts.
 
iii. Determining Location of Taxpayer's Owned or Rented Business Premises. The determination of the particular business premises owned or rented by a taxpayer that an agent is chiefly situated at, or that an agent is chiefly connected with, or that an agent is chiefly sent out from, is a factual determination. In making the determination, the following guidelines will be employed:
 
Business Premises. For purposes of the sales factor, the taxpayer's owned or rented premises for the transaction of business ("business premises") is the taxpayer's owned or rented sales office that the selling agent customarily uses to receive instructions, directions, or supervision from the taxpayer, or communications from customers; to replenish stock or other materials; to repair equipment; or to perform any other function necessary to the selling of the taxpayer's tangible personal property. Facilities used exclusively as warehouses or manufacturing facilities are not sales offices. The presence of company employees receiving orders and shipping tangible personal property will not, by itself, change a facility from a warehouse to a sales office.
 
Chiefly Situated At. In the case of an agent who spends 50% or more of his or her time at a taxpayer's owned or rented business premises, the agent is chiefly situated at that business location.
 
Chiefly Sent Out From. In the case of an agent who spends more than 50% of his or her working hours away from a fixed business premises, the agent is chiefly sent out from that business premises where the agent customarily returns for various paperwork, correspondence and administrative matters, such as participation in office meetings and conferences, meetings with supervisors or managers, and preparation of sales materials, contracts and the like.
 
Chiefly Connected With. In the case of an agent who does not fall within the rules described above in - Chiefly Situated At or - Chiefly Sent Out From, the agent is chiefly connected with the business premises that exercises supervision and control over the agent's activities.
 
The following example illustrates the application of 830 CMR 63.38.1(9)(c)2.c.iii.
 
Taxpayer A has its executive office, sales office, and factory in New York. Taxpayer A also rents a branch sales office in Massachusetts and a warehouse in Rhode Island. Taxpayer A has four (4) sales representatives in the New England region.
 
Saleswoman Barbara resides in Massachusetts. She works daily at the branch sales office in Massachusetts where she meets with customers, receives telephone orders, approves and transmits approved orders to the warehouse personnel in Rhode Island for shipment. Barbara is "situated at" the Massachusetts branch sales office, and all sales made by Barbara are attributed to Massachusetts.
 
Salesman Bob operates out of his New Hampshire residence and solicits orders throughout New Hampshire and Maine. Bob regularly visits, reports to, and sends orders for approval to Saleswoman Barbara at the branch office in Massachusetts. Based on the facts, Bob is "sent out from" the taxpayer's rented branch sales office in Massachusetts. Assuming Taxpayer A is not taxable in New Hampshire and Maine, all sales of tangible personal property made by Bob to purchasers in New Hampshire and Maine are attributed to Massachusetts.
 
Salesman John operates out of his Vermont residence and solicits orders in Vermont. John was hired by, makes weekly reports to, and receives instructions from, the Vice President of Sales who operates out of the New York office. Although John routes his orders through the Massachusetts branch office where they are approved, he has no other contacts with that office. Based on the facts, John is "connected with" the taxpayer's owned New York office. Whether or not Taxpayer A is taxable in Vermont, none of the John's sales of tangible personal property to purchasers in Vermont are attributed to Massachusetts.
 
Salesman Tom resides in Rhode Island and solicits orders in Connecticut. Although Tom regularly visits the warehouse in Rhode Island, he reports to, and sends orders for approval to Saleswoman Barbara at the branch office in Massachusetts. Based on the facts, Tom is "connected with" the taxpayer's rented branch sales office in Massachusetts. Assuming that Taxpayer A is not taxable in Connecticut, all sales of tangible personal property made by Tom to purchasers in Connecticut are attributed to Massachusetts.
 
3. Resale to Foreign Government. Sales of tangible personal property to the United States or any of its agencies or instrumentalities for resale to a foreign government or an agency or instrumentality of a foreign government are not sales in Massachusetts.
 
(d) Sales Other Than Sales of Tangible Personal Property in Massachusetts.
 
1. General Rule. Sales, other than sales of tangible personal property, are attributed to Massachusetts if the income-producing activity that gave rise to the sales was performed wholly within Massachusetts. If income-producing activity is performed both within and without Massachusetts and if the costs of performing the income-producing activity are greater in Massachusetts than in any other one state, then the sales are attributed to Massachusetts.
 
2. Income-producing Activity Defined. For purposes of this subsection, an income-producing activity is a transaction, procedure, or operation directly engaged in by a taxpayer which results in a separately identifiable item of income. In general, any activity whose performance creates an obligation of a particular customer to pay a specific consideration to the taxpayer is an income-producing activity. However, except insofar as required by 830 CMR 63.38.1(9)(d)3.c., below, (relating to the licensing of intangibles), income-producing activity includes only the activities of the taxpayer whose income is being apportioned. Except as provided in 830 CMR 63.38.1(9)(d)3.c., below, income-producing activity does not include activities performed on behalf of a taxpayer by another person, such as services performed on its behalf by an independent contractor or by any other party whose activities are not attributable to the taxpayer for purposes of determining tax jurisdiction under 830 CMR 63.39.1. For example, in the case of a taxpayer who brokers the sale of services that are performed by third parties, the income-producing activity includes only the brokerage activity and not the ultimate services performed, provided that the performance of the ultimate service by the third party is not considered an activity of the taxpayer under 830 CMR 63.39.1 for purposes of determining whether the taxpayer is taxable in the state where the service is performed.
 
3. Specific Income-Producing Activities.
 
a. Income-producing activity includes the rendering of personal services or the use of tangible or intangible property in rendering a service. Where personal services relating to an item of gross receipts are rendered partly within and partly without Massachusetts, the gross receipts for the performance of such services shall be attributed to Massachusetts if, based upon costs of performance, a greater proportion of the services was rendered in Massachusetts than in any other one state.
 
i. Receipts or gain attributable to the sale of tangible personal property designed or constructed and sold under a cost-plus-fixed-fee or similar arrangement are treated as receipts from the sale of tangible personal property, rather than as receipts from personal services.
 
b. Income-producing activity includes the sale, rental, leasing, licensing or other use of real property. Gross receipts from the sale, lease, rental, or licensing of real property are attributable to Massachusetts if the real property is located in Massachusetts.
 
c. In the case of the licensing of intangible property, the income-producing activity is deemed to be performed in the commonwealth to the extent that the intangible property is used by the licensee in the commonwealth. Intangible property generally includes copyrights, patents, trademarks, trade names, trade secrets, contract rights including broadcast rights, and similar intangibles where the use of the property may be transferred separately from ownership, provided that intangible property licensed as part of the sale of tangible property is treated as the sale of tangible property, and sales of good will and other intangible property are governed by 830 CMR 63.38.1(9)(d)3.d. A sale of intangible property that resembles a license, such as a contingent payment sale (a sale in which the receipts from the sale of the intangible property are contingent upon the use, productivity or disposition of property by the purchaser), will be treated as a license under this 830 CMR 63.38.1(9)(d)3.c.
 
i. Sourcing of separately identifiable items of income. For purposes of the provisions of 830 CMR 63.38.1(9)(d)3.c., each use of intangible property by a licensee that results in a separately identifiable item of income for the taxpayer is considered a separate use of the intangible property. For example, in the case of licenses or similar arrangements compensated by a percentage of the licensee's sales, each sale by the licensee that results in a payment to the licensor whether separate from or combined with other payments is a separate use. Except as otherwise stated herein, use of intangible property by a sublicensee does not constitute use for purposes of 830 CMR 63.38.1(9)(d)3.c., provided however that the Commissioner may take into account use by and activities of sublicensees in the case of licensing, sublicensing, or similar relationships among affiliated taxpayers.
 
ii. Attributing sales to place of use.
 
(A) License of marketing intangibles. Where a license is granted for the right to use intangible property in connection with the sale, lease, license, or other marketing of goods, services, or other items (i.e., a marketing intangible), the royalties or other licensing fees paid by the licensee for such right are attributable to the commonwealth to the extent that the fees are attributable to the sale or other provision of goods, services, or other items purchased or otherwise acquired by Massachusetts customers. In the absence of actual evidence of the licensee's receipts derived from Massachusetts customers, the licensing fee will be attributed to the commonwealth based upon the percentage of the Massachusetts population in the geographic area in which the licensee is permitted to use the intangible property to market its goods, services or other items. Examples of a license of a marketing intangible include the license of a service mark, trademark, or trade name. Where the license of a marketing intangible is for the right to use the intangible property in connection with sales or other transfers at wholesale rather than directly to retail customers, the licensing fee will be attributed to the commonwealth based upon the percentage of the Massachusetts population in the U.S. geographic area in which the licensee's goods, services, or other items are ultimately marketed using the intangible property.
 
(B) License of non-marketing intangibles. Where a license is granted for the right to use intangible property other than in connection with the sale, lease, license, or other marketing of goods, services, or other items (i.e., a non-marketing intangible), the licensing fees paid by the licensee for such right are attributable to the commonwealth to the extent that the use for which the fees are paid takes place in Massachusetts. In such cases, it shall be presumed that the use takes place in the state of the licensee's commercial domicile unless the taxpayer or the Commissioner can reasonably establish the location(s) of actual use. Where the Commissioner can reasonably establish that the actual use of intangible property pursuant to a license of a non-marketing intangible takes place in part in Massachusetts, it shall be presumed that the entire use is in Massachusetts except to the extent that the taxpayer can demonstrate that the actual location of some or all of the use takes place outside Massachusetts. Examples of a license of a non-marketing intangible include the license of a patent, a copyright, or trade secrets to be used in a manufacturing process, where the value of the intangible lies predominately in its use in such process.
 
(C) License of mixed intangibles. Where a license of intangible property includes both a license of a marketing intangible and a license of a non-marketing intangible and the fees to be paid in each instance are separately stated in the licensing contract, the Commissioner will accept such separate statement for purposes of this section if it is reasonable. Where a license of intangible property includes both a license of a marketing intangible and a license of a non-marketing intangible and the fees to be paid in each instance are not separately stated in the contract, it shall be presumed that the licensing fees are paid entirely for the license of the marketing intangible except to the extent that the taxpayer or the Commissioner can reasonably establish otherwise.
 
The following examples illustrate the provisions of 830 CMR 63.38.1(9)(d)3.c.i-iv.
 
Example 1. Crayon Corp. and Dealer Co. enter into a license contract whereby Dealer Co. as licensee is permitted to use trademarks that are owned by Crayon Corp. in connection with Dealer Co.'s sale of certain products to retail customers. Under the contract, Dealer Co. is required to pay Crayon Corp. a licensing fee that is a fixed percentage of the total volume of monthly sales made by Dealer Co. of products using the Crayon Corp. trademarks. Under the contract, Dealer Co. is permitted to sell the products at multiple store locations, including store locations that are both within and without Massachusetts. Further, the licensing fees that are paid by Dealer Co. are broken out on a per-store basis. Under 830 CMR 63.38.1(9)(d)3.c.i-ii., the licensing fees paid to Crayon Corp. by Dealer Co. represent fees from the license of a marketing intangible and the fees that derive from the individual sales at Massachusetts stores are separately identifiable items of income of Crayon Corp. that constitute Massachusetts sales.
 
Example 2. Formula, Inc. and Appliance Co. enter into a license contract whereby Appliance Co. is permitted to use a patent owned by Formula, Inc. to manufacture and sell appliances at stores owned by Appliance Co. within a certain geographic region. The license contract specifies that Appliance Co. is to pay Formula, Inc. a royalty that is a fixed percentage of the gross receipts from the products sold. The contract does not specify any other fees. The appliances are manufactured and sold in Massachusetts and several other states. Given the facts, it is presumed that the licensing fees are paid for the license of a manufacturing intangible. In such cases, where the Commissioner can reasonably establish that the actual use of the intangible property takes place in part in Massachusetts, it is presumed that the entire use is in Massachusetts except to the extent that the taxpayer can demonstrate that the actual location of some or all of the use takes place outside Massachusetts. Assuming that Formula, Inc. can demonstrate the percentage of manufacturing that takes place in Massachusetts using the patent, that percentage of the total licensing fee paid to Formula, Inc. under the contract will constitute Formula, Inc.'s Massachusetts sales.
 
Example 3. Team Corp. operates a professional wrestling team and licenses the annual rights to broadcast the team's games to a national television network, TV Co., a regional cable TV company, Cable Co., and a local radio station, Radio Co. TV Co., Cable Co. and Radio Co. send personnel to the site of Team Corp.'s games, both within and without Massachusetts, and broadcast these games on their respective media outlets. In each case the licensing fee paid by the media company to Team Corp. is paid upfront in a lump sum. Each of the three licensing contracts constitutes the license of a marketing intangible. The component of the three licensing streams that constitute the Massachusetts sales of Team Corp. is determined by multiplying in each case the amount of the income stream by the percentage of the Massachusetts audience of the respective licensee that is in Massachusetts.
 
Example 4. Axel Corp. enters into a two-year license agreement with Biker Co. in which Biker Co. is granted the right to produce motor scooters using patented technology owned by Axel Corp., and also to sell such scooters by marketing the fact that the scooters were manufactured using the special technology. The scooters are manufactured outside Massachusetts, but the taxpayer is granted the right to sell the scooters in a geographic region in which the Massachusetts population constitutes 25% of the total population during the period in question. The licensing contract requires an upfront licensing fee to be paid by Biker Co. to Axel Corp. and does not specify what percentage of the fee derives from Biker Co.'s right to use Axel Corp.'s patented technology. Unless either the taxpayer or the Commissioner reasonably establishes otherwise, it is presumed that the licensing fees are paid entirely for the license of a marketing intangible. In such cases, the Commissioner will presume that 25% of the licensing fee constitutes Massachusetts sales.
 
Example 5. Same facts as Example 4, except that the license contract specifies separate fees to be paid for the right to produce the motor scooters and for the right to sell the scooters by marketing the fact that the scooters were manufactured using the special technology. The licensing contract constitutes both the license of a marketing intangible and the license of a non-marketing intangible. Assuming that the separately stated fees are reasonable, the Commissioner will: (1) attribute no part of the licensing fee paid for the non-marketing intangible to Massachusetts, and (2) attribute 25% of the licensing fee paid for the marketing intangible to Massachusetts.
 
Example 6. Moniker Corp. enters into a license contract with Whole Co. Pursuant to the contract Whole Co. is granted the right to use trademarks owned by Moniker Corp. to brand sports equipment that is to be manufactured by Whole Co. or an unrelated entity, and to sell the manufactured product to unrelated companies that make retail sales in a specified geographic region. Although the trademarks in question will be affixed to property to be manufactured, the license agreement confers a license of a marketing intangible. The component of the licensing fee that constitutes the Massachusetts sales of Moniker Corp. is determined by multiplying the amount of the fee by the percentage of the Massachusetts population in the specified geographic region in which the retail sales are made.
 
Example 7. Better Burger Corp., which is based outside Massachusetts, enters into franchise contracts with individuals who agree to operate Better Burger restaurants as franchisees in various states. Several of the Better Burger franchises are in Massachusetts. In each case, the franchise contract between the individual and Better Burger provides that the franchisee is to pay Better Burger Corp. an upfront fee for the receipt of the franchise and monthly franchise fees, which cover, among other things, the right to use the Better Burger name and service marks, patented food processes and cooking know-how, as well as fees for management services and advertising. The upfront fees for the receipt of the Massachusetts franchises constitute fees paid for the licensing of a marketing intangible. These fees constitute Massachusetts sales because the franchises are for the right to make Massachusetts sales. The monthly franchise fees paid by Massachusetts franchisees constitute fees paid for (1) the license of marketing intangibles, (2) the license of non-marketing intangibles and (3) personal services. The fees paid for the license of the marketing intangibles and the non-marketing intangibles constitute Massachusetts sales because in each case the use of the intangibles is to take place in Massachusetts. The fees paid for the personal services may or may not be Massachusetts services depending upon the location of the income producing activity. See 830 CMR 63.38.1(9)(d)3.a. If the fees for the personal services are not separately stated, it shall be presumed that these fees constitute Massachusetts sales, like the fees paid for the marketing and non-marketing intangibles. If the fees for the personal services are separately stated and this separate statement is reasonable, the taxpayer has the burden of proving the location of the income producing activity. In the latter case, if the taxpayer cannot establish the location of the income producing activity, the Commissioner will assume that the income producing activity took place both within and without Massachusetts and that the greater proposition of the costs of performance was in Massachusetts. See id
 
d. In the case of the sale of a taxpayer's good will, or of the sale of other intangible property in a transaction not treated as a license under 830 CMR 63.38.1(9)(d)3.c, the income producing activity is deemed to take place at the location of the taxpayer's commercial domicile.
 
e. Income-producing activity includes the sale of a partnership interest other than a partnership interest treated as a security under 830 CMR 63.38.1. Gross receipts from the sale of a partnership interest are attributable to Massachusetts if the sum of the partnership's Massachusetts property and payroll factors for the taxable year in which the sale occurred exceeds the sum of its property and payroll factors for any other one state. (However, in determining the partnership's apportionment percentage for purposes of this subsection, the Commissioner may disregard partnership transactions after the taxpayer's disposition of its partnership interest whenever necessary to reflect accurately the partnership's activity at the time of the disposition.)
 
f. Income-producing activity includes the protection or enforcement of legal rights of a taxpayer through litigation, arbitration, or settlement of legal disputes or claims, including the filing and pursuit of claims under insurance contracts. Gross receipts from the enforcement of legal rights by taxpayers domiciled in Massachusetts are presumed to be attributable to Massachusetts regardless of the forum through which a claim may be pursued, unless the legal dispute or claim relates directly and exclusively to real or tangible personal property of the taxpayer located outside of the Commonwealth. Gross receipts from the enforcement of legal rights by taxpayers domiciled outside of Massachusetts are attributable to Massachusetts, regardless of the forum through which a claim may be pursued, if the legal dispute or claim relates directly and exclusively to real or tangible property of the taxpayer located within the Commonwealth.
 
g. Income-producing activity includes activity that results in gross receipts from a covenant not to compete. Gross receipts from a covenant not to compete are attributable to Massachusetts to the extent that the geographic area covered by the covenant not to compete is located in Massachusetts.
 
4. Cost of Performance. For purposes of 830 CMR 63.38.1(9)(d), unless otherwise provided in this regulation, 830 CMR 63.38.1, the taxpayer's costs of performance are its direct costs determined in a manner consistent with generally accepted accounting principles. Unless otherwise provided in this regulation, 830 CMR 63.38.1, costs of performance do not include costs of independent contractors or services by subcontractors.
 
(e) Software Transactions. A license of pre-written software for purposes other than commercial reproduction (or other exploitation of the intellectual property rights), whether transferred on a tangible medium or otherwise, is treated as the sale of tangible personal property, rather than as either the licensing of intellectual property or the performance of a service. In such cases, the sales are in Massachusetts as determined under the rules set forth at 830 CMR 63.38.1(9)(c). A license of a software program that is not pre-written software in which the receipts from the license are contingent upon the use or productivity of the software program or the continuing exploitation of the underlying intellectual property rights is treated as the license of intangible property. In such cases, the sales are in Massachusetts as determined under the rules set forth at 830 CMR 63.38.1(9)(d)3.c. In all other cases a license of a software program is treated as involving either the license of intangible property or the performance of a service or both depending upon the specific facts including, without limitation, the object of the transaction, the contractual terms, and the economic substance of the transaction. In cases involving treatment as the performance of a service, the sales from the service are in Massachusetts as determined under the rules set forth at 830 CMR 63.38.1(9)(d)3.a As to situations in which the taxpayer is regularly engaged in the sale or licensing of software, this subsection, 830 CMR 63.38.1(9)(e), is also adopted pursuant to the Commissioner's authority under M.G.L. 63, § 38(j).
 
(f) DISCs and FSCs.
 
1. Sales by a taxpayer to its wholly owned Domestic International Sales Corporation (DISC) as defined in M.G.L. c. 63, § 30.15 are treated as though made directly by the taxpayer to the customer of the DISC.
 
2. If the exempt foreign trading income of a Foreign Sales Corporation (FSC) is excluded from the FSC's gross income under the provisions of 830 CMR 63.38G.2, then the FSC's foreign gross receipts from which the exempt foreign trading income is derived shall be excluded from both the numerator and denominator of the FSC's sales factor. This subsection, 830 CMR 63.38.1(9)(e)2., is adopted pursuant to the Commissioner's authority under M.G.L. c. 63, § 38(j).
 
(g) Sales Factor Consistency. A taxpayer must use the same rules for excluding or including gross receipts in both the numerator and the denominator of the sales factor. If the taxpayer changes its method of excluding or including gross receipts in the sales factor from the method used in its return in the prior year, the taxpayer must disclose in the return for the current year the fact of such change, the nature and extent of the change, and the reason for the change. The Commissioner may disregard changes in the current year or in future tax years if they have not been adequately disclosed.
 
(10) Section 38 Manufacturers.
 
(a) General. For taxable years beginning on or after January 1, 1996, a section 38 manufacturer that has income from business activity which is taxable both in Massachusetts and in another state shall determine the part of its net income derived from business carried on in the Massachusetts by applying the following apportionment percentages:
 
1. 1996 Taxable Years. For taxable years beginning on or after January 1, 1996 and before January 1, 1997, the apportionment percentage shall be a fraction equal to twenty percent of the corporation's property factor, determined under 830 CMR 63.38.1(7), above, plus twenty percent of the corporation's payroll factor, determined under 830 CMR 63.38.1(8), above, plus sixty percent of the corporation's sales factor, determined under 830 CMR 63.38.1(9), above.
 
2. 1997 Taxable Years. For taxable years beginning on or after January 1, 1997 and before January 1, 1998, the apportionment percentage shall be a fraction equal to fifteen percent of the corporation's property factor, determined under 830 CMR 63.38.1(7), above, plus fifteen percent of the corporation's payroll factor, determined under 830 CMR 63.38.1(8), above, plus seventy percent of the corporation's sales factor, determined under 830 CMR 63.38.1(9), above.
 
3. 1998 Taxable Years. For taxable years beginning on or after January 1, 1998 and before January 1, 1999, the apportionment percentage shall be a fraction equal to ten percent of the corporation's property factor, determined under 830 CMR 63.38.1(7), above, plus ten percent of the corporation's payroll factor, determined under 830 CMR 63.38.1(8), above, plus eighty percent of the corporation's sales factor, determined under 830 CMR 63.38.1(9), above.
 
4. 1999 Taxable Years. For taxable years beginning on or after January 1, 1999 and before January 1, 2000, the apportionment percentage shall be a fraction equal to five percent of the corporation's property factor, determined under 830 CMR 63.38.1(7), above, plus five percent of the corporation's payroll factor, determined under 830 CMR 63.38.1(8), above, plus ninety percent of the corporation's sales factor, determined under 830 CMR 63.38.1(9), above.
 
5. 2000 Taxable Years and Thereafter. For taxable years beginning on or after January 1, 2000, the apportionment percentage shall be a fraction equal to the corporation's sales factor, determined under 830 CMR 63.38.1(9), above.
 
(b) Section 38 Manufacturer Defined.
 
1. General. A corporation, other than a utility corporation, is a section 38 manufacturer for any taxable year if (i) it is engaged in manufacturing during the taxable year and (ii) its manufacturing activity during the taxable year is substantial. A corporation that is so engaged in manufacturing and whose manufacturing activities are substantial is a section 38 manufacture for the taxable year regardless of whether, or to what extent, it conducts its manufacturing activities in Massachusetts.
 
2. Substantial Manufacturing. A corporation's manufacturing activity is substantial for any taxable year if the corporation meets any of the following tests:
 
a. The corporation derives twenty-five percent or more of its receipts for the taxable year from the sale of manufactured goods that the corporation manufactures;
 
b. The corporation pays twenty-five percent or more of its payroll for the taxable year to employees working in manufacturing operations and derives fifteen percent or more of its receipts for the taxable year from the sale of manufactured goods that the corporation manufactures;
 
c. The corporation uses twenty-five percent or more of its tangible property in manufacturing during the taxable year and derives fifteen percent or more of its receipts for the taxable year from the sale of manufactured goods that the corporation manufactures;
 
d. The corporation uses thirty-five percent or more of its tangible property in manufacturing during the taxable year.
 
3. Coordination with 830 CMR 58.2.1. For purposes of 830 CMR 63.38.1(10)b.2., above, the following rules shall apply.
 
a. For any taxable year, the percentage of receipts derived from a corporation's sale of manufactured goods that it manufactures shall be equal to the gross receipts fraction determined for that taxable year under 830 CMR 58.2.1(6)(e)1., except that gross receipts attributable to manufacturing performed outside Massachusetts shall be included in the numerator and denominator;
 
b. For any taxable year, the percentage of payroll paid to employees working in manufacturing operations shall be equal to the employees fraction determined for that taxable year under 830 CMR 58.2.1(6)(e)3., except that payroll attributable to manufacturing performed outside Massachusetts shall be included in the numerator and denominator; and
 
c. For any taxable year, the percentage of tangible property used in manufacturing operations shall be equal to the tangible property fraction determined for that taxable year under 830 CMR 58.2.1(6)(e)2., except that tangible property used in manufacturing performed outside Massachusetts shall be included in the numerator and denominator.
 
(11) One or More Factors Inapplicable.
 
(a) Three Factor Apportionment. Where a taxpayer is required to determine the part of its net income derived from business carried on in Massachusetts using an apportionment percentage that employs three factors, the following rules shall apply:
 
1. Two Factors Applicable. In cases where only two of the three apportionment factors (property, payroll, sales) are applicable, the taxable net income of the taxpayer is apportioned by a fraction, the numerator of which is the remaining two factors with their respective weights and the denominator of which is the number of times that such factors are used in the numerator.
 
2. One Factor Applicable. In cases where only one of the three apportionment factors (property, payroll, sales) is applicable, the taxable net income of the taxpayer is apportioned solely by that factor with its respective weight, and the denominator is the number of times the factor is used in the numerator.
 
3. No Factors Applicable. In cases where none of the three apportionment factors (property, payroll, sales) is applicable, the taxable net income of the taxpayer is presumed to be 100 percent apportioned to Massachusetts unless the taxpayer demonstrates that such apportionment will not reasonably approximate its income derived from business carried on within Massachusetts. Where none of the three apportionment factors is applicable to a taxpayer's activities, the taxpayer is encouraged to apply for alternative apportionment under M.G.L. c. 63, § 42.
 
4. Determination of applicability. For purposes of determining whether a factor is applicable, the following rules apply:
 
a. A factor is not inapplicable merely because the numerator of the factor is zero. However, a factor is inapplicable if both its numerator and denominator are zero.
 
b. A factor is inapplicable and, consequently, is not used to calculate a taxpayer's apportionment percentage if the denominator of the factor is less than 3.33 percent of the taxpayer's taxable net income, or if the factor is otherwise determined to be insignificant in producing income.
 
(b) Single Factor Apportionment. Where (i) a taxpayer is required to determine the part of its net income derived from business carried on in Massachusetts using its sales factor only and (ii) the sales factor is inapplicable, then the taxable net income of the taxpayer is presumed to be 100 percent apportioned to Massachusetts unless the taxpayer demonstrates that such apportionment will not reasonably approximate its income derived from business carried on within Massachusetts. Under these circumstances, the taxpayer is encouraged to apply for alternative apportionment under M.G.L. c. 63, § 42. In the instance of a Section 38 manufacturer the sales factor is inapplicable if the denominator of the factor is less than 3.33 percent of the taxpayer's taxable net income, or if the factor is otherwise determined to be insignificant in producing income.
 
(12) Corporate Partners. A corporation with an interest in a partnership must include its distributive share of the partnership income, loss, or deduction in calculating its income, in accordance with the Code and M.G.L. c. 63. The character of any item included in the distributive share is determined as if it were realized or incurred directly by the corporation. Except as otherwise provided, the trade or business of the partnership is treated as the trade or business of the corporation. For purposes of determining whether the corporation is a mutual fund service corporation or a Section 38 manufacturer, the corporation's pro rata share (as defined in 830 CMR 63.38.1(12)(f)) of all of the partnership's items, factors and activities shall be taken into account to the extent relevant to the determination, whether or not the corporation and the partnership are engaged in related business activities. If the partnership and corporate partner are engaged in related business activities, the corporation's pro rata share (as defined in 830 CMR 63.38.1(12)(f)) of partnership property, payroll, and sales are included in the partner's apportionment factors, subject to the special rules provided in 830 CMR 63.38.1(12)(d). (Except as otherwise expressly stated, the partnership rules provided in 830 CMR 63.38.1(12) presume that a partnership and corporate partner are engaged in related business activities.)
 
(a) Taxable in Massachusetts.
 
1. A foreign corporation that is not otherwise subject to Massachusetts tax jurisdiction is nevertheless taxable in Massachusetts if it is a general partner in a partnership whose activities, if conducted directly by the foreign corporation, would subject the corporation to the excise under M.G.L. c. 63, § 39. See 830 CMR 63.39.1(8).
 
2. In general, a foreign corporation that is not otherwise subject to Massachusetts tax jurisdiction is taxable in Massachusetts if it is a limited partner in a partnership whose activities, if conducted directly by the foreign corporation, would subject the corporation to the excise under M.G.L. c. 63, § 39. However, as provided in 830 CMR 63.39.1(8)(f), the business activities of the partnership and the corporate limited partner are, in certain circumstances, presumed to be unrelated, so that unless the presumption is rebutted, the partner is taxable in Massachusetts only with respect to the partnership activity. Moreover, under the circumstances described in 830 CMR 63.39.1(8)(b)-(d) (relating to certain partnerships dealing in securities, publicly traded partnerships, and certain de minimis limited partnership holdings), the activities of the partnership are not attributed to the corporation, and the foreign corporation is not taxable in Massachusetts merely by virtue of holding such a limited partnership interest.
 
(b) Taxable in Another State. A corporation is taxable in another state within the meaning of 830 CMR 63.38.1(5) if the corporation is a general partner in a partnership with business activities in that state that cause either the partnership or its partners to be taxable in that state under the rules described in 830 CMR 63.38.1(5). A corporation that is a limited partner in a partnership with business activity in another state is taxable in another state within the meaning of 830 CMR 63.38.1(5) if and to the extent that the corporation would be taxed in Massachusetts under the same facts and circumstances that exist in the other state. A corporation holding a limited partnership interest in a partnership that does business in another state is taxable in the other state for purposes of apportioning its partnership income, but not for purposes of apportioning income from its other business activities, unless the corporate partner and the partnership are engaged in related business activities, or unless the corporate partner is separately taxable in the other state on the basis of its other (unrelated) business activities.
 
(c) Income Measure of the Excise. When computing its net income for the taxable year, a corporation must include its distributive share of partnership items for any partnership year ending with or within its taxable year. The following examples illustrate the application of 830 CMR 63.38.1(13)(c):
 
1. Corporation C's distributive share of income in Partnership P is 20%. C's income for the year was $1,000,000 and P's income for the same year was $800,000. The income of C is $1,160,000 ($1,000,000 plus 20% of $800,000).
 
2. Corporation C's distributive share of income in Partnership P is 90%. C incurred a loss of $500,000 for the year but P's income was $1,000,000. The income of C is $400,000 (90% of $1,000,000 = $900,000 less the loss of $500,000).
 
(d) Special Apportionment Rules. In general, if a corporate partner is taxable in another state, it must apportion its taxable net income using the apportionment percentage in M.G.L. c. 63, § 38. However, the following special rules apply:
 
1. Property Factor. In determining the denominator of its property factor, a corporate partner must include its pro rata share of the total value of the partnership's real and tangible personal property, owned or rented, used during the partnership's taxable year. In determining the numerator of its property factor, a corporate partner must include its pro rata share of the value of such property located in Massachusetts.
 
a. In order to avoid duplication, however, certain adjustments must be made to the value of any property leased or rented by the corporation to the partnership or vice versa.
 
i. Where a corporation rents property to the partnership, it must include the original cost of the property in its property factor. No portion of the value of this property as rental property of the partnership is included.
 
ii. Where the partnership rents property to the corporation, the corporation includes in its property factor the sum of:
 
A. the original cost of the property multiplied by the corporation's percentage of interest in the partnership; plus
 
B. eight times the net annual rental rate of the property, multiplied by the difference between 100% and the corporation's percentage of interest in the partnership.
 
b. The following examples illustrate the application of 830 CMR 63.38.1(13)(d)1:
 
i. Corporation C's interest in Partnership P is 20%. C owns a building (original cost $100,000) which it rents to P at a fair market rate of $12,000 per year. C must include the $100,000 original cost of the building in its property factor. No portion of the value of the property as rental property of the partnership is included in C's property factor.
 
ii. The facts are the same as in the previous example except that P owns the building and rents it to C. C will include $20,000 (20% of $100,000) in its property factor because of its interest in P. C will also include $76,800 ([$12,000 x 8] x 80%) in its property factor to account for the rented building used in its operations. Thus, the building's value in C's property factor is $96,800 ($20,000, plus $76,800).
 
2. Payroll Factor. In determining the denominator of its payroll factor, a corporate partner must include its pro rata share of the total compensation paid by the partnership during the partnership's taxable year. In determining the numerator of its payroll factor, a corporate partner must include its pro rata share of such compensation paid in Massachusetts during the taxable year. The following example illustrates the application of 830 CMR 63.38.1(13)(d)2:
 
Corporation C's interest in Partnership P is 20%. C's own payroll is $1,000,000, half of which is attributable to Massachusetts employees, and P's payroll is $800,000, one quarter of which is attributable to Massachusetts employees. The denominator of C's payroll factor is $1,160,000 ($1,000,000, plus 20% of $800,000, or $160,000). The numerator of C's payroll factor is $540,000 (50% of $1,000,000 plus 25% of $160,000).
 
3. Sales Factor. In determining the denominator of its sales factor, a corporate partner must include its pro rata share of the partnership's total sales during the partnership's taxable year. In determining the numerator of its sales factor, a corporate partner must include its pro rata share of such sales in Massachusetts.
 
a. In order to avoid duplication, however, the following sales must be eliminated from both the numerator and denominator of the sales factor:
 
i. sales by the corporation to the partnership in an amount equal to the total of such sales multiplied by the corporation's interest in the partnership; and
 
ii. sales by the partnership to the corporation in an amount not to exceed the total of all sales made by the partnership multiplied by the corporation's interest in the partnership.
 
b. The following examples illustrate the application of 830 CMR 63.38.1(13)(d)3.
 
i. Corporation C's interest in Partnership P is 20%. C's sales were $20,000,000 for the year, $5,000,000 of which were made to P. P made sales of $10,000,000 during the same year, none of which were to C or the other partners.
 
The denominator of C's sales factor is $21,000,000 determined as follows:
Sales by Corporation C .............................................20,000,000
Add: Corporation C's interest
(20%) in Partnership P's
sales ..............................................2,000,000
Less: Corporation C's interest
(20%) in Corporation C's
sales to
Partnership P ........................................1,000,000 1,000,000
Denominator of sales factor ........................................21,000,000
 
ii. The following facts apply to examples A. through C. below. Corporation C's interest in Partnership P is 20%, and Corporation D's interest is 80%.
 
A. The sales made by C, D, and P are as follows:
 
Corporation C ......................................................20,000,000
Corporation D ......................................................60,000,000
Partnership P:
To Corporation C ........................2,000,000
To Corporation D ........................8,000,000
 
10,000,000
 
The denominator of Corporation C's sales factor is $20,000,000 determined as follows:
 
Sales by Corporation C ................20,000,000
Add: Corporation C's interest
(20%) in Partnership P's
sales .......................................2,000,000
Less: Partnership P's interest
to Corporation C .......................2,000,000 -0-
20,000,000
---------------
 
The denominator of Corporation D's sales factor is $60,000,000 determined as follows:
 
Sales by Corporation D .........................................60,000,000
Add: Corporation D's interest
(80%) in Partnership P's
sales .......................................8,000,000
Less: Partnership P's sales
to Corporation D ..................8,000,000 -0-
60,000,000
---------------
 
B. The sales made by Corporation C, Corporation D, and Partnership P are as follows:
 
Corporation C ...................................................20,000,000
Corporation D ...................................................60,000,000
 
 
Partnership P:
To Corporation C ......................1,000,000
To Corporation D ......................9,000,000
10,000,000
 
The denominator of Corporation C's sales factor is $21,000,000 determined as follows:
 
Sales by Corporation C .......................................20,000,000
Add: Corporation C's interest
(20%) in Partnership P's
sales ......................................2,000,000
Less: Partnership P's interest
to Corporation C .......................1,000,000 1,000,000
Denominator of Corporation
C's sales factor ............................................. 21,000,000
----------------
 
The denominator of Corporation D's sales factor is $60,000,000 determined as follows:
Sales by Corporation D .......................................60,000,000
Add: Corporation D's interest
(80%) in Partnership P's
sales ......................................8,000,000
Less: Intercompany sales
between Partnership P
and Corporation D .....................8,000,000* -0-
Denominator of Corporation
D's sales factor ............................................. 60,000,000
----------------
 
C. The sales made by Corporation C, Corporation D, and Partnership P are as follows:
 
Corporation C ....................................................20,000,000
Corporation D ....................................................80,000,000
Partnership P:
To Corporation C ......................3,000,000
To Corporation D ......................6,000,000
To Corporation X ...................... 1,000,000 10,000,000
 
 
The denominator of Corporation C's sales factor is $20,200,000 determined as follows:
 
Sales by Corporation C .....................................20,000,000
Add: Corporation C's interest
in Partnership P's sales to
nonpartner X Corporation
(20% x $1,000,000) ..........................................200,000
Corporation C's interest in
Partnership P's sales
to Partners
(20% x $9,000,000) ...................1,800,000
Less: Intercompany
sales from Partnership P
to Corporation C ....................... 1,800,000* -0-
 
Denominator of Corporation
C's sales factor ............................................. 20,200,000
 
The denominator of Corporation D's sales factor is $82,000,000 determined as follows:
 
Sales by Corporation D ......................................80,000,000
Add: Corporation D's interest
in Partnership P's sales to
nonpartner X Corporation
(80% x $1,000,000) ............................................800,000
Corporation D's interest
in Partnership P's sales
to Partners
(80% x $9,000,000)...................7,200,000
Less: Intercompany
sales from Partnership P
to Corporation D ...................... 6,000,000 82,000,000
 
__________________________________________________________________________
* Not to exceed taxpayer's interest in Partnership P's sales.
 
(e) For purposes of the non-income measure of the excise, the classification and valuation of a general or limited partnership interest shall be determined by the books and records of the corporation, as maintained under generally accepted accounting principles (GAAP), as provided below:
 
1. Where (i) a corporation's ownership interest in a general or limited partnership (as determined under GAAP) is less than twenty percent and (ii) the corporation and the partnership are not required to be included in the same consolidated or combined financial statement under GAAP, the corporation shall use the cost method of accounting for its investment in the partnership.
 
2. Where (i) a corporation's ownership interest in a general or limited partnership (as determined under GAAP) is twenty percent or more and (ii) the corporation and the partnership are not required to be included in the same consolidated or combined financial statement under GAAP, the corporation shall use the equity method of accounting for its investment in the partnership.
 
3. Where (i) a corporation owns any interest in a general or limited partnership and (ii) the corporation and the partnership are required to be included in the same consolidated or combined financial statement under GAAP, the corporation may account for its investment in the partnership either (i) by using the equity method or (ii) by consolidating or combining its assets and activities with those of the partnership in the manner required by GAAP; provided that the corporation must use the same method to report its interest in partnerships consistently from taxable year to taxable year.
 
(f) Pro Rata Share. For purposes of 830 CMR 63.38.1(12), a partner's pro rata share of partnership property, payroll and sales shall be its percentage interest in partnership profit or loss for the taxable year, as stated on the partner's Schedule K-1, provided however, that if, under the partnership agreement, a partner's share of gain or loss from the sale of particular partnership assets is different from its profit or loss ratio stated on Schedule K-1, gross receipts from sales of such assets shall be attributed to its sales factor in the same proportion as the partner's interest in gain or loss from the sale. In the event of a termination or other change in a partner's interest during the taxable year, the partner's pro rata share of payroll and sales must be modified to reflect partnership payroll and sales during the actual period that the partner held its interest.
 
(13) Alternative Apportionment Methods.
 
(a) If a taxpayer claims that the allocation or apportionment provisions of 830 CMR 63.38.1 are not reasonably adapted to approximate the net income derived from business carried on in Massachusetts, a taxpayer may apply to the Commissioner to have such income determined by an alternative apportionment method pursuant to the provisions of M.G.L. c. 63, § 42 and 830 CMR 63.42.1.
 
(b) The provisions of 830 CMR 63.38.1(13)(a), above, notwithstanding, if the Commissioner determines that the apportionment provisions of 830 CMR 63.38.1 are not reasonably adapted to approximate the net income derived from business carried on in Massachusetts by certain industries, the Commissioner may, by regulation, adopt alternative apportionment provisions for such industries. To the extent the Commissioner adopts alternative apportionment regulations for certain industries, the rules contained in the alternative apportionment regulations will supersede the provisions of 830 CMR 63.38.1.
 
(14) Effective Dates. This regulation repeals and replaces the prior version of 830 CMR 63.38.1 as of the date of promulgation. The prior version of 830 CMR 63.38.1 is effective for all periods prior to that date. The provisions in this regulation generally shall apply to tax years beginning on or after the promulgation of the regulation, except to the extent that a provision (i) is subject to a specific effective date provided herein, (ii) is subject to a specific effective date created by legislation, or (iii) reflects a position appearing in a prior public written statement or other Department of Revenue publication, including electronic publication. All rules that antedate this regulation, whether appearing in a prior public written statement or other Department of Revenue publication, continue in force and effect except to the extent any such rules are revised or altered by this regulation. These general rules notwithstanding, for periods prior to the promulgation of this regulation, the Commissioner reserves the right to assert a position reflected in this regulation that is not inconsistent with a prior public written statement, and that otherwise is consonant with the law in effect at that time
 
REGULATORY AUTHORITY
830 CMR 63.38.1: M.G.L. c. 14, § 6(1); M.G.L. c. 62C, § 3; M.G.L. c. 63, § 38(j),(k),(l),(m)(n).
 
Date of Promulgation: 8/11/95
New Regulation Promulgated: 2/5/99
Amended: 3/31/00 - sections (12)(e)3; (14)(d)
Amended: 12/21/01 - section (9)(b)7
New Regulation Promulgated: 10/20/06