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Technical Information Release TIR 22-4: Bay State Gas Company & Affiliates v. Commissioner of Revenue – Deductibility of Indiana Utilities Receipts Tax
Table of Contents
I. Introduction and Procedural History
On October 7, 2020, the Massachusetts Appeals Court (“Appeals Court”) reversed the decision of the Appellate Tax Board (“Board”) in favor of the Commissioner in Bay State Gas Company & Affiliates v. Commissioner, 98 Mass. App. Ct. 582 (2020) (“Bay State Gas”). At issue was the deductibility, for Massachusetts corporate excise purposes, of an Indiana gross receipts tax imposed on utilities (known as the “Utilities Receipts Tax” or “URT”). The Board had held that the URT was not deductible under G.L. c. 63, § 30(4)(iii). The Appeals Court disagreed.
This Technical Information Release (“TIR”) explains the position of the Department of Revenue (“Department”) with respect to the application of the Appeals Court’s decision to the corporate excise deduction allowed by G.L. c. 63, § 30(4)(iii).
A. Nondeductible State Taxes Under G.L. c. 63, § 30(4)(iii)
As part of the Massachusetts corporate excise, the Commonwealth imposes a tax on a corporation’s taxable net income. G.L. c. 63, § 39. In calculating its net income, a corporation may claim taxes imposed by other states as “deductions . . . allowable under the provisions of the Federal Internal Revenue Code.” G.L. c. 63, § 30(4). However, the Massachusetts statute further provides that deductions are 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,” even if such deductions are allowed federally. G.L. c. 63, § 30(4)(iii).
The Commissioner has previously issued guidance explaining this disallowance. In Directive 99-9, the Commissioner noted that the types of taxes that are not deductible under § 30(4)(iii) are those that are imposed on a corporation’s business as a whole. These may be distinguished from “transactional taxes,” such as sales taxes, which are intermittently imposed on separate business activities. See DD 99-9. Thus, to determine whether a particular tax is deductible under G.L. c. 63, § 30(4)(iii), the Commissioner will ask whether the tax is imposed on a business as a whole or on discrete transactions or business activities. Id.
In Directive 08-7, the Commissioner further explained that, in general, “gross receipts-based taxes” may not be deducted from net income because such taxes are “franchise taxes imposed on a taxpayer for the privilege of doing business in a state.” Such taxes are generally imposed on the total gross revenues of a business, regardless of whether the business is profitable, and often do not allow for the types of deductions that are common for taxes imposed on net income. See DD 08-7. Instead, these taxes are for the privilege of doing business in the state and are simply measured by gross receipts. Id.
B. The Indiana URT
In Bay State Gas, Bay State Gas Company (the “taxpayer”) and its affiliates provided utility services in several states, including Massachusetts and Indiana. The Indiana affiliates paid the URT, which was imposed by Indiana on
(1) the entire taxable gross receipts of a taxpayer that is a resident or a domiciliary of Indiana; and (2) the taxable gross receipts derived from activities or businesses or any other sources within Indiana by a taxpayer that is not a resident or a domiciliary of Indiana. Bay State Gas, 98 Mass. App. Ct. at 583, citing Ind. Code § 6-2.3-2-1.
The Indiana statute defined “gross receipts” as “anything of value . . . that a taxpayer receives in consideration for the retail sale of utility services for consumption. . .” Bay State Gas, 98 Mass. App. Ct. at 583, citing Ind. Code § 6-2.3-1-4. Certain items were excluded from taxation, including wholesale sales, occasional sales from taxpayers not regularly engaged in the sale of utilities, and sales to the federal government.
C. The Appeals Court’s Decision
The Board had held that the URT was not eligible for the Massachusetts deduction because, although it had some characteristics of a transaction tax, it more closely resembled the types of taxes for which a deduction was disallowed under G.L. c. 63, § 30(4)(iii). The Appeals Court reversed.
The Appeals Court concluded that the URT was not a franchise tax imposed for the privilege of doing business in Indiana. Bay State Gas, 98 Mass. App. Ct. at 587. Instead, the Appeals Court held that the URT was “in substance fundamentally similar to transaction taxes on retail sales, which are deductible.” Id. at 588. The Appeals Court concluded that the tax “is not imposed on the business in its entirety: it is imposed on the receipts received from retail sales of, in this case, natural gas and electricity.” Id. at 586. It noted that certain receipts, from wholesale sales, occasional sales, and sales to the federal government, were not subject to tax. Id. at 587.
In addition, the Appeals Court found it significant that the Indiana legislature had enacted a complementary use tax “on the retail consumption of utility services in Indiana . . .” Id. at 588. This additional tax was apparently enacted because, following the passage of the URT, retail natural gas customers began purchasing natural gas from out-of-state suppliers in an apparent attempt to avoid the additional costs of the URT passed through to them by Indiana retailers. Id. at 584. This use tax further suggested to the Appeals Court that the URT itself was in substance a sales tax rather than a franchise tax on the privilege of doing business.
III. Application of the Bay State Gas Decision
Under the Appeals Court’s decision, an analysis of individual tax statutes remains necessary in order to determine whether the tax at issue is deductible pursuant to G.L. c. 63, § 30(4)(iii). In Bay State Gas, the Appeals Court determined that the URT was deductible because it “was in substance fundamentally similar to [a] transaction tax on retail sales” (as it was imposed on certain receipts but not others and included a complementary use tax), not a franchise tax on the privilege of doing business. Each state tax statute is unique and therefore would need to be analyzed independently to determine whether a similar analysis should apply. Bay State Gas referenced the Department’s Directives 08-7 and 99-9. 98 Mass. App. Ct. at 586. The criteria in those Directives continue to apply. Pursuant to those Directives it remains the case that taxes imposed on a business as a whole, measured by gross receipts, for the privilege of doing business are not deductible under G.L. c. 63, § 30(4)(iii).
/s/Geoffrey E. Snyder
Geoffrey E. Snyder
Commissioner of Revenue
February 4, 2022