|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Personal Income Tax
I. Introduction The Massachusetts Legislature recently enacted chapter 4 of the Acts of 2003, An Act Making Appropriations for Fiscal Year 2003 to Provide for Supplementing Certain Existing Appropriations and for Certain Other Activities and Projects. Section 7 of the Act amends Massachusetts General Laws chapter 62, section 5A(a), Taxation of income earned by non-residents. The amendment defines and clarifies the scope of gross income earned by non-residents that is subject to taxation in Massachusetts. This change is effective for tax years beginning on or after January 1, 2003. The purpose of this Technical Information Release ("TIR") is to explain the changes made by St. 2003, c. 4, § 7.
A. Prior Law
For Massachusetts income tax purposes, Massachusetts gross income of a non-resident is determined solely with respect to items of gross income from sources within Massachusetts. G.L. c. 62, § 5A(a). The prior law at § 5A(a)(1), in relevant part, defined gross income from sources within the Commonwealth as "gross income derived from or effectively connected with … any trade or business, including any employment carried on by the taxpayer in the commonwealth." The Massachusetts courts have interpreted this language to mean that the Massachusetts gross income of a non-resident is taxable only when a non-resident taxpayer carries on business activities in Massachusetts during the taxable year in which the income is received. See, e.g., Commissioner of Revenue v. Oliver, 436 Mass. 467 (2002), where non-qualified pension payments received from a former Massachusetts employer were found to be not taxable during those years in which the taxpayer did not carry on any trade or business in Massachusetts; Commissioner of Revenue v. Destito, 23 Mass. App. Ct. 977 (1987), where it was held that accumulated sick and vacation pay received by a nonresident taxpayer after he had ceased working in Massachusetts was not taxable gross income because the taxpayer did not perform any services in Massachusetts during the year at issue; and Gersh v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 49, (1997), where a non-resident taxpayer's income under a non-competition agreement relating to the sale of Massachusetts corporations was not taxable in the years when the taxpayer no longer acted as an officer and director of the corporations.
B. New Law
For tax years beginning on or after January 1, 2003, section 7 of chapter 4 of the Acts of 2003 modifies the judicial interpretation of § 5A(a). The new § 5A(a)(1) redefines gross income from sources within the Commonwealth as "gross income derived from or effectively connected with … any trade or business, including any employment carried on by the taxpayer in the commonwealth, whether or not the non-resident is actively engaged in a trade or business or employment in the commonwealth in the year in which the income is received." Therefore, Massachusetts source income of a non-resident, regardless of the year in which it is actually received by the taxpayer, will be taxable in the Commonwealth. St. 2003, c. 4, § 7, amending G.L. c. 62, § 5A. For purposes of G.L. c. 62, § 5A(a) and the taxation of non-residents, the Act further provides that "gross income derived from or effectively connected with any trade or business, including any employment, carried on by the taxpayer in the commonwealth" shall include, but not be limited to, "gain from the sale of a business or of an interest in a business, distributive share income, separation, sick or vacation pay, deferred compensation and nonqualified pension income not prevented from state taxation by the laws of the United States and income from a covenant not to compete." Id. Federal legislation effective for amounts received after December 31, 1995 prohibits any state from taxing retirement income received from certain qualified and non-qualified plans and military pensions that are paid to individuals who are not residents or domiciliaries of that state. P.L. 104-95. See TIR 97-2. Items of gross income received by non-residents of Massachusetts, that are derived from or effectively connected with the participation in any lottery or wagering transaction in Massachusetts, and the ownership of any interest in real or tangible personal property located in Massachusetts remain subject to taxation. The Department will be issuing a directive and amending 830 CMR 62.5A.1, the non-resident income tax regulation, in the near future setting forth detailed rules for the taxation of income received by non-residents.
Commissioner of Revenue
July 28, 2003