New Massachusetts Law Applies Single Sales Tax Apportionment to All Industries

On October 4, 2023, Massachusetts Governor Maura Healy signed Bill 4104, the Tax Relief Bill, into law. Previously, we wrote about the new law’s effect on estate taxes, but business owners should be aware that amongst the slew of tax changes is the adoption of single sales tax apportionment which will help reduce tax burdens for those businesses that have a majority of their property and payroll but only a small part of their sales in a given state. This section of the law is arguably the most impactful for businesses.

Background

“Apportionment” is the allocation of a portion of a multi-state corporation’s earnings to a specific state, allowing that state to levy taxes on that income.

Currently, Massachusetts uses a three-factor formula, also known as the Uniform Division of Income for Tax Purposes Act (UDITPA) formula, for taxing business income. Using this formula, corporations with taxable income from business activity are taxed based on payroll, property, and a double-weighted sales factor, based on their activity in Massachusetts.

Most corporations that do business in Massachusetts are subject to this formula, but there are exceptions. One is financial institutions, which are taxed according to an evenly weighted three-factor formula, in which property, payroll, and sales are taken into account on equal measure.

Also, the three-factor formula does not apply to manufacturing companies, qualifying defense contractors, and qualifying mutual fund service corporations. In Massachusetts, companies in these industries fall under a single sales factor apportionment formula, which bases taxes solely on a company’s sales within the state.

Changes in the Tax Relief Bill

Beginning January 1, 2025, the single sales factor apportionment formula will apply to all industries in Massachusetts. Furthermore, it will apply to partnerships as well as corporations. Businesses with a relatively large property and payroll base in Massachusetts should see a reduced tax burden. Additionally, manufacturing corporations will no longer have to prove that they are engaged in substantial manufacturing activities in order to qualify for single sales factor apportionment. This new bill will still allow manufacturers to enjoy sales tax and local property tax exemptions and investment tax credits available to the extent they are conducting manufacturing activities in the State.

Presently, there are than 30 other states have adopted either mandatory or elective single sales factor apportionment.

What Will This Change Mean for Your Business?

One of the primary goals of the Tax Relief bill is to make Massachusetts more attractive to businesses, and overall, this should be good news for multi-state companies that have a presence in the Commonwealth.

Remember, though, that the new rule does not go into effect until the beginning of 2025. There is time to adjust to the new rules and look for and create strategies to take advantage of the single sales tax apportionment application.

How can Tonneson help now? We are happy to review with you, your 2023 data along with your 2024 data and determine the impact of the new law on your Massachusetts entity. If you are a business owner operating in Massachusetts, we urge you to contact Tonneson today to review your situation and discuss how we can help and create a strategy to prepare for the new law proactively.