This Technical Information Release (TIR) explains changes relating to sales and use tax contained in chapter 262 of the Acts of 2004. Except as noted in Section VI, below, these provisions were effective on passage, August 9, 2004.
II. Clarification of the Drop Shipment Provisions:
Massachusetts sales and use tax law generally requires a wholesaler with nexus to Massachusetts to collect tax when it ships goods into the Commonwealth on behalf of a retailer that is not required to collect the tax because it does not have nexus in the state. This amendment clarifies existing law, consistent with the Department's longstanding policy, that a company shipping goods to a Massachusetts customer may not avoid the application of this provision through contractual provisions governing passage of title. St. 2004, c. 262, § 48. Also see generally DD 86-5 and DD 86-21.
B. Statutory Change:
The definition of "sale at retail" or "retail sale" of G.L. c. 64H, § 1, has been amended. The second sentence of the definition has been replaced with the following: "When tangible personal property is physically delivered by an owner, a former owner thereof, a factor, or an agent or representative of the owner, former owner or factor, to the ultimate purchaser residing in or doing business in the commonwealth, or to any person for redelivery to the purchaser, pursuant to a retail sale made by a vendor not engaged in business in the commonwealth, the person making or effectuating the delivery shall be considered the vendor of that property, the transaction shall be a retail sale in the commonwealth by the person and that person, if engaged in business in the commonwealth, shall include the retail selling price in its gross receipts, regardless of any contrary statutory or contractual terms concerning the passage of title or risk of loss which may be expressly or impliedly applicable to any contract or other agreement or arrangement for the sale, transportation, shipment or delivery of that property."
1. Example 1:
Vendor is an Internet seller that has no nexus with Massachusetts. Vendor makes a sale of taxable goods to a retail Customer in Massachusetts that will be shipped directly from Manufacturer, which is a company that has nexus with Massachusetts. Manufacturer ships the goods to Customer in Massachusetts through the use of a Common Carrier, FOB shipment, from a point outside Massachusetts. Generally, in an FOB shipment contract, title and risk of loss pass to the purchaser at the time the shipper turns the goods over to a common carrier. Under these facts, manufacturer must include the retail selling price of the goods in its gross receipts, regardless of whether title or risk of loss passed outside of Massachusetts.
2. Example 2:
Vendor is an Internet seller that has no nexus with Massachusetts. Vendor makes a sale of taxable goods to a retail Customer in Massachusetts that will be shipped directly from Manufacturer. The goods are delivered to the Massachusetts customer by Manufacturer's wholly owned subsidiary, Trucking Company. Trucking Company does not generally hold itself out to the public as a common carrier and makes the majority of its deliveries for Manufacturer and its affiliates. If Manufacturer is properly registered as a Massachusetts vendor, it must include the retail selling price ( i.e., the price between Vendor and Customer) in its gross receipts. If Manufacturer is not registered as a Massachusetts vendor, Trucking Company must register as a vendor and include the retail selling price in its gross receipts. Trucking Company would not be required to register and collect tax, however, if the facts of this example were changed such that (1) Manufacturer does not own or control Trucking Company and the two lack common ownership; (2) Trucking Company holds itself out to the public as a common carrier; and (3) Trucking company does not perform services in Massachusetts on behalf of the Manufacturer or Vendor, other than transportation and delivery of goods to the customer.
III. Renewal Period for Charitable Certificates Lengthened:
Charitable organizations must secure a Certificate of Exemption (Form ST - 2) to qualify for the sales and use tax exemption under G.L. c. 64H, § 6(e). Prior to this amendment, the certification had to be renewed every five years. This requirement generated needless paperwork for both the affected organizations and the Department. The amendment extends the period during which the certification is effective without renewal from five to ten years. St. 2004, c. 262, § 49.
B. Statutory Change:
Following amendment, the applicable sentence in G.L. c. 64H, § 6, reads in relevant part, "The certificate of exemption issued by the commissioner under clause (2) shall be effective for a period of 10 years from the date of its issuance . . . provided that ninety days prior to said date the commissioner shall notify such corporation, foundation, organization or institution of the expiration date of said certificate."
IV. Clarification of Exemption for Promotional Advertising Materials:
G.L. c. 64H, § 6(ff) exempts direct and cooperative direct mail promotional advertising materials. This amendment is a clarification by the Legislature that this exemption is restricted to individual discount coupons or promotional booklets or circulars of six pages or less that incorporate coupons and does not include mail order catalogs, department store catalogs, or telephone directories. St. 2004, c. 262, § 50. In determining what constitutes a page, the Department will consider the formatting and layout of the materials, any numbering that may appear on the pages, as well as the commonly understood meaning of that term. "Page" has been defined as "a leaf or one side of a leaf, as of a book, letter, newspaper, or manuscript ….The writing or printing on one side of a leaf." The American Heritage Dictionary, Fourth Edition . Generally, a leaf that has been printed on one side will be counted as one page; a leaf that has been printed on two sides will be counted as two pages. Also s ee generally DOR Directive 02-7 (as to the definition of a "mailing house") and DOR Directive 03-8 (as to tax collection obligations of printers). TIR 04-26 revokes and replaces TIR 96-5.
B. Statutory Change:
G.L. c. 64H, § 6 (ff) has been amended to replace the second sentence with the following three sentences: "For the purpose of this paragraph, 'direct and cooperative direct mail promotional advertising materials' shall mean individual discount coupons, or advertising leaflets incorporating the coupons within the promotional advertising materials no greater than 6 pages in length, and including any accompanying envelopes and labels. In order to be exempt hereunder, the promotional advertising materials shall be distributed as a part of a package of materials promoting 1 or more than 1 business, each operated at separate and distinct locations, and directed in a single package to potential customers, at no charge to the potential customer, of the businesses paying for the delivery of such material. For the purpose of this paragraph, 'direct and cooperative direct mail promotional advertising materials' shall not include mail order catalogs, department store catalogs, telephone directories, or similar printed advertising books, booklets or circulars greater than 6 pages in total length."
C. Limitations: The exemption continues to be limited as follows:
1. Product Samples.
The exemption is only for direct mail promotional advertising consisting of discount coupons, advertising leaflets and similar printed advertising that incorporates coupons. Sales of envelopes containing discount or advertising coupons of various vendors also fall within this exemption. Sales or use of product samples or other items included with direct mail promotional advertising, such as shampoos, detergents, pain relievers, pens and calendars, are not exempt from tax under section 6(ff).
2. Mixed Purpose Publications.
The exemption applies only to promotional advertising printed for the sole purpose of advertising. It does not apply to printed material provided for mixed purposes such as newsletters, reference guides, resource directories, campaign or fund raising literature, educational publications, and any similar materials that contain advertising materials along with other information, even where the principal purpose of such material is advertising. Other exemptions, such as G.L. c. 64H, § 6 (m), may apply.
3. Method of Delivery.
To be eligible for exemption, direct mail promotional advertising material must be delivered to an interstate carrier, a mailing house or a United States Post Office for delivery or mailing directly to potential customers at their home address or places of business free of charge. Promotional advertising to be distributed by any means other than direct mailing to the potential customer will not qualify for exemption. Accordingly, sales of coupons delivered to a vendor and then re-delivered to a mailing house to be included in a cooperative mailing effort will not be exempt.
V. "Morton Buildings" Case:
The Massachusetts Appeals Court in Morton Buildings, Inc. v. Commissioner, 43 Mass. App. 441 (1997) held that where goods are purchased out of state and significantly altered before being brought into the Commonwealth, the use tax did not apply when the components are used in the Commonwealth. As the result of this holding, such items often escaped sales or use tax in any jurisdiction. The amendment changes the use tax statute to explicitly provide that use tax is due on manufactured, fabricated or assembled items when they are used in the Commonwealth. The amendment applies to items used in the Commonwealth on or after August 9, 2004, regardless of whether (1) the items were purchased prior to August 9, 2004 or (2) the contracts for purchase or use of the items were executed prior to August 9, 2004. See St. 2004, c. 262, § 51.
B. Statutory Change:
G.L. c. 64I, § 2, has been amended to state that the use tax applies to tangible personal property or services purchased from any vendor "or manufactured, fabricated or assembled from materials acquired either within or outside the commonwealth" for storage, use, or other consumption within the Commonwealth." (New statutory language in quotation marks.)
Builder A purchases raw materials, such as lumber and nails, in New Hampshire and, at its New Hampshire factory, partially constructs component parts of buildings that will later be used at its customer's sites. No sales or use tax was paid on the raw materials at the time of purchase. Builder A will be liable for use tax on the cost of the raw materials when it uses the component parts in Massachusetts on or after August 9, 2004, even though the lumber and nails were incorporated into a manufactured, fabricated or assembled product, i.e., the component building part, outside of Massachusetts.
VI. Use Tax Reporting Options:
Since 2002, the Massachusetts personal income tax return has had a line for consumers to report use tax on items that they may have purchased out of state or from Internet or mail order sellers who did not collect Massachusetts sales or use tax. The amendment will permit taxpayers to use a schedule, as set forth below, to self-report a "safe harbor" amount of use tax based on their Massachusetts adjusted gross income. A taxpayer may pay this amount in lieu of the actual amount of use tax that would otherwise be due with respect to such purchases. Individual taxpayers electing to report use tax under this method will not be assessed additional use tax on audit with regard to items having a sales price below $1,000, even if the actual amount of use tax due would have been greater than the amount from the schedule. Purchases of items having a sales price of $1,000 or more are excluded from the safe harbor. The amendment applies to purchases made on or after January 1, 2004 and will be reflected on the 2004 personal income tax return forms. St. 2004, c. 262, § 52.
B. Statutory Change: The following new section has been added to G.L. c. 64I:
"Section 4A. (a) An individual taxpayer subject to the excise under this chapter who has not paid over the excise due for a purchase of tangible personal property as provided for under chapter 64H shall pay and account for that liability to the commissioner annually either by entering the amount of his liability upon the appropriate line item of the taxpayer's personal income tax return or by filing a separate use tax return in the form prescribed by the commissioner. If the taxpayer elects to report the use tax liability on his personal income tax return, irrespective of the filing status chosen, the taxpayer shall enter either: (i) the estimated liability as provided in subsection (b) based upon the taxpayer's Massachusetts adjusted gross income as determined under section 2 of chapter 62; or (ii) the exact amount of the liability based upon actual taxable purchases for the calendar year. Taxpayers opting to pay an estimated use tax liability for any period in accordance with the subsection (b) shall not be subject to any additional assessment of use tax for the period even if the taxpayer's estimated liability is lower than the actual liability. A taxpayer having no use tax liability for a tax period may enter a zero on the appropriate line of his personal income tax return.
(b) A taxpayer electing to satisfy a use tax liability by estimating it shall calculate the liability in accordance with the following table and provisions. The estimated liability shall only be applicable to purchases of any individual items each having a total sales price of less than $1,000. For each taxable item purchased at a sales price of $1,000 or greater, the actual use tax liability for each purchase shall be added to the amount of the estimated liability derived from the below table."
MA AGI Per Return
Use Tax Liability
$0 - $ 25,000
$25,001 - $ 40,000
$40,001 - $ 60,000
$60,001 - $ 80,000
$80,001 - $100,000
(Multiply MA AGI by .0005)
Commissioner of Revenue
October 21, 2004