| Date: | 12/18/2008 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Corporate Excise/Personal Income Tax
I. Introduction
The Department has recently been presented with questions regarding new tax regimes that replace the franchise or corporate excise taxes in certain states. For instance, Texas and Ohio replaced their general business tax regimes with taxes that are based upon or directly derived from the gross receipts of entities doing business in the state, called "margin taxes" and "commercial activity taxes," respectively. See Tex. Tax Code, § 171; OH Rev. Code, § 57. These tax regimes are similar to the gross receipts tax or "B & O" tax that was previously enacted by the state of Washington. See generally R.C.W., § 82. Gross receipts and margin taxes are generally paid at the entity level, even in the case of partnerships. Questions have been raised about whether Massachusetts taxpayers are entitled to a credit under chapter 62 or a deduction under chapter 63 for these types of taxes paid to another state.
II. Issues
(a) Whether, generally, a taxpayer is entitled to a credit against Massachusetts income tax under G.L. c. 62, § 6(a) for gross receipts-based taxes paid to another jurisdiction, and specifically whether a Massachusetts taxpayer who is a Massachusetts resident shareholder of an S corporation, or a Massachusetts resident partner or member of another form of pass-through entity, is entitled to such income tax credit for a distributive share of gross receipts-based taxes paid to another jurisdiction by the entity?
(b) Whether a corporation that calculates its net income under G.L. c. 63, § 30.4 is allowed a deduction from gross income for gross receipts-based taxes paid to another jurisdiction?
III. Directives
(a) No. Whether a gross receipts-based tax is paid by an individual or a pass-through entity, a Massachusetts taxpayer is not entitled to the income tax credit allowed under G.L. c. 62, § 6(a) for gross receipts-based taxes paid to another jurisdiction because these taxes are based on gross receipts, not on net income.
(b) No. When calculating net income a corporation is not entitled to a deduction for gross receipts-based taxes paid, because G.L. c. 63, § 30.4(iii) disallows a deduction for taxes paid in any state that are on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes. Gross receipts-based taxes are franchise taxes imposed on a taxpayer for the privilege of doing business in a state.
IV. Discussion
A. Gross Receipts-Based Taxes
1. General; examples of gross receipts-based taxes [1]
a. Washington Gross Receipts Tax (GRT)
The gross receipts tax is generally a tax on the total gross revenues of a business, regardless of their source. "Gross receipts" reflect the total amount realized, without deduction for the cost of goods sold or other expenses incurred, in a transaction or transactions that contribute to the production of gross income including the fair market value of any property and any services received, and any debt transferred or forgiven. See, e.g., R.C.W, §§ 82.04.070 and 82.04.080. GRTs are not based on a company's profit or loss for the tax year, but are owed whether or not a business is profitable for the act or privilege of engaging in business activities in the state. See R.C.W, § 82.04.220.
b. Texas Gross Margin Tax (GMT)
In Texas, the GMT applies to all types of entities doing business in the state, except for sole proprietors, general partnerships owned solely by individuals, and certain passive entities and real estate entities (including REITs and REMICs). See Tex. Tax Code, § 171. The GMT is based upon gross receipts less the greater of compensation or the cost of goods sold. See Tex. Tax Code, § 171. A taxpayer's total revenue represents its total income as reported on IRS Form 1120 (for corporations) and IRS Form 1065 (for partnerships and other pass-through entities), plus dividends, interest, gross rents and royalties, capital gain net income minus bad debt, etc. Id. The GMT does not generally allow the deductions that would be allowed by a tax imposed on net income, and the Texas Legislature has specifically stated that the GMT is not an income tax. Texas Acts 2006, 79 th Leg., c. 1, § 21 (May 18, 2006).
c. Ohio Commercial Activity Tax (CAT)
In Ohio, the commercial activity tax applies to all types of businesses regardless of their form, e.g., retailers, service providers (such as lawyers, accountants and doctors), manufacturers and other types of businesses. See generally OH Rev. Code, § 57. The CAT is also not an income tax. It is an annual privilege tax measured by gross receipts on business activities in the state. For example, the tax is based on amounts realized from the sale, exchange or other disposition of the taxpayer's property, from performance of services, or from another's use or possession of the taxpayer's property or capital. See OH Rev. Code § 5751.033.
2. Gross Receipts-Based Taxes Are Not Income Taxes
Gross receipts-based taxes like the GRT, adopted by the state of Washington, the Texas GMT and the Ohio CAT are each taxes imposed for the privilege of doing business in a state. These taxes are not based on income and are due whether a business is profitable or not. Therefore, these taxes are not in the nature of net income taxes imposed on taxpayers, either directly or by imposition on pass-through entities in which the taxpayers are members.
B. Individual Income Tax Credit Not Allowed for Gross Receipts-Based Taxes
Under the Massachusetts personal income tax, specifically Massachusetts General Laws chapter 62, § 6(a), a credit is allowed against taxes imposed by this chapter to a resident for taxes due any other state, on account of any item of Massachusetts gross income. See G.L. c. 62, § 6(a). An "item of Massachusetts gross income" is an item of income that is taxable under the Massachusetts personal income tax after applicable adjustments and deductions. See G.L. c. 62, §§ 2 and 3 (defining Massachusetts gross income, adjusted gross income, taxable income, and related terms).
Therefore, the § 6(a) credit is allowed to a resident when the tax paid is an income tax based on an item of Massachusetts gross income or the tax is an income tax in nature and imposed on the net income of a sole proprietor or an entity that flows through to the Massachusetts shareholders or members. The credit is not allowed for other types of taxes. See DOR Directive 08-06; Letter Ruling 94-8.
C. Corporate Excise Tax Deduction Not Allowed for Gross Receipts-Based Taxes
Under the Massachusetts corporate excise, specifically Massachusetts General Laws c. 63, § 30.4, "net income" is gross income less the deductions, but not credits, allowable under the federal Internal Revenue Code, as amended and in effect for the taxable year. Any deduction that is allocable, in whole or in part, to income that is not included in a corporation's taxable net income, as determined under § 38(a), is not allowed. G.L .c. 63, § 30.4. In addition, a deduction is not allowed for taxes on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes imposed by any state. G.L. c. 63, § 30.4(iii). Accordingly, since gross receipts-based taxes such as the GRT, GMT and CAT are franchise taxes that are imposed for the privilege of doing business in a state, they are not deductible pursuant to G.L. c. 63, § 30.4(iii).
V. Conclusion
The GRT, GMT and CAT are based on or derived directly from gross receipts and are not imposed on net income. Accordingly, they are not income taxes in nature. As such, a resident taxpayer who pays one of these taxes in another jurisdiction is not entitled to a credit under G.L. c. 62, § 6(a). Similarly, a Massachusetts shareholder, partner or member of a pass-through entity is not entitled to the credit allowed under G.L. c. 62, § 6(a) when these taxes are paid to another jurisdiction by the entity. In addition, pursuant to G.L. c. 63, § 30.4(iii), when determining net income, a deduction is not allowed for gross receipts-based taxes paid to any state because these taxes are franchise taxes imposed for the privilege of doing business in a given state.
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
NKB:MTF:wm
December 18, 2008
DD 08-7