830 CMR: DEPARTMENT OF REVENUE
830 CMR 64H.00: SALES AND USE TAX
830 CMR 64H.00 is repealed and replaced with the following:
830 CMR 64H.6.11: Qualifying Small Business Exemption

(1) Statement of Purpose; Effective Date; Outline of Topics.

(a) Statement of Purpose. The purpose of this regulation, 830 CMR 64H.6.11, is to explain the exemption from the sales tax for sales of gas, steam, electricity, or heating fuel taxable under M.G.L. chs. 64H and 64I for use by qualifying small businesses under M.G.L. c. 64H, § 6(qq).

(b) Effective Date. This regulation, 830 CMR 64H.6.11, applies to sales of gas, steam, electricity, or heating fuel for use by a qualifying small business on or after April 1, 2006.

(c) Outline of Topics. This regulation, 830 CMR 64H.6.11, is organized as follows:

1. Statement of Purpose; Effective Date; Outline of Topics.
2. Definitions.
3. General Rule.
4. Employee Status.
5. Aggregation of Employees of Affiliated Businesses.
6. Identity of Purchaser as affecting eligibility for exemption.
7. Effect on Vendor.
8. Annual Eligibility for Exemption.
9. Exemption Certificates.

(2) Definitions. For the purpose of this regulation, 830 CMR 64H.6.11, the following terms have the following meanings:

Business, any activity engaged in by any person or caused to be engaged in by him with the object of gain, benefit, or advantage, whether direct or indirect, but not including investment activities by an individual or an individual's estate in tangible or intangible personal property that do not constitute a trade or business for federal income tax purposes. For purposes of this regulation, a business includes all members of an affiliated group, as defined by section 1504 of the Internal Revenue Code, and any other combination of related parties as the Commissioner may define by regulation.

Code, Internal Revenue Code, as amended and in effect for the applicable period.

Commissioner, the Commissioner of Revenue or the Commissioner's duly authorized representative.

Employee, any person performing services for a business for consideration, if the relationship between the person performing services and the person for whom the person performs such services is the relationship of employer and employee, as described in I.R.C. § 3401(c), (d), and Treas. Regs. §§ 31.3401(c)‑1, 31.3401(d)‑1, whether or not the individual is treated as such by the business, and who meets both of the following criteria:

a) the person normally works for the business for thirty hours per week or
more; and
b) the person is hired for a period of five months or more, or for an
indefinite period of time.

The term employee also includes any partner, owner, or officer of a business who normally works for the business for thirty hours per week or more.

Gross income, the amount properly reportable as the total amount of income of a business, less any amount attributable to cost of goods sold.

Qualifying small business, a small business that meets all of the prerequisites of M.G.L. c. 64H, § 6(qq) and this regulation for the applicable period, including compliance with the requirements for presenting its vendor with Department of Revenue Form ST‑13, properly completed in accordance with this regulation.

Small business, a business that has five or fewer employees and that had gross income of less than $1,000,000 for the preceding calendar year, and that reasonably expects gross income of less than $1,000,000 for the current calendar year.

Seasonal business, for purposes of this regulation, a seasonal business is a business that operates for periods of less than 12 consecutive months during the calendar year in the regular course of its business, and which, as a result of such seasonal operation, may have fewer or greater than 5 employees at different times during the calendar year.

Small business exemption, the exemption from tax available under M.G.L. c. 64H, § 6(qq).

Tangible personal property, personal property of any nature consisting of any produce, goods, wares, merchandise, and commodities whatsoever, brought into, produced, manufactured, or being within Massachusetts but not including rights and credits, insurance policies, bills of exchange, stocks, bonds, and similar evidences of indebtedness or ownership. For purposes of M.G.L. c. 64H and c. 64I, tangible personal property includes gas, electricity, steam, and heating fuel.

Tax, the excise imposed under M.G.L. c. 64H or c. 64I.

Taxable fuel, gas, steam, electricity, or heating fuel which is subject to tax imposed under M.G.L. c. 64H or c. 64I.

Vendor, a retailer or other person selling tangible personal property or services of a kind the gross receipts from the retail sale of which are required to be included in the measure of the tax imposed by M.G.L. c. 64H or c. 64I.

(3) General Rule. Sales of gas, steam, electricity and heating fuel are generally taxable when sold to businesses. However, such sales may be exempt under M.G.L. c. 64H, § 6(qq), provided that both of the following requirements are met.

(a) the gas, steam, electricity or heating fuel must be solely for use by a qualifying small business;

(b) the small business for whose use the energy is purchased must have had gross income of less than $1,000,000 for the preceding calendar year, and must reasonably expect to have gross income of less than $1,000,000 for the current calendar year.

(4) Employee Status.

(a) Presumption of employee status for partners, owners, and officers. A partner, owner, or officer of any business who regularly works for the business is presumed to be an "employee" of the business. This presumption may be rebutted by the business upon evidence establishing that such partner, owner, or officer does not normally work for the business for thirty hours per week or more.

(b) Determining employee status for other workers. In determining whether a person is an employee for purposes of the small business exemption, the Commissioner will examine the particular facts and circumstances surrounding the relationship between a business and an individual who works for the business, including, but not limited to, the following:

1. whether the business pays the individual a wage or salary;

2. whether the business is required to withhold income tax from the individual's compensation;

3. whether the business is required to pay FICA on behalf of the individual;

4. whether the business pays worker's compensation insurance premiums on behalf of the individual;

5. whether the business is required to pay FUTA on behalf of the individual;

6. whether the business considers the individual to be an employee;

7. whether the business exercises or has a right to exercise control over the means of accomplishing the end result, or over the end result only;

8. the general practices of the business with respect to the employment status of other individuals who work for the business.

(c) Normally working thirty hours per week or more. A person normally works thirty hours per week or more if in the calendar year the number of hours the person works divided by the number of weeks the person works is equal to or greater than thirty.

(d) Employment for five months or more. A person is hired by a business for five months or more if the person works for the business for at least twenty weeks in the calendar year or for twenty weeks during the twelve month period immediately preceding the claim of the small business exemption. A person is hired by a business for fewer than five months only if the person and the business specifically agree, prior to the employment, that the person will work for the business for fewer than five months and the person in fact works for the business for fewer than twenty weeks in the calendar year or fewer than twenty weeks during the twelve months period immediately preceding the claim of the small business exemption.

(e) Special rules for seasonal businesses.

1. Seasonal business having five or fewer employees at the time of its first purchase of taxable fuel. A seasonal business that has five or fewer employees at the time it first purchases taxable fuel in a calendar year may qualify for exemption on its purchases made during the remainder of the calendar year, even if it has greater than 5 employees during subsequent periods in the calendar year provided it meets the following requirements:

a. It had gross income of less than $1,000,000 from the previous calendar year and reasonably expects to have gross income of less than $1,000,000 for the current year; and

b. It reasonably expects that it will have a monthly average of 5 or fewer employees for the current calendar year. A seasonal business may reasonably expect that it will have a monthly average of 5 or fewer employees if, after applying the following formula, its total number of anticipated employees in the current calendar year, is 5 or fewer: The numerator of the formula is comprised of the following: (number of employees during operational months times number of operational months) plus (number of employees during non-operational months times number of non-oprational months). The denominator of the formula is 12.

2. Seasonal business having greater than five employees at the time of its first purchase of taxable fuel. A seasonal business that has greater than five employees at the time it first purchases taxable fuel in a calendar year may nonetheless qualify for exemption if it meets the following requirements:

a. During the previous calendar year, it had gross income of less than $1,000,000, and reasonably expects to have less than $1,000,000 in current calendar year; and

b. It had an average monthly number of 5 or fewer employees during the previous calendar year, determined by applying the formula in 830 CMR 64H.6.11(4)(e)1.b, and reasonably expects that it will have a monthly average of 5 or fewer employees for the current calendar year, determined by applying the same formula.

(f) Examples. The provisions of this section, 830 CMR 64H.6.11(4), are illustrated by the following examples.

Example 1: ABC Jewelry Boutique is a business that purchases electricity for its own use. It has five or fewer employees during calendar year 2006. During calendar year 2006, it will have gross income of $980,000. It expects to have gross income or $990,000 during 2007. ABC is a qualifying small business. Upon presentation of a valid Small Business Exemption Certificate (Form ST‑13) to the vendor of the heating fuel at the time of its first purchase in the calendar year, ABC is not required to pay tax on its purchase of the fuel. However, ABC continues to be liable for sales tax on purchases of all other tangible personal property except gas, steam, electricity, and heating fuel, since the exemption applies only to these purchases by a qualifying small business.

Example 2: Same facts as Example 1, except that ABC reasonably expects to have $1,500,000 in income for calendar year 2007. Although it has 5 or fewer employees during both calendar years 2006 and 2007, it is ineligible to claim exemption on its purchases made in calendar year 2007 because it reasonably expects to have gross income in excess of $1,000,000. If, at the end of calendar year 2007, its gross income remains at less than $1,000,000, ABC may request a refund of overpaid tax from its vendor. The vendor may apply for an abatement of overpaid tax in accordance with the rules set forth in the Abatements regulation, 830 CMR 62C.37.1.

Example 3: XYZ Corporation is a small business that employs a number of people to perform weekend security guard services for various companies. It consists of one full‑time owner‑operator who works thirty or more hours per week. The corporation also employs fifteen security guards who normally work eight hours each day on Saturdays and Sundays. During the previous calendar year, XYZ Corporation had gross income of less than $1,000,000. It reasonably expects to have less than $1,000,000 in gross income for the current calendar year. Under these facts, for the calendar years in question, XYZ Corporation has only one employee, since only one individual normally works 30 hours per week or more. The 15 part time security guards who work only 16 hours per week do not qualify as employees. Thus, the business meets the "five or fewer employees test". It must also meet the income test. If its gross income for the previous calendar year and its expected gross income for the current calendar year is less than $1,000,000, it is a qualifying small business and may present a valid exemption certificate (Form ST-13) to its fuel vendors, at the time of its first purchase in the calendar year.

Example 4: Betty's Office Cleaning Service, Inc. ("Betty's") is a business owned and operated by Betty, who works 30 hours per week for the business. Betty employs a number of people who provide day and evening office cleaning services to a large office building. All individuals work according to a fixed regular schedule as follows: Five individuals work 7 hours a day on Mondays, Tuesdays, and Wednesdays from 4:00 p.m. until 11:00 p.m. On Thursdays and Fridays, Betty's uses five different individuals who work the same shift from 4:00 p.m. to 11:00 p.m.

Under these facts, Betty's Office Cleaning Service has only one employee, since none of the other individuals normally works 30 hours per week or more. However, if Betty's hired the same individuals to work the entire five day work week, it would not qualify for the exemption on its purchases of taxable fuels, since it would have more than five employees who normally work thirty hours per week or more. In such a case, Betty's would be ineligible to claim the exemption, regardless of whether it has gross income of less than $1,000,000 for applicable calendar years.

Example 5: "The Four G's Bakery" is a local business that operates a neighborhood bakery. It is owned by four sisters who are equal partners in the business: Greta, Gertrude, Gilda, and Grace. Greta and Gertrude each work forty hours per week at the bakery. Gilda does the bookkeeping for the business at home. Grace, who provided most of the initial capital for the business, occasionally works at the bakery if one of the other workers is unable to go to work. In addition to Greta and Gertrude, the bakery also hired Fanny and Frieda to work 40 hours per week for an indefinite (rather than temporary) period of time, and Paula and Phyllis, who each work 20 hours per week.

For purposes of determining if The Four G's Bakery is a qualifying small business so that it may purchase gas, steam, electricity or heating fuel tax free, Greta, Gertrude, Fanny and Frieda must be counted as employees of the business, since an employee includes any person, including a partner, owner, or officer of the business who normally works for the business for 30 hours per week or more. Paula and Phyllis do not qualify as employees, since neither normally works for the business for 30 hours per week or more. Gilda and Grace normally work for the business, although their hours vary. Since any partner, owner, or officer of the business who normally works for the business is considered an employee, the business must demonstrate that Gilda and Grace do not work for 30 hours per week or more. If the business cannot demonstrate that Gilda and Grace do not normally work for the business for thirty hours per week or more, the business is not eligible for the exemption, since it would maintain more than five employees. However, if the business is able to demonstrate that only one of them (Gilda or Grace) qualifies as an employee, the Bakery would have five or fewer employees. Provided that its gross income for the previous calendar year and its gross income for the current year is reasonably expected to be less than $1,000,000, the business would not be required to pay sales tax on its purchases of taxable fuels solely for its own use, upon presenting a valid exemption certificate to its fuel vendors.

Example 6: Sally's Ski Emporium ("Sally's) is a seasonal ski shop operating on the premises of a ski resort in Massachusetts. Sally's is not affiliated with any other businesses. It generally operates from January through April and from November through December in a given calendar year. From May until October, the business is closed. From January, when it makes its first purchase of fuel, through April of the current calendar year, it has 10 employees. In November through December of the current year, it reasonably expects to have the same employees. For the previous calendar year, its income was less than $1,000,000. It also reasonably expects that its income for the total current calendar year will be less than $1,000,000.

In order to determine its eligibility for exemption, the business must meet the "income" requirements as well as the "5 or fewer employees" requirement of this regulation. In this example, Sally's meets the income requirements of the exemption. It must also determine whether it qualifies based on its having five or fewer employees. Although Sally's has greater than 5 employees (i.e. 10) at the time of its first purchase of taxable fuel in January and although it reasonably expects to have 10 employees in November and December, it may nonetheless qualify for exemption if, after applying the formula set forth in 830 CMR 64H.6.11(4)(e)1.b. it has a monthly average of number 5 or fewer employees.

Applying the formula as follows: (10 x 6) + (0 x 6) = 60 = 5,
12 12
Sally has an average number of 5 or fewer employees.

(5) Affiliated Businesses.

(a) Aggregation of Code section 1504 affiliated groups. All members of an affiliated group as defined by Code section 1504, are deemed to be a single business for purposes of the small business exemption. If a business is an affiliated group, as so defined, all employees of all members of the affiliated group are deemed to be employees of a single business in determining whether the small business exemption applies.

(b) Aggregation of other affiliated businesses. Two or more affiliated businesses, including corporations, that are engaged in related business activities are deemed to be a single business for purposes of the small business exemption, and all employees of all such affiliated businesses are deemed to be employees of a single business in determining whether such exemption applies.

1. Affiliated businesses. Two or more businesses are affiliated when the same owner or the same group of common owners holds in the aggregate, directly or indirectly, fifty percent or more of the total value of the ownership interest or fifty percent or more of the combined voting power in each business.

2. Related business activity. Whether two or more businesses are engaged in related business activities depends on the facts and circumstances of each case. The Commissioner will determine that business activities are related if there is a sharing or exchange of value between two or more businesses beyond the mere flow of funds arising out of a passive investment by one business in another or the flow of investment funds from one business to a separate and distinct business. In general, two or more businesses are engaged in related business activities if, based on functional integration, centralization of management, or economies of scale between or among the businesses, the businesses are engaged in a unitary business.

3. Attribution rules for common ownership. The Commissioner will apply the constructive ownership provisions of Code section 318 for purposes of determining ownership under 830 CMR 64H.6.11(4)(b)1., above, regardless of whether the ownership is represented by stock shares, partnership interests, or other indicia of ownership, provided that the constructive ownership provisions shall apply to siblings in addition to the relationships enumerated in Code section 318.

(6) Purchaser Status as affecting availability of the exemption. The following general rules apply to purchases of energy by businesses.

(a) If a qualifying small business is the purchaser of fuel solely for its own use, the purchase is exempt.

(b) If a qualifying small business is the purchaser of fuel that is not solely for its own use, whether or not any portion of the fuel is for use by an entity that is a qualifying small business, the purchase is not exempt.

(c) If a business that is not a qualifying small business purchases fuel on behalf of a qualifying small business, the purchase is not exempt.

(7) Effect on Vendor. Unless a vendor of taxable fuel has actual knowledge that the purchaser is not purchasing taxable fuel for its own use as a small business, the vendor may in good faith treat the payor as a qualifying small business and accept a validly executed exemption certificate, Form ST-13.

(8) Annual Eligibility for Exemption.

(a) General. To be eligible for the exemption for purchases of gas, steam, electricity, or heating fuel at the time it first purchases gas, steam, electricity, or heating fuel from a vendor in the calendar year, a qualifying small business must have five or fewer employees, and also must have had gross income of less than $1,000,000 for the preceding calendar year, and must reasonably expect that it will have gross income of less than $1,000,000 for current calendar year. A seasonal business that has more than five employees on the date of its first purchase of taxable fuels in a calendar year may be eligible to claim exemption, provided it meets the requirements for seasonal businesses in 830 CMR 64H.6.11(4)(e). Once a qualifying small business presents an exemption certificate to a vendor in a calendar year, it continues to be eligible for the small business exemption on subsequent purchases from that vendor during such year even if thereafter it has more than five employees, provided that its average monthly number of employees for the entire year, as determined by this regulation, is five or fewer, and further provided that its gross income for the current calendar year is less than $1,000,000. If a business ceases to qualify for exemption at some point during a calendar year, the business owes taxes on amounts for which no tax was paid during the period in which it did not qualify. Notwithstanding the foregoing, the Commissioner may deny the small business exemption in any case in which the Commissioner determines that a business's employment or purchasing practices are intended to evade the tax. The business must retain adequate employee time and wage records, as well as income records to substantiate the exemption. Refer to 830 CMR 64H.6.11(9)(b) and (c) for specific rules governing presentation of exemption certificates for purchases of taxable fuels.

(9) Exemption Certificates.

(a) General. A qualifying small business as defined in this regulation, 830 CMR 64H.6.11(2), may purchase gas, steam, electricity, or heating fuel tax free, provided the requirements listed in sections (9)(b) and (c) below, are met.



(b) Fuel Purchases ‑ Presentation of Certificates. To qualify for tax free purchases of gas, steam, electricity or heating fuel, a small business must present the vendor with a properly completed, timely, Form ST‑13.

1. Annual exemption certificates on fuels. A qualifying small business must give each fuel vendor a Small Business Exemption Certificate (Form ST‑13) annually at the time of its first purchase from such vendor of taxable fuels as a qualifying small business. The certificate only applies to purchases made on or after the date the certificate is signed and presented to the vendor. Generally, a vendor of fuels must collect tax from any small business purchaser that has not provided Form ST‑13, unless the purchaser qualifies for the manufacturing exemption for energy, and has provided the appropriate exemption certificate substantiating that exemption.

(c) Vendor's Obligations. A vendor must ensure that he receives a properly completed, signed Form ST‑13 as required and must keep a copy of the certificate on file along with other required tax records. See Department of Revenue Record Retention Regulation 830 CMR 62C.25.1. Generally, if the vendor accepts in good faith a properly completed exemption certificate in lieu of charging tax, the vendor is relieved from the burden of proving that the sale is not a taxable sale at retail.

(d) Misuse of Certificates. Any person who willfully presents any certificate under M.G.L. chs. 64H or 64I known by that person to be fraudulent or false as to any material matter and given for the purpose of evading payment of sales or use tax may be subject to fines, imprisonment, or both. Any person who willfully aids or assists in the preparation of presentation of such a fraudulent or false document may be subject to fines, imprisonment, or both. If any purchaser of taxable fuel improperly presents a certificate, the purchaser remains fully liable for payment of use tax on its purchase.

REGULATORY AUTHORITY
830 CMR 64H.6.11: M.G.L. c. 14, § 6(1); M.G.L. c. 62C, § 3; M.G.L. c. 64H, § 6(qq)

REGULATORY HISTORY
Emergency Regulation: 11/30/90
Date of Promulgation: 8/16/91

New Regulation Promulgated: 6/2/06