(1)
General.
(a)
Massachusetts source income is generally taxable to non-residents. 830 CMR
62.5A.1 sets forth detailed rules for the taxation of this income.
Massachusetts source income includes items of gross income derived from or
effectively connected with any trade or business, including any employment,
carried on by the taxpayer in Massachusetts, whether or not the non-resident is
actively engaged in a trade or business or employment in Massachusetts in the
year in which the income is received; the participation in any lottery or
wagering transaction in Massachusetts; or the ownership of any interest in real
or tangible personal property located in Massachusetts. All types of income,
including investment income, derived from or effectively connected with the
carrying on of a trade or business within Massachusetts are Massachusetts
source income. The term may include 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. For rules that apply to non-resident members of professional
athletic teams,
see
830
CMR
62.5A.2.
Certain types of income received by non-residents from sources
within Massachusetts are excluded from taxation, such as non-business-related
interest, dividends and gains from the sale or exchange of intangibles that are
not derived from or effectively connected with the carrying on of a trade or
business, and certain qualified pension income.
Massachusetts source income derived from pass-through entities,
such as partnerships, trusts, estates, limited liability companies (LLCs), or S
corporations, generally is also subject to Massachusetts income taxation for
non-residents. The activities of a pass-through entity are attributed to its
owners, including non-resident partners, members, or shareholders. Thus, if a
non-resident has an ownership interest in a pass-through entity that is engaged
in the conduct of a trade or business in Massachusetts, or derives income from
the ownership of real or tangible personal property in Massachusetts, the
non-resident is treated as if conducting those activities in his or her
individual capacity.
The income of a pass-through entity that derives from or is
effectively connected with the conduct of a trade or business or the ownership
of real or tangible personal property in Massachusetts retains its character as
it passes through a tiered structure of pass-through entities before becoming
income to the non-resident. Thus, income that is derived from a trade or
business does not convert to non-business-related income as it passes through a
series of entities. Similarly, Massachusetts source income of any pass-through
entities engaged in a unitary business that conducts a trade or business in
Massachusetts is taxable to a non-resident member to the extent it would be
taxable if received directly by the nonresident.
In the case of multi-tiered unitary businesses where at least
one entity in the structure is engaged in the conduct of a trade or business or
the ownership of real or tangible personal property in Massachusetts, and
income derived from one or more members of the unitary business is taxable in
another state, the group of entities must apportion its income, as determined
under 830 CMR 62.5A.1.
When a non-resident earns or derives income from sources both
in Massachusetts and elsewhere, only that portion of the income earned or
derived from Massachusetts is taxed. The types of deductions and exemptions
available to a non-resident with respect to Massachusetts source income are
generally the same as those granted to a resident.
All transactions involving the taxation of non-residents are
subject to the sham transaction rule, as defined in 830 CMR 62.5A.1.
To the extent that any rule in 830 CMR 62.5A.1 conflicts with
that in another regulation, such as
830
CMR 62.17A.1, "Massachusetts Taxation of S
Corporations and their Shareholders," the most recently promulgated rule
applies.
(b)830 CMR
62.5A.1
is organized as follows:
1. General.
2. Definitions.
3. Income Subject to Massachusetts Income
Tax.
4. Income Not Subject to
Massachusetts Income Tax.
5. Rules
for Apportionment of Income for Non-Resident Individuals Working in
Massachusetts.
6. Rules for
Apportionment of Income to Massachusetts for Non-resident Members of
Pass-through Entities.
7.
Exemptions.
8.
Deductions.
9. Estates of
Non-resident Decedents.
10.
Non-resident Trusts.
11.
Returns.
12. Effective
Dates
(2)
Definitions. Unless the context requires otherwise,
for the purposes of 830 CMR
62.5A.1, the following definitions apply:
Code, as defined in M.G.L. c. 62,
§ 1, which refers to the federal Internal Revenue Code, with certain
modifications.
Corporate Trust, any partnership,
association, or trust, the beneficial interest of which is represented by
transferable shares, which is subject to tax imposed by M.G.L. c. 62 as a
corporate trust.
Domicile, the place which is an
individual's true, fixed and permanent home, determined by established common
law principles and the facts and circumstances in each case.
Entertainer, an individual employee,
partner or sole proprietor who receives compensation to perform, entertain,
amuse, or inform (as, for example, a lecturer) at one or more discrete
events.
Federal Gross Income, gross income as
defined under the Code.
Massachusetts Cooperative Housing
Corporation, a corporation organized or existing under M.G.L. c.
157B, or M.G.L. c. 157, § 3A.
Massachusetts Gross Income, federal
gross income as modified by M.G.L. c. 62, § 2(a).
Massachusetts Source Income,
Massachusetts gross income derived from or effectively connected with:
(a) any trade or business, including any
employment, carried on by a non-resident in Massachusetts, whether or not the
non-resident is actively engaged in a trade or business or employment in
Massachusetts in the year in which the income is received;
(b) the participation in any lottery or
wagering transaction in Massachusetts; or
(c) the ownership of any interest in real or
tangible personal property located in Massachusetts.
Massachusetts Timesharing Arrangement
, an arrangement under which a taxpayer purchases a right to use accommodations
located in Massachusetts for a specific period of less than a year's duration
during any given year over a period of greater than three years.
Member, may include a shareholder of
an S corporation; a partner in a partnership, including a limited partner in a
limited partnership, or a partner in a limited liability partnership; a member
of a limited liability company; or a beneficiary of an estate or trust other
than a corporate trust.
Non-resident, any natural person who
is not a resident or inhabitant.
Partner, a member of an entity
organized as a general partnership, limited liability partnership, or limited
partnership, or a member of any business entity subject to tax as a partnership
for Massachusetts purposes.
Partnership, an unincorporated
association of two or more individuals or entities organized to carry on, as
co-owners, a business for profit. A partnership includes any business entity
treated as a partnership for Massachusetts tax purposes, such as LLCs that are
classified as partnerships for federal tax purposes. Businesses subject to
Massachusetts tax on their income at the entity level, such as a corporate
trust or an LLC that elects to be taxed as a corporation for federal tax
purposes, are not treated as partnerships for Massachusetts tax
purposes.
Part-year Resident, a taxpayer who
moves to Massachusetts or establishes a permanent place of abode in
Massachusetts and becomes a tax resident during the tax year, or a taxpayer who
terminates his or her status as a Massachusetts resident and establishes a
residence outside of the state during the tax year.
Pass-through Entity, includes a
limited partnership, limited liability partnership, general partnership, a
limited liability company that is treated as a partnership for Massachusetts
tax purposes, an S corporation, and a trust not taxed at the entity level,
including a grantor-type trust, but not including a corporate trust, and an
estate not taxed at the entity level.
Person, an individual, corporation,
society, association, partnership or other entity.
Presence for Business in Massachusetts
, physical presence in Massachusetts for the purpose of engaging in any
activity, the object of which is financial profit, gain, benefit, or advantage,
direct or indirect.
Professional Athlete who is not a Member of a
Professional Athletic Team, an individual employee, partner or
sole proprietor who receives compensation to compete in athletics (other than
as a member of a professional athletic team) at one or more discrete sporting
events. For rules that apply to non-resident professional team athletes,
see
830
CMR 62.5A.2.
Related Business Activities, as more
fully defined in 830 CMR 62.5A.1(6)(d), include activities where there is a
sharing or exchange of value between the segments of a single entity or
multiple entities such that the activities are mutually beneficial,
interdependent, integrated, or such that they otherwise contribute to one
another. The term also includes the short-term investment of capital in a
non-unitary business segment or activity, or any other investment that serves
an operational function.
Resident or Inhabitant, any natural
person domiciled in Massachusetts or any natural person who is not domiciled in
Massachusetts but who maintains a permanent place of abode in Massachusetts and
spends in the aggregate more than 183 days of the tax year in Massachusetts,
including days spent partially in and partially out of Massachusetts.
S Corporation, an S corporation as
defined in the Code.
Sham Transaction, a transaction that
does not have:
(a) a valid, good faith
business purpose other than tax avoidance; and
(b) economic substance apart from the
asserted tax benefit.
Sham Transaction Rule, the rule, set
forth at M.G.L. c. 62C, § 3A, that permits the commissioner, in his
discretion, to disallow the asserted tax consequences of a transaction by
asserting that it is a sham transaction; in such cases the taxpayer has the
burden of proving by clear and convincing evidence that it is not a sham
transaction, as more fully described in M.G.L. c. 62C, § 3A.
Tiered Structure, a pass-through
entity that has a pass-through entity as a member. As between two entities, the
pass-through entity that is a member is the upper-tier entity, and the entity
of which it is a member is the lower-tier entity. A tiered pass-through entity
arrangement may have two or more tiers; in such cases, a single entity can be
both a lower-tier and an upper-tier entity.
Trust, a trust as defined under
Massachusetts law, but for purposes of 830 CMR 62.5A.1, not including a
corporate trust.
Unitary Business, a group of related
businesses under common ownership that have one or more of the following
factors:
(a) functional
integration;
(b) centralization of
management; and
(c) economies of
scale.
Evidence of a unitary business includes facts indicating that
there is a flow of value among the entities, or that capital transactions among
the businesses serve an operational rather than an investment
function.
(3)
Income Subject to Massachusetts Income Tax. The
Massachusetts income tax is imposed on the Massachusetts source income earned
or derived by non-residents. Massachusetts source income includes the following
types of income, but excludes items of income set forth in 830 CMR
62.5A.1(4):
(a)
Income Derived from or
Effectively Connected with a Trade or Business, Including Any Employment
Carried on in Massachusetts. This income is defined as the income
that is earned by, credited to, accumulated for or otherwise attributable to
the taxpayer's trade or business in the Commonwealth in any year or part
thereof, regardless of the year in which the income is actually received by the
taxpayer and regardless of the taxpayer's residence or domicile in the year it
is received. All types of income, including investment income, derived from or
effectively connected with the carrying on of a trade or business within
Massachusetts are Massachusetts source income. The term may include gain from
the sale of a business or 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.
1. "Trade or business, including any
employment."
a.
General
Rule. Subject to the exception that applies to presence for
business that is casual, isolated, or inconsequential, described in 830 CMR
62.5A.1(3)(h), a nonresident has a trade or business, including any employment
carried on in Massachusetts:
i. If the
non-resident, directly or through representatives or employees, maintains or
operates or shares in maintaining or operating any place in Massachusetts where
business affairs are systematically and regularly conducted;
ii. If the non-resident owns an interest in a
pass-through entity that, directly or through representatives or employees, or
through other pass-through entities, maintains or operates or shares in
maintaining or operating any place in Massachusetts where its business affairs
are systematically and regularly conducted;
iii. If the non-resident, directly or through
representatives or employees, is present for business in Massachusetts either
as an employee or as a sole proprietor or other self-employed individual, or if
the non-resident owns an interest in a pass-through entity that, directly or
through representatives or employees or through other pass-through entities, is
present for business. All activities that are considered a "trade or business,"
including employment, under Massachusetts and/or federal tax law are subject to
taxation in Massachusetts under M.G.L. c. 62, § 5A. Income from a trade or
business generally includes that gross income against which trade or business
expense deductions are allowable under sections 62 and 162 of the Code.
See M.G.L. c. 62, § 1(l), IRC §§ 62, 162,
Treas. Reg. §§ 1.161-1 through 1.162-29;
iv. If the non-resident licenses intangibles,
including trademarks or patents, directly or through representatives or
employees, for use in Massachusetts on an ongoing basis.
2.
Current Residence
or Domicile of a Non-resident Taxpayer has no Effect on the Taxability of
Massachusetts Source Income. All items of income that derive from
the conduct of a trade or business or employment in Massachusetts, as those
terms are defined in 830 CMR
62.5A.1(3)(a)1., are Massachusetts source income,
even if the taxpayer has not been present in Massachusetts during the year of
receipt.
Example (3)(a)(2). Taxpayer is a
resident of New Hampshire and works in Massachusetts from 1984 through 2004.
Upon retirement in 2004 Taxpayer receives a severance compensation package that
includes $10,000 for severance pay and $5,000 for unused sick leave. The entire
$15,000 package is derived from and attributable to Taxpayer's employment in
Massachusetts. The entire $15,000 package is thus Massachusetts source
income.
(b)
Income from a Pass-through Entity that is Derived from or
Effectively Connected with a Trade or Business, Including Any Employment
Carried on in Massachusetts.
1.
General Rule. The activities of a pass-through entity
are attributed to its individual members. A non-resident member of a
pass-through entity is therefore engaged in the conduct of the trade or
business of the pass-though entity of which it is a member, and thus is taxable
on the Massachusetts source income of the entity. The character of any item of
income, loss, deduction or credit included in the member's distributive share
is determined as if it were realized directly by the member from the source
from which realized by the pass-through entity, or incurred in the same manner
as incurred by the pass-through entity. The principles in 830 CMR
62.5A.1(3)(b)1. shall apply in the case of an ownership chain that runs through
multiple pass-through entities. For example, if a non-resident individual is a
member of a pass-through entity that, in turn, is a member of a lower-tier
pass-through entity that is engaged in a trade or business in Massachusetts,
then the non-resident will be taxable on its share of the Massachusetts source
income derived from the trade or business conducted by the lower-tier entity.
The income derived by a non-resident limited partner of a
Massachusetts limited partnership engaged exclusively in buying, selling,
dealing in or holding securities on its own behalf and not as a broker, is not
subject to the Massachusetts income tax. See M.G.L. c. 62,
§ 17(b). The Massachusetts source income derived by a non-resident general
partner of such a partnership is subject to Massachusetts income tax, provided
the partnership is engaged in the conduct of a trade or business in the
Commonwealth, or owns or leases real property in the
Commonwealth.
2.
Multiple Pass-through Entities that are not Engaged in a Unitary
Business. In the case of multiple pass-through entities that are
not engaged in a unitary business, the pass through entities must identify the
Massachusetts income or loss, reporting that amount to its members, allocated
or apportioned as appropriate pursuant to 830 CMR
62.5A.1(6). That income must
retain its identity as Massachusetts source income, and be reported as such to
members as it passes through multiple pass-through entities, without further
apportionment.
Example (3)(b)(2). Florida domiciled
LLC ("Florida LLC") has three non-resident members. Florida LLC owns a
Massachusetts domiciled LLC ("Massachusetts LLC") that invests in securities on
its own behalf and is not engaged in a trade or business. Florida LLC owns a
New York domiciled LLC ("New York LLC") that has an office in Boston that
offers management services and advice to Massachusetts LLC and receives a fee
from Massachusetts LLC based on a percentage of the portfolio value of
Massachusetts LLC. Florida LLC also owns Real Estate LLC, commercially
domiciled in Utah, but which owns an office tower in Boston and collects rents
on that. Real Estate LLC is not engaged in a unitary business with the other
members of the group.
Taxation of non-resident members of Florida LLC. The
Massachusetts source income of Real Estate LLC, determined pursuant to the
allocation and apportionment rules of 830 CMR 62.5A.1(6), is identified and
reported to Florida LLC, and is taxable to the non-resident members. It is not
subject to further apportionment under 830 CMR 62.5A.1(6) at the level of
Florida LLC. Income from Massachusetts LLC is not subject to Massachusetts
taxation to the non-resident members, because Massachusetts LLC only invests in
securities on its own behalf. The Massachusetts source income derived from New
York LLC, determined pursuant to the allocation and apportionment rules of 830
CMR 62.5A.1(6)(a), is taxable because the management company is engaged in the
conduct of a trade or business in Massachusetts. The income of the group is not
subject to the apportionment provisions described at 830 CMR 62.5A.1(6)(b),
because the entities subject to Massachusetts taxation are not engaged in a
unitary business.
3.
Multiple Pass-through Entities Engaged in a Unitary
Business. In the case of multiple pass-through entities that are
engaged in a unitary business, the income of any entity in the structure that
derives from or is effectively connected with the conduct of a trade or
business or the ownership of real or tangible personal property in
Massachusetts retains its character as it passes through the structure. Thus,
business income of a pass-through entity does not convert to non-business
income as it passes through a series of pass-through entities engaged in
related business activities, as that term is defined in 830 CMR
62.5A.1(2), and
is further explained in 830 CMR
62.5A.1(6). Investment income of a pass-through
entity that would be taxable as business income if received directly by a
non-resident member engaged in business in Massachusetts is treated as taxable
income of the non-resident. Note that business income can include investment
income that the pass-through entity or entities derives from an operational
function.
Example (3)(b)(3). A non-resident is a
member of a Nevada LLC. The Nevada LLC sells computer software, and has an 80%
ownership interest in a Partnership that develops computer software in
Massachusetts. The partnership is treated as a partnership for federal and
Massachusetts tax purposes. The income of the Partnership flows through the LLC
to non-resident members. The LLC and the Partnership are functionally
integrated, and are a unitary business. Subject to the apportionment rules
found at 830 CMR 62.5A.1(6), below, the income of the Partnership that is
passed through to the nonresident shareholders is Massachusetts source
income.
(c)
Specific Types of Massachusetts Source Income. If a
non-resident has a trade or business, including any employment, carried on in
Massachusetts, Massachusetts source income includes, among other things:
1.
Compensation for Personal
Services. All types of compensation received for personal services
performed in Massachusetts, regardless of where paid, are Massachusetts source
income. Personal service compensation includes wages, salaries, commissions,
fees, or payments in kind. In the case of compensation for personal services,
the taxpayer must report all Massachusetts source income even though the
taxpayer does not receive the entire amount of such income. For example,
amounts withheld by an employer for federal or state income taxes, FICA
contributions, medical insurance premiums not otherwise excluded from federal
gross income, or other similar withholding deductions must be included in
Massachusetts source income.
2.
Stock Options. A taxpayer must recognize income
derived from nonqualified stock options that are connected with employment, or
with the conduct of a trade or business, in Massachusetts in the year the
income is recognized for federal purposes whether or not the taxpayer is a
resident of Massachusetts during the year in which the income is reported and
whether or not the taxpayer remains employed by the issuer of the option in the
year of recognition of the income. The amount of such income that is taxable to
Massachusetts is determined by applying the taxpayer's average Massachusetts
apportionment percentage (based on the taxpayer's employment or conduct of
business within or without Massachusetts, as described in 830 CMR
62.5A.1(5))
for the period between the option grant date and the option exercise date to
the income that derives from the exercise of the option, measured by the share
price at exercise minus the option share price, multiplied by the number of
shares. A non-resident will generally not be taxable on income that derives
from sales of stock acquired pursuant to the exercise of a qualified stock
option, namely, an incentive stock option under IRC § 422 or an employee
stock purchase plan option under IRC § 423, except in the case of a
disqualifying disposition of such stock.
Example (3)(c)(2). Taxpayer works in
Massachusetts from 1997 until 2004. Taxpayer lives in Massachusetts in 1997,
and then moves to Rhode Island, continuing to work in Massachusetts, with some
work days spent in Rhode Island. Taxpayer is granted stock options according to
the following schedule:
Grant Date
|
# of shares
|
Option Price/Share
|
Exercise Date
|
Price at Exercise/Share
|
Income From Exercise
|
11/19/1997
|
150
|
$14.68
|
12/9/2004
|
$108.5625
|
$14,082
|
11/18/1998
|
1,200
|
13.82
|
5/28/2004
|
94.0625
|
96,291
|
11/17/1999
|
1,500
|
25.22
|
12/9/2004
|
108.5625
|
125,014
|
Taxpayer had the following apportionment percentages for the
years during which the options were unexercised:
1997, 100% (taxpayer was a resident during 1997 and worked
exclusively in Massachusetts during that year); 1998, 83%; 1999, 93.45%; 2000,
89.36%; 2001, 91.27%; 2002, 95.71%; 2003, 93.47%; 2004, 97.44%.
Calculation of apportioned stock option income is as
follows:
a.
For Grant of
11/19/1997. Average apportionment percentage for 1997-2004, the
period the option exists and is unexercised, is 92.96%, which represents the
sum of the apportionment percentages, 1997 - 2004, divided by 8, the number of
years in the period. The calculation is thus:.9296 * $14,082 (income from
exercise) = $13,091 Massachusetts taxable income in 2004.
b.
For Grant of
11/18/1998. Average apportionment percentage for 1998-2004, the
period the option exists and is unexercised, is 91.96%, which represents the
sum of the apportionment percentages, 1998 - 2004, divided by 7, the number of
years in the period. The calculation is thus:.9196 * $96,291 (income from
exercise) = $88,549 Massachusetts taxable income in 2004.
c.
For Grant of
11/17/1999. Average apportionment percentage for 1999-2004, the
period the option exists and is unexercised, is 93.45%, which represents the
sum of the apportionment percentages, 1999 - 2004, divided by 6, the number of
years in the period. The calculation is thus:.9345 * $125,014 (income from
exercise) = $116,826 Massachusetts taxable income in 2004.
The total Massachusetts source income derived from these
options in 2004 is $218,466.
3.
Shares of Stock Issued by a
Corporation as Compensation. If a taxpayer obtains an ownership
interest in a trade or business as part of the taxpayer's compensation
attributable to the period the taxpayer is employed or conducting the trade or
business in Massachusetts, the income that the taxpayer recognizes from this
element of compensation for federal tax purposes is Massachusetts source income
in the year of federal recognition whether or not the taxpayer is a resident of
Massachusetts at that time and whether or not the taxpayer continues to conduct
a trade or business or be employed in Massachusetts. This rule applies to an
ownership interest in any business entity, including a C corporation, S
corporation, general partnership, limited liability partnership, limited
partnership, or limited liability company.
Example (3)(c)(3). Executive works for
C Corporation in Massachusetts in 2003 and is promised one thousand shares of
stock as a bonus in 2003, but the stock is not actually issued until 2004,
after Executive has been transferred to C Corporation's Boise, Idaho
headquarters. The receipt of this stock is attributable to Executive's
employment in Massachusetts and is taxable as Massachusetts source income to a
non-resident in 2004, the year of federal recognition.
4.
Payments from a Covenant not
to Compete. Income derived from a covenant not to compete is
Massachusetts source income to the extent that it is derived from or
effectively connected with any trade or business, including any employment
carried on by the taxpayer in Massachusetts.
Example (3)(c)(4). Franchise Owner
owns several franchises of a fast food chain in Massachusetts, each of which is
a separate corporation. Franchise Owner sells her interest in the corporations
and executes an agreement with the purchaser not to open any competing fast
food restaurant near the existing stores. The covenant not to compete provides
for payments over a period of three years. Franchise Owner moves to another
state and never returns to Massachusetts. Since all the income from the
covenant not to compete derives both from the Franchise Owner's former conduct
of and her sale of a trade or business in Massachusetts, it is Massachusetts
source income for the duration of the covenant, notwithstanding Franchise
Owner's change in domicile or lack of business activity in Massachusetts for
the years of receipt.
5.
Nonqualified Pension Income.
a. Nonqualified pension income is
Massachusetts source income to the extent that it is derived from or
effectively connected with any trade or business, including employment, carried
on by the taxpayer in Massachusetts.
Example (3)(c)(5.1). Taxpayer worked
in Massachusetts from 1985 through 2002 and retires, moving out of state. A
portion of her pension package includes nonqualified benefits that
non-domiciliary states are permitted to tax under federal law. Those benefits
are paid in 2003 and years thereafter. Because this taxable pension income is
derived from Taxpayer's employment in Massachusetts, it is Massachusetts source
income taxable to Taxpayer in the year of receipt.
Example (3)(c)(5.2). Same facts as in
Example (3)(c)(5.1), but Taxpayer worked for the same company in various states
from 1985 through 2002. Taxpayer is allowed to source her non-qualified pension
benefits to Massachusetts in the same proportion as her period of Massachusetts
employment credited toward her pension bears to the total period of employment
credited toward her pension. The apportionment calculation for this example
must be based on the entire employment period from 1985 through 2002, assuming
that all of those years were credited toward Taxpayer's
pension.
6.
Severance and Accumulated Sick Leave. Severance and
accumulated sick leave is Massachusetts source income to the extent that it is
derived from or effectively connected with any trade or business, including
employment carried on by the taxpayer in Massachusetts.
Example (3)(c)(6). See Example
(3)(a)(2).
7.
Deferred Compensation. Deferred compensation is
Massachusetts source income to the extent it is derived from or effectively
connected with a trade or business including employment carried on in
Massachusetts. For purposes of 830 CMR
62.5A.1, deferred compensation is all
compensation for services paid or made available to the taxpayer in a tax year
following the year in which the services were performed, but does not include
qualified pension income as defined in 830 CMR
62.5A.1(4)(e), nor shall it be
deemed to include income from qualified tax-deferred retirement plans that is
exempt from Massachusetts taxation under any other provision of federal or
Massachusetts law. A non-resident whose deferred compensation income is derived
from or effectively connected with a trade or business or employment carried on
by the non-resident both in Massachusetts and elsewhere may apportion the
deferred compensation income under 830 CMR
62.5A.1(5).
Example (3)(c)(7.1). LLP is a limited
liability partnership that conducts its business out of its Massachusetts
headquarters. It consists of 20 partners. In 2002, ten partners withdraw,
leaving ten Active Partners and ten Withdrawn Partners. Upon withdrawal, the
ten Withdrawn Partners cease to be members of the partnership, and move out of
state. The Withdrawn Partners receive annual payments for ten years after
withdrawal. Because these payments are attributable to the partners' conduct of
a trade or business in Massachusetts, they are taxable Massachusetts source
income to the non-residents.
Example (3)(c)(7.2). Same facts as in
Example (3)(b)(7.1), except that from 1998 through 2002 the partnership had one
or more non-resident individual partners and had income derived from business
activities in another state, and that other state had jurisdiction to levy an
income tax on the partnership or partners. Five-Year Partner was a partner
during the period 1998 through 2002. The partnership should apply the average
apportionment percentage of the partnership under 830 CMR 62.5A.1(6) during the
period 1998 through 2002 and notify the Five-Year Partner of the Massachusetts
source income portion of his annual payments.
8. Sale of a Business or an Interest in a
Business. Income from a trade or business may include income that results from
the sale of a business or an interest in a business. This rule generally
applies to the sale of an interest in a sole proprietorship, general
partnership, limited liability partnership, a general or limited partner's
interest in a limited partnership (subject to the exception in the following
sentence), or an interest in a limited liability company. It generally does not
apply to the sale of a limited partner's interest in a publicly traded limited
partnership, or to the sale of shares of stock in a C or S corporation, to the
extent that the income from such gain is characterized for federal income tax
purposes as capital gains. Nevertheless, gain from the disposition of a limited
partner's interest in a publicly traded limited partnership or the disposition
of shares of corporate stock will be considered Massachusetts source income if
it is treated as compensation for federal income tax purposes. Such gain may
also give rise to Massachusetts source income if, for example, the gain is
otherwise connected with the taxpayer's conduct of a trade or business,
including employment (as in a case where the stock is related to the taxpayer's
compensation for services) or if the organizational form of a business is
changed in anticipation of the disposition of one or more interests therein for
the purpose of avoiding Massachusetts tax. Depending on the facts and
circumstances of the case, gain from the sale of such corporate stock or
limited partner's interest in a publicly traded limited partnership will be
taxable to non-residents if it is determined that the taxpayer has engaged in a
transaction or multiple transactions, the purpose of which is the avoidance of
tax upon the gain (
e.g. sham or step transaction, or
prohibited assignment of income).
Example (3)(c)(8.1). Limited Liability
Partner, a non-resident, owns a 25% partnership interest in a Massachusetts
limited liability partnership that operates a computer consulting business in
Massachusetts. Partner contributed funds to the limited liability partnership
upon its creation, but took no part in its management or operations. Partner
sells his interest in the partnership and recognizes a capital gain for federal
tax purposes. Partner is taxable in Massachusetts on the gain.
Example (3)(c)(8.2). Same facts as in
Example (3)(c)(8.1), but the partnership had one or more nonresident individual
partners, had income derived from business activities in another state, and
such other state had the jurisdiction to levy an income tax on the partnership
or partners. Non-resident Limited Liability Partner may apportion the gain on
the sale of the partnership interest. The proper method for determining
apportionment is to use the average of the apportionment percentages under 830
CMR 62.5A.1(6), taken from each partnership Form 3, during the period the
partner owned the partnership interest.
Example (3)(c)(8.3). Limited Partner,
a non-resident, purchased an interest in a limited partnership that was not
publicly traded, but that had Massachusetts source income. After two years,
Limited Partner sells her interest. Limited partner is taxable on the
apportioned share of gain from the disposition, apportioned by averaging the
apportionment percentages of the partnership under 830 CMR 62.5A.1(6) during
the two years Limited Partner owned her shares
Example (3)(c)(8.4). Investor is an
out-of-state employee of National Corp, a C corporation doing business in
Massachusetts. Investor works in National Corp's Massachusetts offices.
Investor purchases stock of National Corp as an ordinary investment unrelated
in any way to his compensation. The gain on Investor's sale of the stock is not
Massachusetts source income.
Example (3)(c)(8.5). Employee works in
Massachusetts and is granted a bonus of restricted stock, subject to risk of
forfeiture, with vesting conditioned on her employer's reaching certain
projected increases in corporate earnings. Employee does not make an election
to include the value of the stock in gross income in the year of the transfer
under IRC § 83(b). Three years later Employee moves out of state, and
sells the stock before it becomes substantially vested, triggering inclusion of
the gain in income as compensation for federal income tax purposes. Employee's
gain is Massachusetts source income taxable to Employee.
9.
Taxable Unemployment
Compensation or Disability Income. All unemployment compensation
and disability income included in Massachusetts gross income and derived from
employment in Massachusetts is Massachusetts source income.
(d)
Income from
Ownership of Any Interest in Real or Tangible Personal Property.
All income derived from the ownership of any interest in real or tangible
personal property located in Massachusetts is Massachusetts source income. For
purposes of 830 CMR
62.5A.1, the ownership of an interest in real property
located within Massachusetts includes the ownership of an interest in a
partnership to the extent that the partnership holds an interest in real
property located in Massachusetts. Income from the ownership of any interest in
real or tangible personal property located in Massachusetts includes income and
gains derived from the following:
1.
Real Property Located in Massachusetts. This category
includes the ownership of an interest in a partnership, to the extent that the
partnership holds an interest in real property located in Massachusetts.
Example (3)(d)(1.1). A Vermont
resident owns real estate located in Massachusetts that is sold for a profit.
The Vermont resident will be subject to Massachusetts income tax on the net
gain derived from the sale.
Example (3)(d)(1.2). A New York
resident receiving rental income from real estate located in Massachusetts will
be subject to Massachusetts income tax on such income.
Example (3)(d)(1.3). A Connecticut
resident owns real estate located in Massachusetts. She sells the property for
a gain and as part of the consideration for the sale receives a note from the
buyer for 20% of the purchase price. Under the note the buyer will pay
principal and interest in installments over the next five years. Both the gain
and interest received will be subject to Massachusetts income tax, whether or
not the non-resident elects to defer recognition of the income under the
installment sale provisions set forth in M.G.L. c. 62, § 63.
Example (3)(d)(1.4). Texas General
Partnership has three non-resident partners. The Partnership owns shares in a
REIT that is formed as a corporation that are sold on a secondary market, such
as through an investment firm, which it has purchased at arms length. Income
from the REIT is not treated as income from real estate, but rather as income
from certain intangibles not subject to Massachusetts income tax for
nonresidents, according to the rule at 830 CMR 62.5A.1(4)(b). As in all cases,
such income may be taxable to non-residents under the sham transaction
rule.
Example (3)(d)(1.5). Mall Partners is
a partnership with three non-resident partners that owns malls throughout the
country, including a mall in Massachusetts. Income derived from the
Massachusetts mall is Massachusetts source income derived from real property,
and is taxable to the non-resident partners.
Example (3)(d)(1.6). Non-resident is a
partner in a partnership that owns ten acres of land in Massachusetts.
Non-resident sells his interest in the partnership. Non-resident is taxable on
the gain from the sale.
1.
Like-kind exchanges under Code section 1031. Massachusetts does not tax gain
from the sale of real property that is deferred under the like-kind exchange
provisions of Code section 1031. However, when the taxpayer subsequently
disposes of the property acquired in such an exchange, the amount of the gain
that reflects appreciation of Massachusetts real estate is Massachusetts source
income.
2. tangible personal
property having a situs in Massachusetts;
3. any interest in a Massachusetts
cooperative housing corporation;
4.
any interest in a Massachusetts timesharing or similar arrangement;
5. another interest in Massachusetts real or
tangible personal property. This category includes income from extractive
rights for timber or minerals.
(e)
Income from Lottery or
Wagering Transactions. All winnings from lottery or wagering
transactions within Massachusetts are Massachusetts source income.
Example (3)(e)(1.1). A Maine resident
who purchases a Massachusetts lottery ticket and wins a prize will be subject
to Massachusetts income tax on the full amount of the winnings.
Example (3)(e)(1.2). A New Hampshire
resident visits a horseracing track in Massachusetts, places a bet on a horse
and wins. The full amount of the winnings will be subject to Massachusetts
income tax.
(f)
Income from Patents, Copyrights and Other Similar
Intangibles.
1.
Royalty Income. Royalty income from the licensing of a
patent or copyright, and income from the licensing of a design, idea or other
similar intangible, to a person for use in Massachusetts is Massachusetts
source income. For this purpose, "royalty income" shall include payments
derived from the licensing or sale of an intangible where the amount is
contingent on productivity, use, or disposition of the intangible (royalty-type
payments) irrespective of whether such transaction may be treated as a "sale"
of all substantial rights in the intangible for certain tax purposes.
Example (3)(f)(1). A non-resident
scientist develops a formula for a new drug product, patents the formula and
grants a license to a pharmaceutical company, which produces the product at its
Springfield, Massachusetts plant. The entire income from the licensing
agreement is Massachusetts source income to the scientist.
2.
Non-royalty-type Income from
Sale or Exchange of Intangible. Income derived from
non-royalty-type payments from the sale or exchange of a patent, copyright,
design, idea or other similar intangible by a non-resident is Massachusetts
source income if derived from or effectively connected with a trade or business
including employment carried on in Massachusetts.
(g)
Other Income.
All other types of income that fall within the definition of Massachusetts
source income.
(h)
Presence for Business, Casual, Isolated and Inconsequential for
Non-resident Individuals. Notwithstanding the provisions of 830
CMR
62.5A.1(3)(a), a non-resident individual does not have a trade or business,
including any employment, carried on in Massachusetts if the non-resident's
presence for business in Massachusetts is casual, isolated and inconsequential.
A non-resident's presence for business in Massachusetts will ordinarily be
considered casual, isolated and inconsequential if the non-resident's presence
for business in Massachusetts is ancillary to the non-resident's primary
business or employment duties performed at a base of operations outside of
Massachusetts, as with occasional presence in Massachusetts for management
reporting or planning, training, attendance at conferences or symposia, and
other similar activities that are secondary to the individual's primary
out-of-state duties.
Example (3)(h)(1.1). A former
politician, a resident of California, now earns a living speaking at various
functions across the country. She spends one day in Massachusetts delivering a
speech at a convention in Lowell, Massachusetts and earns $30,000. This
nonresident is considered to be carrying on business in Massachusetts because
the fee is earned as a direct consequence of the Massachusetts activity, and
this activity is not merely ancillary to her business conducted outside of
Massachusetts.
Example (3)(h)(1.2). A dentist
employed by a health maintenance organization in Portland, Maine, comes to
Massachusetts for a paid six-week training course in pediatric dentistry. Her
presence for business in Massachusetts is ancillary to her primary employment
duties elsewhere and is therefore casual, isolated and inconsequential. She is
not considered to be carrying on employment in Massachusetts.
Example (3)(h)(1.3). A New York
attorney, practicing law as a sole practitioner primarily in New York City, is
retained by a Massachusetts business in connection with a pending lawsuit in a
Massachusetts court. All of the trial preparation occurs in New York but the
attorney appears in court in Massachusetts every day for four weeks. This
non-resident is considered to be carrying on business in Massachusetts while in
the Commonwealth because the duties performed in Massachusetts are not merely
ancillary to his primary business outside Massachusetts.
(4)
Income Not Subject
to Massachusetts Income Tax. The following types of income earned
or derived by non-residents are not subject to Massachusetts income tax:
(a)
Duty in the Armed
Forces. Compensation paid by the United States of America to its
service members for services rendered on active duty, including members of the
Army, Navy, Air Force, Coast Guard and Marines who are assigned to a military
airbase, naval station, or any facility, public or private, in Massachusetts,
to which they must report under service orders.
(b)
Income from Certain
Intangibles. Income from annuities, interest, dividends, and gains
from the sale or exchange of intangibles, when purely of a passive investment
character, not related to the operational functions of a business, and not
related to employment or business activity in Massachusetts or to the sale or
exchange of Massachusetts real or tangible personal property or of an interest
in a business, and not related to a partnership interest in a partnership to
the extent the partnership holds an interest in real property located in
Massachusetts.
(c)
Certain Income of Foreign Citizens. Massachusetts
source income received by a nonresident who is a citizen of a foreign country,
which income is excluded from federal gross income under an income tax treaty
or convention to which the United States is a party. Massachusetts source
income not excluded from federal gross income by the treaty or convention and
that is included in federal gross income is subject to Massachusetts income
tax.
(d)
Certain
Pension Income. Income from any contributory annuity, pension,
endowment or retirement fund of the United States Government or the
Commonwealth or any political subdivision thereof, to which the employee has
contributed.
(e)
Qualified Pension Income, as set forth in
4
U.S.C. §
114, or other provision of
federal law that would preclude such income from being subject to Massachusetts
tax, which includes any distribution received by the taxpayer from:
1. a qualified trust under section 401(a) of
the Code that is exempt from taxation under section 501(a) of the
Code;
2. a simplified employee
pension as defined in section 408(k) of the Code;
3. an annuity plan described in section
403(a) of the Code;
4. an annuity
contract described in section 403(b) of the Code;
5. an individual retirement plan described in
section 7701(a)(37) of the Code;
6.
an eligible deferred compensation plan as defined in section 457 of the
Code;
7. a governmental plan as
defined in section 414(d) of the Code;
8. a trust described in section 501(c)(18) of
the Code;
9. any plan, program, or
arrangement described in section 3121(v)(2)(C) of the Code, under the
conditions provided in
4
U.S.C. §
114.
(f) Federal Preemption. Any other income that
is the subject of federal preemption on state taxation. This includes income
of: certain seafarers and fishers, as set forth at
46 USC
§
11108, or its successor; certain
employees of interstate rail carriers, as set forth at
49 USC
§
11502, or its successor; certain
employees of motor carriers, as set forth at
49 USC
§
14503, or its successor; certain
employees of air carriers who regularly perform duties on an aircraft, as set
forth at
49 USC, §
40116, or its successor.
(5)
Rules for Allocation or
Apportionment of Income to Massachusetts for Non-resident Individuals Working
in Massachusetts. When a non-resident earns or derives income from
sources both within Massachusetts and elsewhere, the taxpayer must either
allocate or apportion the income to determine the amount of Massachusetts
source income, using the following apportionment provisions. 830 CMR
62.5A.1(5)
applies to non-resident individuals working in Massachusetts. Non-resident
members of pass-through entities use the rules at 830 CMR
62.5A.1(6). The
Commissioner may by rule or other public statement create alternate allocation
and apportionment methods.
(a)
Employees Compensated on an Hourly, Daily, Weekly or Monthly
Basis. When a nonresident employee is able to establish the exact
amount of pay received for services performed in Massachusetts, that amount is
the amount of Massachusetts source income. When no exact determination of
amounts earned or derived in Massachusetts is possible, the income of employees
who are compensated on an hourly, daily, weekly or monthly basis must be
apportioned to Massachusetts by multiplying the gross income, wherever earned,
by a fraction, the numerator of which is the number of days spent working in
Massachusetts and the denominator of which is the total working days. The
result is the amount of the nonresident's Massachusetts source income. Total
working days does not include days in which the employee was not required to
work, such as holidays, sick days, vacations, and paid or unpaid leave. When a
working day is spent working partly in Massachusetts and partly elsewhere, it
will be treated as a day spent working in Massachusetts, unless the
non-resident can prove that he or she worked outside Massachusetts for more
than half the day.
Example (5)(a)(1.1). An auditor living
in Providence, Rhode Island is employed by an accounting firm in Boston at an
annual salary of $66,000. The auditor is considered to have a trade or business
including employment carried on in Massachusetts. He works a total of 240 days
during the year. He works on audit engagements in Rhode Island and Connecticut
on 160 days of the year and works 80 days in Boston. His Massachusetts source
income is $22,000, calculated as follows:
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Example (5)(a)(1.2). A telecommuter
works for a Massachusetts firm, mainly out of her home in Ohio. The
telecommuter works a total of 240 days during the tax year, and is in
Massachusetts on 60 of those days. Her salary is $120,000 per year. Her
Massachusetts source income is $30,000, calculated as follows:
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The following example is an instance where the rule in 830 CMR
62.5A.1(5)(a) is modified to apply to a specific industry.
Example (5)(a)(1.3). In some cases, a
non-resident flight crew member, such as a pilot or flight attendant, may be
subject to taxation in Massachusetts. The general apportionment rules at 830
CMR 62.5A.1(5)(a) do not adequately measure a flight crew member's activities
in the state. Using the authority stated in 830 CMR 62.5A.1(5), the
Commissioner has by rule created an alternate allocation and apportionment
method, as follows. When a flight crew member is unable to establish the exact
amount of pay received for services performed in Massachusetts, the employee
should apportion his or her income to Massachusetts by multiplying the gross
income related to his or her employment, wherever earned, by an apportionment
factor, that is, a fraction, the numerator of which is Massachusetts workdays
and the denominator of which is total workdays. For purposes of this example, a
Massachusetts workday is any workday that a flight crew member flies out of
Massachusetts. For workdays on which a flight crew member does not fly out of
Massachusetts, the general rule at 830 CMR 62.5A.1(5)(a) applies, and any day
part of which is spent in Massachusetts will be treated as a Massachusetts
workday, unless the taxpayer can prove that he or she worked outside of
Massachusetts for more than half the day. The term "total work days" is the sum
of all days that an employee is either flying or is required to be on duty
(non-flight workdays).
(b)
Employees Compensated on a Mileage Basis. The amount
of Massachusetts source income of an employee whose wages are based on mileage
is determined by multiplying the employee's Massachusetts gross income,
determined as if the non-resident were a resident, by a fraction, the numerator
of which is the employee's total mileage traveled in Massachusetts and the
denominator of which is the employee's total mileage upon which the employer
computes total wages.
(c)
Salespersons. The amount of Massachusetts source
income of a salesperson or other employee whose compensation is based in whole
or in part upon commissions is determined by multiplying the Massachusetts
gross income, determined as if the non-resident were a resident, by a fraction,
the numerator of which is the dollar amount of sales made within Massachusetts
and the denominator of which is the dollar amount of sales everywhere. The
determination of whether sales are made within Massachusetts or elsewhere is
based upon where the salesperson performs the activities in obtaining the
order, not the location of the formal acceptance of the contract.
(d)
Self-employed Non-residents
Carrying on a Trade or Business in Massachusetts and Elsewhere.
1.
General Rule. The
non-resident must report on the return the gross income of the trade or
business, wherever derived, and apportion that income in the same manner as
employees apportion income under either 830 CMR
62.5A.1(5)(a), (b) or (c),
whichever applies. In the following examples, the non-resident is considered to
have a trade or business including employment carried on in Massachusetts:
Example (5)(d)(1.1). A non-resident
surgeon is called in from New York to perform tests and surgery at a Boston
hospital. The surgeon spends six days performing the tests and surgery in
Boston and is paid $50,000. The entire $50,000 is income subject to the
Massachusetts income tax.
Example (5)(d)(1.2). A non-resident
carpenter is contracted by a Vermont resident to remodel her Vermont home and
perform other work as needed. The carpenter works a total of 90 days remodeling
the house. As part of the contract, the carpenter works for 45 additional days
repairing the Vermont resident's Massachusetts vacation house. The carpenter is
paid a total of $21,000 for his services under the contract. His Massachusetts
source income from this contract is $7,000, calculated on the following
basis:
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2.
Other Situations - Three
Factor Apportionment. If none of the formulas described in 830 CMR
62.5A.1(5)(a) through (c) is applicable to the apportionment of a nonresident's
trade or business income, then the amount of Massachusetts source income is
determined based upon the three-factor formula for apportioning a corporation's
income under M.G.L. c. 63, § 38 and the definitions applicable to that
formula. The following three factors must be determined:
a.
Property Factor.
The average value of the taxpayer's real and tangible personal property owned
or rented, and used in the taxpayer's business in Massachusetts, divided by the
average value of all the taxpayer's real and tangible personal property owned
or rented everywhere, and used in the taxpayer's business during the tax year.
The average value of property is determined by averaging the values at the
beginning and at the end of the tax year.
b.
Payroll Factor.
The total wages, salaries and other personal service compensation paid during
the tax year to employees in connection with the trade or business carried on
within Massachusetts divided by the total of such wages and compensation
wherever earned and paid.
c.
Sales Factor. The gross sales in Massachusetts, or
gross receipts derived from activities in Massachusetts, divided by the total
gross sales or charges everywhere.
The above three factors must be carried out to four decimal
places. The apportionment percentage is a fraction, the numerator of which is
the property factor plus the payroll factor plus twice the sales factor, and
the denominator of which is four. The resulting figure is then multiplied by
the entire net income of the trade or business, wherever derived. The result is
the Massachusetts source income.
d. In a case where only two of the foregoing
three factors are applicable, the Massachusetts source income is determined by
multiplying the entire net income of the business by a fraction, the numerator
of which is the remaining two factors with their respective weights and the
denominator of which is the number of times that such factors are used in the
numerator. If only one of the three factors is applicable, the Massachusetts
source income is determined solely by that factor. A factor will not be deemed
to be inapplicable merely because the numerator of the factor is zero. A factor
will not be applicable if the denominator of the factor is less than 10% of one
third of the entire net income or if it is otherwise determined to be
insignificant in producing income.
(e)
Entertainers and Professional
Athletes not Members of a Professional Athletic Team. The
Massachusetts source income of non-resident entertainers and professional
athletes who are not members of a professional athletic team is the entire
amount received for performances, engagements or events that occurred in
Massachusetts. If the entertainer or athlete is not paid separately for each
Massachusetts event, then the following apportionment formula must be used. The
income earned and subject to the Massachusetts income tax is the total annual
compensation derived from performances, engagements, or events multiplied by a
fraction, the numerator of which is the number of performances or events the
entertainer or athlete performed (or was available to perform, as, for example,
with understudies) in Massachusetts, and the denominator of which is the total
number of performances or events that the entertainer or athlete was obligated
to perform during the tax year.
Example (5)(e)(1.1). A non-resident
entertainer performs for three evenings at Symphony Hall in Boston and earns
$100,000. The entire $100,000 is income subject to Massachusetts income
tax.
Example (5)(e)(1.2). A non-resident
professional dancer earns an annual salary of $50,000. She dances in all 40 of
her dance company's performances during the tax year, 20 of which took place in
Massachusetts. The income subject to tax in Massachusetts is $25,000,
calculated by multiplying $50,000 by 20/40.
Example (5)(e)(1.3). A non-resident
professional tennis player plays in one tournament in Massachusetts during the
tax year. She spends six days in Massachusetts and earns $75,000 in winnings
from the tournament. The entire $75,000 income is subject to Massachusetts
income tax.
(f)
Allocation and Apportionment for Non-residents who have Income
Attributable to a Period of Massachusetts Residence. Non-residents
who have income attributable to a period during which they were residents are
taxable only on income from sources within Massachusetts, which includes items
of gross income derived from or effectively connected with any trade or
business, including any employment carried on by the taxpayer in Massachusetts.
Because taxpayers were residents and thus subject to 100% allocation of income
during the period to which the current income is attributable, the non-resident
receiving such income may allocate or apportion it according to 830 CMR
62.5A.1(5) if the income was attributable to more than one jurisdiction during
the year it was earned. A taxpayer asserting this right must document all
factors used in calculating the Massachusetts source income under 830 CMR
62.5A.1(5). In the absence of such documentation, the presumption will be that
100% of the income for that year is allocated to Massachusetts. For allocation
and apportionment rules for income derived from the sale of a business or an
interest in a business,
see Example (3)(c)(8.2).
Example (5)(f)(1). Taxpayer lived in
Massachusetts in 2005 and worked for a single corporation in both Massachusetts
and Connecticut during that year. In 2006, Taxpayer moved to Florida. In 2008,
Taxpayer receives income that is attributable to her work for that corporation
in 2005. Taxpayer has no apportionment percentage available for 2005, because
Taxpayer was a resident and subject to 100% allocation of income. Taxpayer is
unable to establish the exact amount of pay received for services performed in
Massachusetts. Taxpayer can, however, prove through documentation that she
worked 50% of her working days in Massachusetts and 50% in Connecticut. The
Massachusetts source income is the amount of the payment attributable to 2005
multiplied by the resulting apportionment percentage of
50%.
(6)
Rules for Allocation or Apportionment of Income to Massachusetts
for Non-resident Members of Pass-through Entities. A pass-through
entity that earns or derives income from sources both within Massachusetts and
elsewhere must either allocate or apportion the income to determine the amount
of Massachusetts source income of its non-resident members, using the following
allocation and apportionment provisions. 830 CMR
62.5A 1(6) applies to
pass-through entities with non-resident members that have Massachusetts source
income. Non-resident individuals use the rules at 830 CMR
62.5A.1(5). The
Commissioner may by rule or other public statement create alternate allocation
and apportionment methods.
(a)
General. A pass-through entity that has income that is
taxable both within and outside of Massachusetts must report the member's
apportioned share of income to the member. To arrive at the apportioned income
figure, the pass-through entity must multiply its taxable net income by the
apportionment percentage determined under M.G.L. c. 63, § 38(c) through
(g) and
830 CMR
63.38.1. For Massachusetts purposes, the
pass-through entity's income subject to apportionment is its entire net income
derived from its related business activities, as that term is defined at 830
CMR
62.5A.1(2), and further described at 830 CMR
62.5A.1(6)(d), within and
outside of Massachusetts. The entity's income subject to Massachusetts tax is
its apportioned net income derived from its related business activities, plus
any other income subject to the tax jurisdiction of Massachusetts. Guaranteed
payments made to pass-through entity members are treated as other income of the
pass-through entity is treated, and are subject to the apportionment rules in
830 CMR
62.5A.1(6)(a).
(b)
Treatment of Multiple Pass-through Entities Engaged in a Unitary
Business. If a passthrough entity has Massachusetts source income
and is related to one or more other pass-through entities in a unitary
business, including non-Massachusetts businesses that are in a unitary
relationship, the entire income derived from the related activities of the
members of the unitary business is subject to Massachusetts apportionment. The
method of apportionment is to take the
pro rata share of the
factors of each entity in the unitary structure, and to aggregate the result
for the entire group, according to the method in the following example. The
non-resident members will report as Massachusetts source income their
apportioned share of income of the entire unitary business.
Example (6)(b)(1.1). General
Partnership (General) has a 50% interest in Subsidiary Partnership
(Subsidiary); the entities are engaged in a unitary business. General has the
following apportionment factors attributable to Massachusetts, presented as a
fraction of Massachusetts activity divided by activity everywhere: Property,
25/100; Payroll, 50/100; Sales, 1000/10,000. General has income of $1,000.
Subsidiary has the following apportionment factors, presented as a fraction of
Massachusetts activity divided by activity everywhere: Property, 10/100;
Payroll, 50/100; Sales, 1000/10,000. Subsidiary has a loss of $500. The
Massachusetts income of the unitary group is calculated as follows: Income =
$1,000 (General's income) - $250 (representing half the loss of Subsidiary;
half because General has a 50% interest in Subsidiary) = $750. The $750 income
figure must be multiplied by the blended apportionment factors. The blended
factors are determined by adding the full factor of General to half the value
of Subsidiary's factors (again, because of the 50% ownership). Thus the blended
property factor is (25 + 5)/(100 + 50) = 30/150; the blended payroll factor is
(50 + 25)/(100 + 50) = 75/150; the blended sales factor (to be counted twice
according to the double weighted sales factor rule) is [(1000 + 500)/(10,000 +
5,000)] = 1,500/15,000; the sum of these factors is then divided by four to
yield the following result:.2 +.5 +.1 +.1 =.9 / 4 =.225.
(c)
Treatment of Income Derived
from Unrelated Activities. If the unitary business subject to
Massachusetts apportionment has income derived from unrelated business
activities, as determined under 830 CMR
62.5A.1(6)(d), these items of income
will be excluded from the taxpayer's taxable net income and will not be
apportioned to Massachusetts if Massachusetts does not have jurisdiction to tax
the items of income under the Constitution of the United States. Income derived
from unrelated business activities will be allocated to Massachusetts when the
entity's commercial domicile is Massachusetts. The unitary business must report
to the non-resident taxpayer, and the non-resident taxpayer must disclose on
his or her return, the nature and amount of any item of income that is derived
from unrelated business activities and is excluded from (or is excludable from)
taxable net income. The taxpayer must also disclose and exclude expenses
allocable in whole or part to such unrelated business activities. Any property,
payroll, or sales derived from unrelated business activity are excluded from
the taxpayer's apportionment factors.
Example (6)(c)(1). Massachusetts LLC
owns a commercial real estate property that it leases, both to its parent, a
Partnership that gives investment advice to clients, and to other unrelated
tenants. The Partnership, in turn, is owned by three Owner LLCs, all of which
have a commercial domicile in other states. The Owner LLCs own the interests in
the Partnership, as well as other business ventures, such as a manufacturing
corporation in South Carolina and a public utility corporation in North Dakota.
The manufacturing corporation and the utility corporation are not in a unitary
business with other entities, nor do they have any contacts with Massachusetts.
The Massachusetts LLC and the Partnership have centralization of management and
a flow of value between the entities, and comprise a unitary business. In
determining the Massachusetts source income of the Owner LLC members, the
Massachusetts LLC and the Partnership must combine their taxable net income and
calculate the Massachusetts apportionment percentage based on their combined
property, payroll, and sales. The unitary business will exclude the income of
the manufacturing corporation and the public utility corporation from this
determination, and will not take into account any of the property, payroll, or
sales of the two corporations in calculating the Massachusetts apportionment
percentage of the unitary business.
(d)
Related Business
Activities.
1.
Definition.
a.
General Rule. Related business activities are
activities where there is a sharing or exchange of value between the segments
of a single entity or multiple entities such that the activities are mutually
beneficial, interdependent, integrated, or such that they otherwise contribute
to one another, as generally described under the discussion of the unitary
business principle in
Allied-Signal, Inc. v. Director, Division of
Taxation, 504 U.S.
768 (1992). The rules that apply to corporations,
found at
830 CMR
63.38.1(4), generally apply
to pass-through entities as they are applicable, with certain modifications set
forth in 830 CMR
62.5A.1. In general, any two segments or activities of a
single pass-though entity are related business activities unless the two
segments or activities are not unitary. In addition, the following activities
are related business activities notwithstanding the absence of a unitary
relationship:
i. the short term investment of
capital in a non-unitary business segment or activity; and
ii. any other investment of capital that
serves an operational function.
b.
Income from Cash, Cash
Equivalents, and Short-term Securities. Interest or other income
from cash deposits, cash equivalents, and short-term securities is considered
related business income if such capital serves or performs an operational
function. Without limitation, examples of operational functions include: the
use or holding of funds as working capital or reserves; the use or holding of
funds to maintain a favorable credit rating (e.g. by
maintaining a strong current or quick asset ratio); the use or holding of funds
to self-insure against business risks; and the interim investment of funds
pending their future use in the taxpayer's business.
2.
Burden of Proof.
Except as provided in 830 CMR
62.5A.1(6)(d)(3) (relating to passthrough entity
limited partners), all income of a single pass-though entity (whether derived
directly or through representatives, or other pass-through entities) is
presumed to be income from related business activities until the contrary is
established. Either the taxpayer or the Commissioner may assert that an item of
a taxpayer's income is derived from unrelated business activities. The party
making such an assertion must prove by clear and cogent evidence that the
business activities do not reasonably warrant a finding that the business
activities are related. To demonstrate that income from cash, cash equivalents,
or short-term securities is derived from unrelated business activities, a
taxpayer must prove by clear and cogent evidence that the underlying assets and
their acquisition, maintenance, and management were, in fact, unrelated to the
pass-through entity's business activities in the Commonwealth.
3.
Presumption of Unrelated
Business Activity of Pass-through Entity Limited Partners. In
cases where a pass-through entity limited partner owns no more than 50% of the
capital interests of a partnership, income that the pass-through entity limited
partner derives from the holding or disposition of its limited partnership
interest is presumed to be unrelated to the pass-through entity's other
business activities unless the Commissioner or the taxpayer rebuts this
presumption, as provided (and applicable) in
830 CMR
63.39.1(8)(f). If the
business activities of the pass-through entity limited partner and the limited
partnership are unrelated, then the pass-through entity limited partner must
separately account for its limited partnership income and its other business
income and must separately apportion to Massachusetts income from each
unrelated activity (to the extent that Massachusetts has jurisdiction to tax
income from each such activity), using only the apportionment factors
applicable to that activity.
Example (6)(d)(3.1). Texas LLC owns a
minority limited partnership interest in Partnership A. Partnership A conducts
business in Massachusetts. Apart from this partnership holding, Texas LLC does
not conduct business in Massachusetts. Texas LLC does conduct business in other
jurisdictions, either directly or through ownership of other pass-through
entities. Neither Texas LLC nor the Commissioner rebuts the presumption that
the business activities of Texas LLC and Partnership A are unrelated. Texas LLC
must separately apportion to Massachusetts income from the holding or
disposition of its interest in Partnership A, using the apportionment factors
derived from the partnership's activity. Income from Texas LLC's other
activities is not subject to Massachusetts tax jurisdiction and is excluded
from the Massachusetts source income that it reports to its
members.
(e)
Special Apportionment Rules for the Gain on the Sale of an
Ownership Interest in a Partnership that Holds Real Property in
Massachusetts.
1.
Partnerships that are Carrying on a Trade or Business in
Massachusetts. A nonresident partner who sells an interest in a
partnership that both holds an interest in real property in Massachusetts and
is carrying on a trade or business in Massachusetts is subject to the general
rule at 830 CMR
62.5A.1(3)(c)8., particularly as illustrated at 830 CMR
62.5A.1, Example (3)(c)(8.2).
2.
Partnerships that are not Carrying on a Trade or Business in
Massachusetts. A nonresident partner who sells an interest in a
partnership that holds an interest in real property in Massachusetts but is not
carrying on a trade or business in Massachusetts should apply the following
rule. The non-resident partner selling his or her interest in the partnership
must multiply the gain by a fraction, the numerator of which is the value of
the Massachusetts real property and the denominator of which is the total value
of the partnership. The value of real property to be used in the fraction is
the current fair market value of the property reduced by the value of any lien
or encumbrance remaining thereon at the time the partner sells his or her
interest in the partnership.
Example (6)(e)(2). Non-resident is a
partner in Land Hold, a partnership that purchases land in several states and
holds the land for subsequent sale to developers. The partnership was formed
with an initial capital contribution from its partners, but was not engaged in
the conduct of a trade or business in Massachusetts during the year that
Nonresident sells his interest in the partnership. The Massachusetts source
income derived from the sale is the total gain from the sale, multiplied by
fraction set forth in 830 CMR 62.5A.1(6)(e)(2).
(11)
Returns.
General Note. All
returns may be subject to electronic filing requirements, subject to change
over time, according to the rules set forth on the Department of Revenue's web
site.
See
www.mass.gov/dor for current requirements.
(a)
Individuals.
1.
General. An
individual non-resident whose Massachusetts source income exceeds $8,000 or the
personal exemption to which the non-resident is entitled after apportionment,
whichever is the lesser, is required to file with the Commissioner a return on
Form 1-NR/PY.
2.
Married Individuals. If the Massachusetts source
income of one or both spouses exceeds the minimum filing amount, each spouse
whose income exceeds that amount must file a Form 1-NR/PY. However, a married
individual may file Form 1-NR/PY jointly with his or her spouse provided that
they are both non-residents and that their tax years begin on the same day and
either end on the same day or end on different days solely because of the death
of either or both.
3.
Failure to File. The Massachusetts income tax will be
assessed on the entire Massachusetts source income of a non-resident who fails
to file a return. The Commissioner will determine the non-resident's
Massachusetts source income according to his best information and belief and
may assess the tax with penalties and interest, and without allowance for
deductions or exemptions, in addition to any other penalties allowed by
law.
(b)
Partnerships. Any partnership having a usual place of
business in Massachusetts and federal gross income in excess of $100 during the
tax year must file with the Commissioner on or before the
15th day of the fourth month following the close of
the tax year, an information return, sworn to by a member of the partnership,
on Form 3 and its schedules. The return must include the partnership's income
or losses from Massachusetts sources; any deductions or credits attributable
thereto; the names and addresses of the resident and nonresident partners;
their distributive shares of the various classes of the partnership's income,
losses, deductions or credits apportioned to each, and other information as
required by Form 3 and its schedules. In general, a partnership must maintain
an office or other place of business in the state (which may include an office
that is neither owned nor rented by the partnership, but is provided by another
party) in order for it to have a "usual place of business" in Massachusetts. It
is not necessary that the place of business maintained in Massachusetts be the
principal place of business of a partnership in order for it to be a usual
place of business.
(c)
Estates of Non-resident Decedents. An executor or
administrator of a non-resident decedent's estate deriving Massachusetts source
income that meets other filing requirements must file with the Commissioner a
return on Form 2, Fiduciary Income Tax Return, and all other required
forms.
(d)
Non-resident
Trusts. The trustee of a non-resident trust deriving Massachusetts
source income that meets other filing requirements must file with the
Commissioner a return on Form 2, Fiduciary Income Tax Return, and all other
required forms.
(e)
Payor's Information Returns. Every individual or
entity doing business in Massachusetts must file information returns (such as
the federal form W-2 or form 1099) with the Commissioner, on or before June
1
st of each year, for each non-resident deriving
income in Massachusetts to whom it has paid any income subject to Massachusetts
income taxation. All returns must report the name and address of the
non-resident recipient(s), the total amount paid to him or her during the
preceding calendar year, the amount of Massachusetts source income, and the
amount of Massachusetts tax withheld.
See
830 CMR
62B.2.1(6). This requirement
applies to payments to any entity, as described in
830 CMR
62B.2.1.
(f)
Composite
Returns.
1.
General
Rule. A pass-through entity may file a composite return on behalf
of qualified electing non-residents reporting and paying income tax on the
non-residents'
pro rata or distributive shares of
Massachusetts source income of the pass-through entity.
a.
Person Responsible for
Filing. Each qualified electing non-resident member must give the
pass-through entity a power of attorney authorizing a common member to act as
the filing agent to represent the participating member in making, executing,
and filing the return, and in acting on any matter relating to the return. The
power of attorney shall include authorization of a successor to the filing
agent. The filing agent must make the composite tax return using the
pass-through entity's name and federal identification number, sign the
composite tax return, and accept all notices from the Department of Revenue on
behalf of any and all qualified electing nonresidents.
b.
Qualified Electing
Non-residents. A non-resident who meets all of the following
criteria is a qualified electing non-resident:
i. the person must be an individual, or an
entity that is taxed under the Code as an individual, such as an electing small
business trust (ESBT), or the estate or trust of a deceased
non-resident;
ii. the person must
be a non-resident for the entire tax year;
iii. the person must elect to be included in
the composite return by signing, either as individual or as trustee, the
statement required under 830 CMR
62.5A.1(11)(f)3.; and
iv. the person must waive the right to claim
deductions, exemptions, and credits allowable under M.G.L. c. 62, §§
3, 5, and 6 on income reported on the composite return.
c.
Tiered Pass-through
Entities. To prevent multiple composite returns on the same
income, an upper-tier pass-through entity that recognizes distributive share
income is not required to file a composite return on non-resident member income
generated by a lower-tier entity that the lower-tier entity has already
reported on a composite return.
d.
Special Rule for Trusts that are not Taxed Under the Code as
Individuals. Trusts that are not taxed as individuals under the
Code may be qualified electing nonresidents if each beneficiary of the trust
that receives Massachusetts-source income would qualify to join in the filing
of a composite return under 830 CMR
62.5A.1(11)(f)1.b.i. through iv. In
addition to other requirements under 830 CMR
62.5A.1(11)(f), the trust must
file a statement with the composite return that contains the name and federal
identification number of each beneficiary of the trust that receives
Massachusetts-source income. The statement must affirm that each beneficiary
meets the requirements of 830 CMR
62.5A.1(11)(f)1.b.i through iv.
e.
Withholding
Requirement. To the extent applicable, a pass-through entity is
subject to the withholding requirements at
830 CMR
62B.2.2.
2.
Composite Returns and Other
Filing Obligations.
a.
General Rule. The filing of a composite tax return and
composite payments of estimated taxes will satisfy the obligation, as to any
Massachusetts-source income derived from the pass-through entity, of each
qualified electing non-resident to file a tax return and to make estimated tax
payments under M.G.L. c. 62C, § 6, and M.G.L. c. 62B, § 13.
b.
Limitations of Composite
Returns.
i. deductions,
exemptions, and credits allowable under M.G.L. c. 62, §§ 3, 5, and 6
may not be claimed on a composite return.
ii. for purposes of the statute of
limitations on assessments provided in M.G.L. c. 62C, § 26(b), the
statutory period will apply with regard to the composite return and items of
income required to be reported on a composite return; the Commissioner will
not, however, treat a composite return as a return by the individuals on whose
behalf it is filed.
c.
Separate Tax Return in Addition to Composite Return.
i. Separate tax return required for other
Massachusetts-source income. A taxpayer with Massachusetts-source income other
than that reported on one or more composite returns, or with a separate filing
obligation, must ensure timely payment of tax through withholding or estimated
payments with respect to such income and must report such income on a separate
tax return filed in addition to any composite returns filed on the taxpayer's
behalf. A taxpayer subject to personal income tax may claim a share of
exemptions and deductions based only on the income reported on the separate
return, as calculated under 830 CMR
62.5A.1(7) and (8).
ii.
Required Information on
Separate Tax Return. A person filing a separate income tax return
for whom one or more composite returns are also filed must identify, on the
separate income tax return, the name, address, and federal identification
number of all entities filing composite returns on that person's
behalf.
3.
Filing Statement. Each person participating in the
filing of a composite return must sign under penalties of perjury a statement
affirmatively stating the person's qualifications and election to file a
composite return. The person must submit this filing statement to the filing
agent, who must retain the statements in his or her records. The statement must
include the following information:
a. the
name and taxpayer identification number of the pass-through entity;
b. the person's taxpayer identification
number and the exact address of the person's principal place of
residence;
c. an acknowledgment of
the person's obligation to file a return, make estimated tax payments if
required, and pay his or her pro rata share of any penalty and
interest due for any underpayment of estimated taxes;
d. an agreement to be subject to jurisdiction
in Massachusetts;
e. a statement of
waiver of the right to claim, with regard to the income reported on the
composite return, any deductions, exemptions, and credits allowable under
M.G.L. c. 62, §§ 3, 5, and 6; and
f. a power of attorney authorizing the filing
agent to represent the qualified electing non-resident in making, executing,
and filing the composite return, making tax payments and estimated tax payments
and authorizing the filing agent to receive notices from the Department of
Revenue on behalf of the non-resident. A properly completed Massachusetts Power
of Attorney Form M-2848 attached to the qualified electing non-resident's
statement will fulfill the power of attorney authorization
requirement.
4.
Composite Return Filing Requirements. The filing agent
must file composite returns electronically. The total Massachusetts source
income reported on the composite return shall be the sum of all the qualified
electing non-residents' Massachusetts-source income. Persons included in the
composite return filing must have the same tax year.
5.
Components of the Composite
Return. The filing agent shall submit as part of the return:
a. a statement signed by the filing agent
under penalties of perjury, certifying that:
i. each non-resident included in the
composite return has executed the statement required by 830 CMR
62.5A.1(11)(f)3.;
ii. those
statements are on file at the principal office in Massachusetts of the
pass-through entity; and
iii. the
filing agent signing the composite return is authorized to act as such under
power of attorney. The statement shall provide the address of the principal
office in Massachusetts of the pass-through entity, or the address of the
passthrough entity if there is no Massachusetts office.
b. a schedule showing the name, tax
identification number, address, method of tax compliance, Massachusetts-source
distributive share items of each non-resident member of the pass-through
entity, and any other information the Commissioner requires. The schedule shall
specify which non-residents are participating in the composite
return.
6.
Composite Payments of Estimated Tax. Composite
payments of estimated tax must satisfy the estimated payment obligations for
each electing non-resident with regard to the Massachusetts-source income of
the pass-through entity. The filing agent shall make payments of estimated tax
electronically, through ACH debit.
Estimated tax payments made by individuals cannot be credited
against tax due with the composite return. Individuals who have made such
payments with respect to a tax year and desire to participate in a composite
return filing for that year may file a separate income tax return and request a
refund of any overpaid taxes.
7.
Extension of Time to
File. The filing agent may obtain an extension of time to file the
composite return in the same manner as an individual filer obtains an
extension. An extension of time to file does not affect the due date for
payment of tax.
8.
Due
Dates. The following due dates apply to 830 CMR
62.5A.1(11)(f):
a. A qualified electing non-resident must
submit the filing statement required under 830 CMR
62.5A.1(11)(f)3. to the
pass-through entity on or before the last day of the first month of the
entity's taxable year, or within 30 days of joining the entity.
b. A composite return is due on the same date
that the return of an individual would be due, and may be allowed the same
extensions granted individuals under M.G.L. c. 62C, § 19.
c. Composite payments of estimated tax are
due on April 15th of the tax year, June
15th of the tax year, September
15th of the tax year, and January
15th of the following tax year.
9.
Filing
Instructions. The filing agent shall submit the composite return
and composite payments of tax in accordance with the filing instructions at the
Department of Revenue web site,
www.mass.gov/dor.
10.
Special Rules.
The following special rules apply to composite returns and composite payments
of estimated tax:
a. The filing agent is
merely an agent for the qualified electing non-residents and each qualified
electing non-resident is personally responsible for timely filing of returns
and payment of his or her tax liabilities. Non-residents are subject to the
same requirements for filing tax returns and the same penalties for failure to
file or failure to pay their tax as other taxpayers.
b. A non-resident taxpayer has the right to
file an individual amended return. The Commissioner retains the right to
require the filing of an individual non-resident personal income tax return by
any of the qualified electing non-residents. The filing of an individual tax
return will not, ordinarily, affect the validity of the original composite
return for the tax year to which the individual return required by the
Commissioner relates.
c. A
pass-through entity may file an amended composite return on behalf of electing
non-residents only if it filed an original composite return on their
behalf.
(g)
Composite Returns for Tiered Pass-through Entities. A
tiered group of pass-through entities (a pass-through entity with one or more
members that are also pass-through entities) may file a single composite return
on behalf of its non-resident members if each entity and individual taxpayer is
otherwise eligible to participate in the filing of a composite return. The
following additional requirements must also be met:
1. Each of the pass-through entities must
join in the filing of a single composite return on behalf of its qualified
electing non-residents, and the filing agent of each entity must sign the
return.
2. A schedule must be
submitted with the composite return indicating each qualified electing
non-resident's distributive share of Massachusetts source income from each
pass-through entity, and the total amount of Massachusetts source income
received by each taxpayer from all the pass-through entities
combined.
3. A statement must be
submitted with the composite return disclosing the group's ownership structure,
the identity of each member, (including name, address, and federal
identification number), the nature and extent of ownership interests, and the
identity of each partner or member of all of the related entities from which
participating nonresidents directly or indirectly derive Massachusetts source
income.
4. The return must indicate
that it is a tiered entity composite return.