2023 Massachusetts General Laws › Part I - Administration of the Government › Title IX - Taxation › Chapter 63 - Taxation of Corporations › Section 38 - Determination of Net Income Derived From Business Carried on Within Commonwealth

[ Text of section effective until January 1, 2025. For text effective January 1, 2025, see below.]
Section 38. The commissioner shall determine the part of the net income of a business corporation derived from business carried on within the commonwealth as follows:
(a) Net income as defined in section thirty of this chapter adjusted as follows shall constitute taxable net income:
(1) Ninety-five per cent of dividends, exclusive of distributions in liquidation, included therein shall be deducted other than dividends from or on account of the ownership of:
(i) shares in a corporate trust, as defined in section 1 of chapter 62, to the extent such dividends represent tax-free earnings and profits, as defined in section 8 of chapter 62, as in effect on December 31, 2008.
(ii) deemed distributions and actual distributions, except actual distributions out of previously taxed income, from a DISC which is not a wholly owned DISC, or
(iii) any class of stock, if the corporation owns less than fifteen per cent of the voting stock of the corporation paying such dividend.
(2) Long-term capital gains realized and long-term capital losses sustained from the sale or exchange of intangible property affected under the provisions of the Federal Internal Revenue Code, as amended, and in effect for taxable years ended on or before December thirty-first, nineteen hundred and sixty-two, shall not be included in any part therein.
(b) If the corporation does not have income from business activity which is taxable in another state, the whole of its taxable net income, determined under the provisions of subsection (a), shall be allocated to this commonwealth. For purposes of this section, a corporation is taxable in another state if (1) in that state such corporation is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax, or (2) that state has jurisdiction to subject such corporation to a net income tax regardless of whether, in fact, the state does or does not. Notwithstanding any other provision of this section, the portion of the taxable net income of a corporation that a non-domiciliary state is prohibited from taxing under the Constitution of the United States shall be allocated in full to the commonwealth if the commercial domicile of the corporation is in the commonwealth.
(c) If a corporation, other than a defense corporation as described in subsection (k), a manufacturing corporation as described in subsection (l), or a mutual fund service corporation to the extent of its mutual fund sales as described in subsection (m), has income from business activity which is taxable both within and without this commonwealth, its taxable net income, as determined under the provisions of subsection (a), shall be apportioned to this commonwealth by multiplying said taxable net income by a fraction, the numerator of which is the property factor plus the payroll factor plus twice times the sales factor, and the denominator of which is four.
(d) The property factor is a fraction, the numerator of which is the average value of the corporation's real and tangible personal property owned or rented and used in this commonwealth during the taxable year and the denominator of which is the average value of all the corporation's real and tangible personal property owned or rented and used during the taxable year. Property owned by the corporation shall be valued at its original cost. Property rented by the corporation shall be valued at eight times the net annual rental rate, provided such rate reflects the fair rental value of the property as of the date of the rental agreement. Net annual rental rate is the annual rental rate paid by the corporation less any annual rental rate received by the corporation from sub-rentals.
The average value of property shall be determined by averaging the values at the beginning and the end of the taxable year, but the commissioner may require the averaging of monthly values during the taxable year if reasonably required to reflect properly the average value of the corporation's property. For the purpose of this subsection leaseholds and leasehold improvements, whether located within or without the commonwealth, shall be included within the meaning of real and tangible personal property.
(e) The payroll factor is a fraction, the numerator of which is the total amount paid in this commonwealth during the taxable year by the corporation for compensation, and the denominator of which is the total compensation paid everywhere during the taxable year.
The payroll factor for a manufacturing corporation or a business corporation engaged primarily in research and development, which has been deemed to be such under the provisions of section forty-two B, is a fraction the numerator of which is the lesser of the following amounts:--
(i) the total amount paid in this commonwealth by the corporation for compensation during the taxable year; or
(ii) the greater of (a) the total amount paid in this commonwealth by the corporation for compensation during the taxable year ended in the year nineteen hundred and seventy-two increased by five per cent per year for each taxable year subsequent to the taxable year ended in nineteen hundred and seventy-two; or (b)(1) in taxable years ending on or after December thirty-first, nineteen hundred and eighty-two and before December thirty-first, nineteen hundred and eighty-three, seventy-five per cent of the total amount paid in this commonwealth by the corporation for compensation,
(2) in taxable year ending on or after December thirty-first, nineteen hundred and eighty-three and before December thirty-first, nineteen hundred and eighty-four, eighty per cent of the total amount paid in this commonwealth by the corporation for compensation, (3) in taxable year ending on or after December thirty-first, nineteen hundred and eighty-four, and before December thirty-first, nineteen hundred and eighty-five, ninety per cent of the total amount paid in this commonwealth by the corporation for compensation, and (4) in taxable years ending on or after December thirty-first, nineteen hundred and eighty-five and thereafter, the total amount paid in this commonwealth by the corporation for compensation.
The denominator of the payroll factor for such corporation shall be adjusted for compensation paid in this commonwealth to include in total compensation paid everywhere only that amount for compensation paid in this commonwealth which is equal to the amount included in the numerator as determined under (i) and (ii) in this subsection.
Notwithstanding the provisions of this subsection, a corporation shall be eligible for the credit provided for in section thirty-one C. For the purposes of determination of the credit under section thirty-one C, the total amount of compensation paid in this commonwealth by the corporation for the taxable year shall be allowed.
As used in this subsection, "compensation'' means wages, salaries, commissions, and any other form of remuneration paid to employees for personal services. Compensation is paid in this commonwealth if:
1. the employee's service is performed entirely within this commonwealth; or
2. the employee's service is performed both within and without this commonwealth, but the service performed without this commonwealth is incidental to the employee's service within this commonwealth; or
3. some of the service is performed in this commonwealth and (i) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in this commonwealth, or (ii) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the employee's residence is in this commonwealth.
(f) The sales factor is a fraction, the numerator of which is the total sales of the corporation in the commonwealth during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year.
As used in this subsection, unless specifically stated otherwise, "sales'' shall mean all gross receipts of the corporation, including deemed receipts from transactions treated as sales or exchanges under the Code, except interest, dividends and gross receipts from the maturity, redemption, sale, exchange or other disposition of securities; provided, however, that "sales'' shall not include gross receipts from transactions or activities to the extent that a non-domiciliary state would be prohibited from taxing the income from such transactions or activities under the Constitution of the United States. Sales of tangible personal property are in the commonwealth if:--
(1) the property is delivered or shipped to a purchaser within the commonwealth regardless of the f.o.b. point or other conditions of the sale; or
(2) the corporation is not taxable in the state of the purchaser and the property was not sold by an agent or agencies chiefly situated at, connected with or sent out from premises for the transaction of business owned or rented by the corporation outside the commonwealth. "Purchaser'', as used in clauses (1) and (2) shall include the United States government.
Sales, other than sales of tangible personal property, are in the commonwealth if the corporation's market for the sale is in the commonwealth. The corporation's market for a sale is in the commonwealth and the sale is thus assigned to the commonwealth for the purpose of this section:--
(1) in the case of sale, rental, lease or license of real property, if and to the extent the property is located in the commonwealth;
(2) in the case of rental, lease or license of tangible personal property, if and to the extent the property is located in the commonwealth;
(3) in the case of sale of a service, if and to the extent the service is delivered to a location in the commonwealth;
(4) in the case of lease or license of intangible property, including a sale or exchange of such property where the receipts from the sale or exchange derive from payments that are contingent on the productivity, use or disposition of the property, if and to the extent the intangible property is used in the commonwealth; and
(5) in the case of the sale of intangible property, other than as provided in clause (4), where the property sold is a contract right, government license or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area, if and to the extent that the intangible property is used in or otherwise associated with the commonwealth; provided, however, that any sale of intangible property, not otherwise described in this clause or clause (4), shall be excluded from the numerator and the denominator of the sales factor.
For the purposes of this subsection: (1) in the case of sales, other than sales of tangible personal property, if the state or states to which sales should be assigned cannot be determined, it shall be reasonably approximated; (2) in the case of sales other than sales of tangible personal property if the taxpayer is not taxable in a state to which a sale is assigned, or if the state or states to which such sales should be assigned cannot be determined or reasonably approximated, such sale shall be excluded from the numerator and denominator of the sales factor; (3) the corporation shall be considered to be taxable in the state of the purchaser if tangible personal property is delivered or shipped to a purchaser in a foreign country; (4) sales of tangible personal property to the United States government or any agency or instrumentality thereof for purposes of resale to a foreign government or any agency or instrumentality thereof are not sales made in the commonwealth; (5) in the case of sale, exchange or other disposition of a capital asset, as defined in paragraph (m) of section 1 of chapter 62, used in a taxpayer's trade or business, including a deemed sale or exchange of such asset, "sales'' shall be measured by the gain from the transaction; (6) "security'' shall mean any interest or instrument commonly treated as a security as well as other instruments which are customarily sold in the open market or on a recognized exchange, including, but not limited to, transferable shares of a beneficial interest in any corporation or other entity, bonds, debentures, notes and other evidences of indebtedness, accounts receivable and notes receivable, cash and cash equivalents including foreign currencies and repurchase and futures contracts; (7) in the case of a sale or deemed sale of a business, the term "sales'' shall not include receipts from the sale of the business "goodwill'' or similar intangible value, including, without limitation, "going concern value'' and "workforce in place''; (8) in the case of a business deriving receipts from operating a gaming establishment or otherwise deriving receipts from conducting a wagering business or activity, income-producing activity shall be considered to be performed in the commonwealth to the extent that the location of wagering transactions or activities that generated the receipts is in the commonwealth; (9) in the case of a business deriving receipts from operating a marijuana establishment or otherwise deriving receipts from conducting a marijuana business or activity, income-producing activity shall be considered to be performed in the commonwealth to the extent that the location of marijuana transactions or activities that generated the receipts is in the commonwealth; and (10) dividends that are deemed to be received from an entity, including amounts included in federal gross income pursuant to sections 951 or 951A of the Code, shall not be considered "sales''.
Notwithstanding the foregoing, mutual fund sales as defined in subsection (m), other than the sale of tangible personal property, shall be assigned to the commonwealth to the extent that shareholders of the regulated investment company are domiciled in the commonwealth as follows:
(a) by multiplying the taxpayer's total dollar amount of sales of such services on behalf of each regulated investment company by a fraction, the numerator of which shall be the average of the number of shares owned by the regulated investment company's shareholders domiciled in the commonwealth at the beginning of and at the end of the regulated investment company's taxable year that ends with or within the taxpayer's taxable year and the denominator of which shall be the average of the number of shares owned by the regulated investment company shareholders everywhere at the beginning of and at the end of the regulated investment company's taxable year that ends with or within the taxpayer's taxable year.
(b) A separate computation shall be made to determine the sale for each regulated investment company, the sum of which shall equal the total sales assigned to the commonwealth.
The commissioner shall adopt regulations to implement this subsection. Nothing in this subsection shall limit the commissioner's authority under subsection (j).
(g) In a case where only two of the foregoing three factors are applicable, the taxable net income of the corporation shall be apportioned 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 taxable net income of the corporation shall be apportioned solely by that factor. A factor shall not be deemed to be inapplicable merely because the numerator of the factor is zero. A factor shall not be applicable if the denominator of the factor is less than ten per cent of one third of the taxable net income or if it is otherwise determined to be insignificant in producing income.
(h) If a corporation maintains an office, warehouse or other place of business in a state other than this commonwealth for the purpose of reducing its tax under this chapter, the commissioner shall, in determining the amount of taxable net income apportionable to this commonwealth, adjust any factor to properly reflect the amount which the factor ought reasonably to assign to this commonwealth.
(i) In the case of consolidated returns of net income, the commissioner shall apportion the taxable net income, so far as practicable, in accordance with apportionment rules set forth in this section.
(j) If the apportionment provisions of this section are not reasonably adapted to approximate the net income derived from business carried on within this commonwealth by any type of industry group, the commissioner may, by regulation, adopt alternative apportionment provisions to be applied to such an industry group in lieu of the foregoing provisions.
(k)(1) As used in this section, the following words shall, unless the context otherwise requires, have the following meaning:
"Base period property level'', the average value of all the corporation's real and tangible personal property, owned or rented, and used in this commonwealth, as computed under subsection (d), for the corporation's taxable year immediately preceding its first taxable year beginning on or after January first, nineteen hundred and ninety-six, as adjusted to include only real and tangible personal property actively used by the corporation in the conduct of a trade or business on the first day of the immediately succeeding taxable year.
"Base period payroll level'', the total amount paid in this commonwealth for compensation, as computed under subsection (e), excluding amounts paid or attributable to the ten most highly compensated officers or employees, for the corporation's taxable year immediately preceding its first taxable year beginning on or after January first, nineteen hundred and ninety-six, as adjusted to include only compensation paid during such taxable year to individuals who are actively employed by the corporation on the first day of the immediately succeeding taxable year.
"Defense corporation'', a business corporation which, during the sixty month period ending on December thirty-first, nineteen hundred and ninety-five, has derived more than fifty percent of its total gross receipts from the manufacture of tangible personal property for sale directly or, in the case of a subcontractor, indirectly, to the Department of Defense or any branch of the Armed Forces of the United States.
"Property level'', the average value of all the corporation's real and tangible personal property owned or rented and used in this commonwealth for the corporation's taxable year, as computed under subsection (d).
"Payroll level'', the total amount paid in this commonwealth for compensation for the corporation's taxable year, as computed under subsection (e), excluding amounts paid or attributable to the ten most highly compensated officers or employees.
(2) For any taxable year beginning on or after January first, nineteen hundred and ninety-six but before January first, two thousand, a defense corporation may, if required to apportion its taxable net income pursuant to subsection (l), elect to have such apportionment determined solely by use of the sales factor. A defense corporation must apportion its income pursuant to said subsection (l) if the denominator of the sales factor is less than ten percent of the taxable net income or it is otherwise determined to be insignificant in producing income. A defense corporation's ability to apportion its taxable net income solely by use of the sales factor shall be reduced to the extent set forth in paragraph (3).
(3) If for any taxable year beginning on or after January first, nineteen hundred and ninety-six but before January first, two thousand, such corporation's property level is less than ninety percent of the base period property level or its payroll level is less than ninety percent of the base period payroll level, the corporation shall instead be required to apportion its taxable net income for such taxable year to the commonwealth in accordance with subsection (l); provided, however, that any reduction in the property level or payroll level for any taxable year that is demonstrated to be attributable to a net reduction in business in this commonwealth under contracts with any branch of the Armed Forces of the United States or with any military or defense agency of a foreign government not resulting from transfers of contract work to facilities of the corporation in other states shall not be taken into account in determining whether the property or payroll level for such taxable year is less than ninety percent of the comparable base period level.
(4) The commissioner of revenue shall promulgate rules and regulations implementing the provisions of this subsection.
(5) For the purpose of determining compliance with the provisions of paragraphs (2), (3) and (4), each defense corporation with more than twenty-five employees, as part of its tax return for each taxable year, shall submit a report, whose form and substance shall be determined by the commissioner of revenue, that describes for each taxable year as of the last day of such taxable year the following: (i) the number, nature and wages of jobs added or lost in the commonwealth and worldwide from the previous taxable year; (ii) the number of contracts with the Armed Forces of the United States or a foreign government for which a bid was (a) submitted, (b) awarded or (c) lost during the taxable year; (iii) the number of contracts with the Armed Forces of the United States or with foreign governments that were terminated during the taxable year; (iv) the nature and amount of any change in the property factor during the taxable year; (v) the nature and amount of any change in the payroll factor in the taxable year; (vi) the dollar amount of revenue foregone by the adoption and utilization of the single sales factor pursuant to this section as compared to the apportionment method in effect for the first taxable year beginning on or after January first, nineteen hundred and ninety-five; (vii) volume of sales in the commonwealth and worldwide; (viii) taxable income in the commonwealth and worldwide; (ix) book value of plant, land and equipment in the commonwealth and worldwide; (x) net capital investments in the commonwealth and worldwide; (xi) net assets; (xii) capacity utilization; and (xiii) debts, itemized by the following categories: (a) loans; and (b) mortgages.
The commissioner of revenue shall annually prepare a comprehensive report utilizing the information received in this paragraph and other sources describing and evaluating the impact, if any, of the utilization of the single sales factor only upon the defense industry. Said report shall contain only cumulative information for all defense corporations submitting reports. Said report shall set forth for all defense corporations submitting reports the cumulative totals worldwide and, where applicable, in the commonwealth of the items specified in clauses (i) to (xiii) and the changes in such aggregate totals from the previous taxable year. The commissioner's report shall be filed not later than October first of each year with the clerk of the senate and the clerk of the house of representatives who shall forward the same to their respective committees on ways and means and to the joint committee on taxation. Said report of the commissioner shall be a public record.
(
l
)(1) As used in this section, the following words shall, unless the context otherwise requires, have the following meaning:
"Manufacturing corporation'', a corporation that is engaged in manufacturing. In order to be engaged in manufacturing, the corporation must be engaged, in substantial part, in transforming raw or finished physical materials by hand or machinery, and through human skill and knowledge, into a new product possessing a new name, nature and adapted to a new use. Any operation manufacturing, in substantial part, value-added agricultural products shall be considered a manufacturing corporation.
A manufacturing corporation's activities will be considered to be substantial if any one of the following five tests are met:
1. twenty-five percent or more of its gross receipts are derived from the sale of manufactured goods that it manufactures;
2. twenty-five percent or more of its payroll is paid to employees working in its manufacturing operations and fifteen percent or more of its gross receipts are derived from the sale of manufactured goods that it manufactures;
3. twenty-five percent or more of its tangible property is used in its manufacturing operations and fifteen percent or more of its gross receipts are derived from the sale of manufactured goods that it manufactures;
4. thirty-five percent or more of its tangible property is used in its manufacturing operations; or
5. the corporation's manufacturing activities are deemed substantial under relevant regulations promulgated by the commissioner.
In determining whether a process constitutes manufacturing, the commissioner will examine the facts and circumstances of each case.
For the purposes of this section, a corporation which apportions its income pursuant to subsection (k) is not a manufacturing corporation.
"Value-added agricultural products'' shall be defined as any products of "farming'' or "agriculture'', as defined in section 1A of chapter 128, which have increased in market value due to some process other than packaging. Value-added agricultural products shall include, but not be limited to, the following: cheese, butter, buttermilk, yogurt, cream, ice cream, fruit preserves, fruit juices, fruit sauces, fruit syrups, dried fruit, seeded fruits, peeled or chopped fruit and vegetables, processed fruit and vegetables, salads, maple syrup, maple candy, honey and all apicultural products, horticulture nursery and greenhouse products, topiary plants, bacon, sausage, lard, dried or smoked meat, and wool as well as fish, seafood, and other aquatic products.
(2) If a manufacturing corporation, as defined in paragraph (1), has income from business activity which is taxable both within and without this commonwealth, its taxable net income, determined under the provisions of subsection (a), shall not be apportioned pursuant to the percentage that results from the three-factor formula set forth in subsection (c) but, instead, shall be apportioned by multiplying its taxable net income, determined under the provisions of subsection (a), by the resulting percentage as determined in the following formulas:
(i) For taxable years beginning on or after January first, nineteen hundred and ninety-six but before January first, nineteen hundred and ninety-seven, twenty percent of the property factor plus twenty percent of the payroll factor plus sixty percent of the sales factor.
(ii) For taxable years beginning on or after January first, nineteen hundred and ninety-seven but before January first, nineteen hundred and ninety-eight, fifteen percent of the property factor plus fifteen percent of the payroll factor plus seventy percent of the sales factor.
(iii) For taxable years beginning on or after January first, nineteen hundred and ninety-eight but before January first, nineteen hundred and ninety-nine, ten percent of the property factor plus ten percent of the payroll factor plus eighty percent of the sales factor.
(iv) For taxable years beginning on or after January first, nineteen hundred and ninety-nine but before January first, two thousand, five percent of the property factor plus five percent of the payroll factor plus ninety percent of the sales factor.
(v) For taxable years beginning on or after January first, two thousand, one hundred percent of the sales factor.
(3) Each manufacturing corporation with more than twenty-five employees, apportioning its income in accordance with the provisions of this subsection, as part of its tax return for each year, shall submit a report, whose form and substance shall be determined by the commissioner of revenue, that describes for each taxable year as of the last day of such taxable year the following: (i) the number, nature and wages of jobs added or lost in the commonwealth and worldwide from the previous taxable year; (ii) the nature and amount of any change in the property factor during the taxable year; (iii) the nature and amount of any change in the payroll factor in the taxable year; (iv) the dollar amount of revenue foregone by the increased weighting of the sales factor pursuant to this section as compared to the apportionment method in effect for the first taxable year beginning on or after January first, nineteen hundred and ninety-five; (v) volume of sales in the commonwealth and worldwide; (vi) taxable income in the commonwealth and worldwide; (vii) book value of plant, land and equipment in the commonwealth and worldwide; (viii) net capital investment in the commonwealth and worldwide; (ix) net assets; (x) capacity utilization; and (xi) debts, itemized by the following categories: (a) loans; and (b) mortgages.
The commissioner of revenue shall annually prepare a comprehensive report utilizing the information received in this paragraph and other sources describing and evaluating the impact, if any, of the utilization of the increased weighting of the sales factor upon the manufacturing industry. Said report shall contain only cumulative information for all manufacturing corporations submitting reports. Said report shall set forth for all manufacturing corporations submitting reports the cumulative totals worldwide and, where applicable, in the commonwealth of the items specified in clauses (i) to (xi) and the changes in such aggregate totals from the previous taxable year. The commissioner's report shall be filed not later than October first of each year with the clerk of the senate and the clerk of the house of representatives who shall forward the same to their respective committees on ways and means and to the joint committee on taxation. Said report of the commissioner shall be a public record subject to the provisions of section ten of chapter sixty-six.
(m)(1) As used in this subsection and in subsections (c) and (f), the following words shall, unless the context otherwise requires, have the following meaning:
"Administration services'', include, but are not limited to, clerical, fund or shareholder accounting, participant record keeping, transfer agency, bookkeeping, data processing, custodial, internal auditing, legal and tax services performed for a regulated investment company, but only if the provider of such service or services during the taxable year in which such service or services are provided also provides or is affiliated with a person that provides management or distribution services to any regulated investment company.
"Affiliate'', the meaning as set forth in 15 USC section a-2(a)(3)(C), as may be amended from time to time.
"Base period employment level'', the number of qualified employees in this commonwealth of a mutual fund service corporation as of January first, nineteen hundred and ninety-six, or if the mutual fund service corporation is one of the mutual fund service corporations filing a combined return for the tax year ending as of December thirty-first, nineteen hundred and ninety-six, the aggregate number of all qualified employees as of January first, nineteen hundred and ninety-six of all of the mutual fund service corporations participating in such combined return. If a mutual fund service corporation was not engaged in business in the commonwealth on January first, nineteen hundred and ninety-six, the base period employment level shall be the average employment level for the first two taxable years during which it is engaged in business in the commonwealth. In the event of the acquisition of a business or line of business or any other corporate restructuring that increases the number of qualified employees of the mutual fund service corporation, the base period employment level to be applied in the taxable year in which the acquisition or restructuring occurs and in all subsequent taxable years shall be increased to reflect such an increase. In the event of a divestiture of a line of business or other corporate restructuring that decreases the number of qualified employees of the mutual fund service corporation, the base period employment level to be applied in the taxable year in which such divestiture or other corporate restructuring occurs and in all subsequent taxable years shall be recalculated to reflect such decrease only if the mutual fund service corporation can demonstrate that such divestiture or other corporate restructuring will not result in any reduction in the number of jobs in the commonwealth.
"Distribution services'', include, but are not limited to, the services of advertising, servicing, marketing or selling shares of a regulated investment company, but, in the case of advertising, servicing or marketing shares, only where such service is performed by a person who is, or in the case of a close end company, was, either engaged in the services of selling regulated investment company shares or affiliated with a person that is engaged in the service of selling regulated investment company shares. In the case of an open end company, such service of selling shares must be performed pursuant to a contract entered into pursuant to 15 USC section a-15(b), as from time to time amended.
"Domicile'', presumptively the shareholder's mailing address on the records of the regulated investment company. If, however, the regulated investment company or the mutual fund service corporation has actual knowledge that the shareholder's primary residence or principal place of business is different than the shareholder's mailing address said presumption shall not control. If the shareholder of record is a company which holds the shares of the regulated investment company as depositor for the benefit of a separate account, then the shareholder shall be the contract owners or policyholders of the contracts or policies supported by the separate account, and it shall be presumed that the domicile of said shareholder is the contract owner's or policyholder's mailing address to the extent that the company maintains such mailing addresses in the regular course of business. If the regulated investment company or the mutual fund service corporation has actual knowledge that the shareholder's principal place of business is different than the shareholder's mailing address said presumption shall not control.
"Employment level'', the number of qualified employees of the mutual fund service corporation in the taxable year, or if the mutual fund service corporation is one of the mutual fund service corporations filing a combined return for such taxable year, the sum of the number of qualified employees of all such mutual fund service corporations in this commonwealth for the taxable year.
"Jobs commitment level'', except as provided in subparagraph (b) of paragraph (4), for taxable years beginning on or after January first, nineteen hundred and ninety-seven, but before January first, nineteen hundred and ninety-eight, an employment level of one hundred and five percent of the base period employment level; for taxable years beginning on or after January first, nineteen hundred and ninety-eight, but before January first, nineteen hundred and ninety-nine, an employment level of one hundred and ten percent of the base period employment level; for taxable years beginning on or after January first, nineteen hundred and ninety-nine, but before January first, two thousand, an employment level of one hundred and fifteen percent of the base period employment level; for taxable years beginning on or after January first, two thousand, but before January first, two thousand and one, an employment level of one hundred and twenty percent of the base period employment level; for taxable years beginning on or after January first, two thousand and one, but before January first, two thousand and two, an employment level of one hundred and twenty-five percent of the base period employment level; for taxable years beginning on or after January first, two thousand and two, but before January first, two thousand and three, an employment level of one hundred and twenty-five percent of the base period employment level. If a mutual fund service corporation was not engaged in business in the commonwealth on January first, nineteen hundred and ninety-six, for all taxable years beginning before January first, two thousand and three, the jobs commitment level shall be the base period employment level increased by five percent of the base period employment level for every year after which the base period employment level is established.
"Management services'', include, but are not necessarily limited to, the rendering of investment advice directly or indirectly to a regulated investment company, making determinations as to when sales and purchases of securities are to be made on behalf of the regulated investment company, or the selling or purchasing of securities constituting assets of a regulated investment company, and related activities, but only where such activity or activities are performed: (i) pursuant to a contract with the regulated investment company entered into pursuant to 15 USC section a-15(a), as from time to time amended; (ii) for a person that has entered into such contract with the regulated investment company; or (iii) for a person that is affiliated with a person that has entered into such contract with a regulated investment company.
"Mutual fund sales'', taxable net income derived within the taxable year directly or indirectly from the rendering of management, distribution or administration services to a regulated investment company, including net income received directly or indirectly from trustees, sponsors and participants of employee benefit plans which have accounts in a regulated investment company.
"Mutual fund service corporation'', any corporation doing business in the commonwealth which derives more than fifty percent of its gross income from the provision directly or indirectly of management, distribution or administration services to or on behalf of a regulated investment company and from trustees, sponsors and participants of employee benefit plans which have accounts in a regulated investment company.
"Number of qualified employees'', the number of qualified employees who are employed by a mutual fund service corporation in the commonwealth as of the last day of a given taxable year.
"Number of qualified employees worldwide'', the total number of qualified employees worldwide who were employed by the mutual fund service corporation on a specified date.
"Qualified employee in this commonwealth'', an individual who: (i) is employed by a mutual fund service corporation; (ii) works on a full-time basis with a normal work week of thirty or more hours; (iii) at the inception of the employment relationship does not have a termination date which is either a date certain or determined with reference to the completion of some specified scope of work; (iv) is eligible to receive employee benefits including, but not limited to, paid holidays, vacation and unemployment benefits; and (v) is subject to Massachusetts income tax withholding. Three or fewer individuals who collectively fulfill the requirement of clause (ii) and who each meet the requirements of clauses (i), (iii), (iv) and (v) shall be counted as one qualified employee for purposes of this section.
"Qualified employee worldwide'', an individual who meets the criteria in subsections (i) to (iv), inclusive, of the definition of "Qualified employee in this commonwealth.'' Three or fewer individuals who collectively fulfill the requirement of clause (ii) of said definition of "Qualified employee in this commonwealth'' and who each meet the requirements of clauses (i), (iii) and (iv) of said definition of "Qualified employee in this commonwealth'' shall be counted as one qualified employee for purposes of this section.
"Regulated investment company'', the meaning as set forth in section 851 of the Internal Revenue Code as amended and in effect for the taxable year.
(2) Notwithstanding any other provision of the General Laws, any mutual fund service corporation having income from mutual fund sales to one or more regulated investment companies with shareholders domiciled within and without this commonwealth shall apportion such income pursuant to the provisions of subsection (c). Furthermore, any such mutual fund service corporation whose employment level in the current taxable year is equal to or greater than its jobs commitment level for such taxable year and who satisfies the requirements of paragraphs (3) and (4), or any such mutual fund service corporation for which the jobs commitment level requirement no longer applies shall apportion such income by multiplying it by one hundred percent of the sales factor, subject to the provisions of clause (i). The provisions of paragraph (2) of subsection (m) shall take effect as of July first, nineteen hundred and ninety-seven. For taxable years beginning on or after January first, nineteen hundred and ninety-seven and including July first, nineteen hundred and ninety-seven, a mutual fund service corporation shall apportion its taxable income to this commonwealth for such taxable year by multiplying taxable net income by the percentage calculated by weighting the apportionment percentage determined under subsection (c), as in effect before July first, nineteen hundred and ninety-seven, by the number of days in such taxable year preceding July first, nineteen hundred and ninety-seven and by weighting the apportionment percentage determined under said paragraph (2) of said subsection (m) by the number of days in such taxable year on and after July first, nineteen hundred and ninety-seven.
(3) Notwithstanding a mutual fund service corporation's failure to achieve its jobs commitment level in the taxable year, the percentage set forth in the second paragraph of paragraph (2) of subsection (m) may be applied, where the failure to achieve the jobs commitment level for any taxable year is demonstrated by the mutual fund service corporation to be a direct result of adverse economic conditions in that taxable year.
(a) Adverse economic conditions can affect only one taxable year except as set forth in subparagraph (b) and (c). Adverse economic conditions shall exist only where during any twelve month period ending during the taxable year, either: (A) the Standard & Poor's 500 Stock Index decreases ten percent or more compared to its level at the beginning of such twelve month period or (B) the average daily trading volume on the New York Stock Exchange decreases fifteen percent or more compared to the average over the preceding twelve months; or (C) at any time during the taxable year, the total assets under management of the mutual funds served by the mutual fund service corporation decreases twelve and one-half percent or more compared to such total assets under management twelve months earlier.
(b) If a mutual fund service corporation demonstrates that failure to achieve the jobs commitment level for one taxable year was the direct result of an adverse economic condition, such corporation may decrease its jobs commitment level by five percent of the base period employment level for all subsequent taxable years prior to the first taxable year beginning on or after January first, two thousand and two.
(c) If a mutual fund service corporation demonstrates that failure to achieve the jobs commitment level for more than one taxable year was the direct result of an adverse economic condition, such corporation may decrease its jobs commitment level by five percent of the base period employment level for each taxable year in which an adverse economic condition was established for all subsequent taxable years prior to the first taxable year beginning on or after January one, two thousand and two. However, for each taxable year beginning on or after January first, two thousand and two, but prior to the first taxable year beginning on or after January first, two thousand and four, the jobs commitment level shall be an employment level equal to the sum of: (i) the jobs commitment level for the most recent taxable year immediately prior to such year for which an adverse economic condition was not established; and (ii) five percent of the base period employment level.
(4) For the purposes of determining compliance with the provisions of this subsection, each mutual fund service corporation that seeks to rely on the provisions of this subsection for the taxable year in question shall submit, as part of its tax return, a report, with such supporting documentation as the commissioner may require, containing the following:
(i) the number, nature, and aggregate wages of the qualified employees in this commonwealth and qualified employees worldwide as of the end of the taxable year and the number of jobs added or lost as compared to the previous taxable year;
(ii) the number of the qualified employees in this commonwealth as of the last day of the taxable year sorted by place of employment;
(iii) the base period employment level;
(iv) the volume of sales attributable to this commonwealth and worldwide;
(v) the taxable income in this commonwealth;
(vi) net assets under management in this commonwealth and worldwide; and
(vii) the median income of all of qualified employees in the commonwealth and of all of its qualified employees worldwide.
The information provided by each individual mutual fund service corporation shall be treated as confidential under the provisions of section twenty-one of chapter sixty-two C. Said information shall be used by the commissioner of revenue to prepare a comprehensive annual report setting forth the changes in the aggregate from the previous taxable year for each of the items listed above. The commissioner's report shall also set forth any recommendations the commissioner may have for any amendments to the provisions of this section, and the reasons for any such recommendations. The commissioner's report shall be filed by October first of each year with the clerk of the senate and the clerk of the house of representatives who shall forward the same to the respective committees on ways and means and the joint committee on taxation.
(5) The commissioner of revenue shall promulgate regulations implementing the provisions of this subsection.
(n) In any case in which a purchasing corporation makes an election under section 338 of the Code, the target corporation shall be treated as having sold its assets for purposes of this section.
Chapter 63: Section 38. Determination of net income derived from business carried on within commonwealth
[ Text of section as amended by 2023, 50, Sec. 31 effective January 1, 2025 for taxable years beginning on or after January 1, 2023. See 2023, 50, Secs. 47 and 49. For text effective until January 1, 2025, see above.]
Section 38. The commissioner shall determine the part of the net income of a business corporation derived from business carried on within the commonwealth as follows:
(a) Net income, as defined in section 30, adjusted as follows shall constitute taxable net income:
(1) 95 per cent of dividends, exclusive of distributions in liquidation, included therein shall be deducted other than dividends from or on account of the ownership of:
(i) shares in a corporate trust, as defined in section 1 of chapter 62, to the extent such dividends represent tax-free earnings and profits, as defined in section 8 of said chapter 62, as in effect on December 31, 2008;
(ii) deemed distributions and actual distributions, except actual distributions out of previously taxed income, from a domestic international sales corporation, as defined in 26 U.S.C. § 992, which is not a wholly owned domestic international sales corporation; or
(iii) any class of stock, if the corporation owns less than 15 per cent of the voting stock of the corporation paying such dividend.
(2) Long-term capital gains realized and long-term capital losses sustained from the sale or exchange of intangible property affected under the provisions of the Federal Internal Revenue Code, as amended, and in effect for taxable years that ended on or before December 31, 1962, shall not be included in any part therein.
(b) If the corporation does not have income from business activity which is taxable in another state, the whole of its taxable net income, determined pursuant to subsection (a), shall be allocated to the commonwealth. For purposes of this section, a corporation is taxable in another state if: (1) in that state such corporation is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business or a corporate stock tax; or (2) that state has jurisdiction to subject such corporation to a net income tax regardless of whether, in fact, the state does or does not. Notwithstanding any other provision of this section, the portion of the taxable net income of a corporation that a non-domiciliary state is prohibited from taxing under the Constitution of the United States shall be allocated in full to the commonwealth if the commercial domicile of the corporation is in the commonwealth.
(c) If a corporation has income from business activity which is taxable both within and without the commonwealth, its taxable net income, as determined pursuant to subsection (a), shall be apportioned to the commonwealth by multiplying such taxable net income by the sales factor.
(d) The sales factor is a fraction, the numerator of which is the total sales of the corporation in the commonwealth during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year.
As used in this section, unless specifically stated otherwise, "sales'' shall mean all gross receipts of the corporation, including deemed receipts from transactions treated as sales or exchanges under the Code, except interest, dividends and gross receipts from the maturity, redemption, sale, exchange or other disposition of securities; provided, however, that "sales'' shall not include gross receipts from transactions or activities to the extent that a non-domiciliary state would be prohibited from taxing the income from such transactions or activities under the Constitution of the United States.
(e) Sales of tangible personal property are in the commonwealth for purposes of this section if: (1) the property is delivered or shipped to a purchaser within the commonwealth regardless of the f.o.b. point or other conditions of the sale; or (2) the corporation is not taxable in the state of the purchaser and the property was not sold by an agent or agencies chiefly situated at, connected with or sent out from premises for the transaction of business owned or rented by the corporation outside the commonwealth. "Purchaser'', as used in clauses (1) and (2) shall include the United States government.
(f) Sales, other than sales of tangible personal property, are in the commonwealth for purposes of this section if the corporation's market for the sale is in the commonwealth. The corporation's market for a sale is in the commonwealth and the sale is thus assigned to the commonwealth for the purpose of this section:
(1) in the case of sale, rental, lease or license of real property, if and to the extent the property is located in the commonwealth;
(2) in the case of rental, lease or license of tangible personal property, if and to the extent the property is located in the commonwealth;
(3) in the case of sale of a service, if and to the extent the service is delivered to a location in the commonwealth;
(4) in the case of lease or license of intangible property, including a sale or exchange of such property where the receipts from the sale or exchange derive from payments that are contingent on the productivity, use or disposition of the property, if and to the extent the intangible property is used in the commonwealth; and
(5) in the case of the sale of intangible property, other than as provided in clause (4), where the property sold is a contract right, government license or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area, if and to the extent that the intangible property is used in or otherwise associated with the commonwealth; provided, however, that any sale of intangible property, not otherwise described in this clause or clause (4), shall be excluded from the numerator and the denominator of the sales factor.
(g) If the sales factor is missing, the whole of the corporation's net income shall be taxable net income allocated to the commonwealth. The sales factor shall be missing if both its numerator and denominator are zero, but it shall not be missing merely because its numerator is zero.
(h) For the purposes of this section:
(1) in the case of sales, other than sales of tangible personal property, if the state or states to which sales should be assigned cannot be determined, it shall be reasonably approximated;
(2) in the case of sales other than sales of tangible personal property if the taxpayer is not taxable in a state to which a sale is assigned, or if the state or states to which such sales should be assigned cannot be determined or reasonably approximated, such sale shall be excluded from the numerator and denominator of the sales factor;
(3) the corporation shall be considered to be taxable in the state of the purchaser if tangible personal property is delivered or shipped to a purchaser in a foreign country;
(4) sales of tangible personal property to the United States government or any agency or instrumentality thereof for purposes of resale to a foreign government or any agency or instrumentality thereof are not sales made in the commonwealth;
(5) in the case of sale, exchange or other disposition of a capital asset, as defined in paragraph (m) of section 1 of chapter 62, used in a taxpayer's trade or business, including a deemed sale or exchange of such asset, "sales'' shall be measured by the gain from the transaction;
(6) "security'' shall mean any interest or instrument commonly treated as a security as well as other instruments which are customarily sold in the open market or on a recognized exchange, including, but not limited to, transferable shares of a beneficial interest in any corporation or other entity, bonds, debentures, notes and other evidences of indebtedness, accounts receivable and notes receivable, cash and cash equivalents including foreign currencies and repurchase and futures contracts;
(7) in the case of a sale or deemed sale of a business, "sales'' shall not include receipts from the sale of the business "goodwill'' or similar intangible value, including, without limitation, "going concern value'' and "workforce in place'';
(8) in the case of a business deriving receipts from operating a gaming establishment or otherwise deriving receipts from conducting a wagering business or activity, income-producing activity shall be considered to be performed in the commonwealth to the extent that the location of wagering transactions or activities that generated the receipts is in the commonwealth;
(9) in the case of a business deriving receipts from operating a marijuana establishment or otherwise deriving receipts from conducting a marijuana business or activity, income-producing activity shall be considered to be performed in the commonwealth to the extent that the location of marijuana transactions or activities that generated the receipts is in the commonwealth; and
(10) dividends that are deemed to be received from an entity, including amounts included in federal gross income pursuant to sections 951 or 951A of the Code, shall not be considered "sales''.
(i)(1) As used in this subsection, the following words shall, unless the context requires otherwise, have the following meanings:
"Administration services'', include, but are not limited to, clerical, fund or shareholder accounting, participant record keeping, transfer agency, bookkeeping, data processing, custodial, internal auditing, legal and tax services performed for a regulated investment company, but only if the provider of such service or services during the taxable year in which such service or services are provided also provides or is affiliated with a person that provides management or distribution services to any regulated investment company.
"Affiliated person'', the meaning as set forth in 15 USC section 80a-2(a)(3)(C), as may be amended from time to time.
"Distribution services'', include, but are not limited to, the services of advertising, servicing, marketing or selling shares of a regulated investment company, but, in the case of advertising, servicing or marketing shares, only where such service is performed by a person who is, or in the case of a close end company, was, either engaged in the services of selling regulated investment company shares or affiliated with a person that is engaged in the service of selling regulated investment company shares. In the case of an open end company, such service of selling shares shall be performed pursuant to a contract entered into pursuant to 15 USC section 80a-15(b), as from time to time amended.
"Domicile'', presumptively the shareholder's mailing address on the records of the regulated investment company. If, however, the regulated investment company or the corporation has actual knowledge that the shareholder's primary residence or principal place of business is different than the shareholder's mailing address said presumption shall not control. If the shareholder of record is a company which holds the shares of the regulated investment company as depositor for the benefit of a separate account, then the shareholder shall be the contract owners or policyholders of the contracts or policies supported by the separate account, and it shall be presumed that the domicile of said shareholder is the contract owner's or policyholder's mailing address to the extent that the company maintains such mailing addresses in the regular course of business. If the regulated investment company or the corporation has actual knowledge that the shareholder's principal place of business is different than the shareholder's mailing address said presumption shall not control.
"Management services'', include, but shall not necessarily be limited to, the rendering of investment advice directly or indirectly to a regulated investment company, making determinations as to when sales and purchases of securities are to be made on behalf of the regulated investment company, or the selling or purchasing of securities constituting assets of a regulated investment company, and related activities, but only where such activity or activities are performed: (i) pursuant to a contract with the regulated investment company entered into pursuant to 15 USC section 80a-15(a), as amended; (ii) for a person that has entered into such contract with the regulated investment company; or (iii) for a person that is affiliated with a person that has entered into such contract with a regulated investment company.
"Mutual fund sales'', taxable net income derived within the taxable year directly or indirectly from the rendering of management, distribution or administration services to a regulated investment company, including net income received directly or indirectly from trustees, sponsors and participants of employee benefit plans, which have accounts in a regulated investment company.
"Regulated investment company'', the meaning as set forth in section 851 of the Code.
(2) Mutual fund sales, other than the sale of tangible personal property, shall be assigned to the commonwealth to the extent that shareholders of the regulated investment company are domiciled in the commonwealth as follows:
(i) By multiplying the taxpayer's total dollar amount of sales of such services on behalf of each regulated investment company by a fraction, the numerator of which shall be the average of the number of shares owned by the regulated investment company's shareholders domiciled in the commonwealth at the beginning of and at the end of the regulated investment company's taxable year that ends with or within the taxpayer's taxable year and the denominator of which shall be the average of the number of shares owned by the regulated investment company shareholders everywhere at the beginning of and at the end of the regulated investment company's taxable year that ends with or within the taxpayer's taxable year.
(ii) A separate computation shall be made to determine the sale for each regulated investment company, the sum of which shall equal the total sales assigned to the commonwealth.
(3) Nothing in this subsection shall limit the commissioner's authority under subsection (k).
(j) If a corporation maintains an office, warehouse or other place of business in a state other than the commonwealth for the purpose of reducing its tax under this chapter, the commissioner shall, in determining the amount of taxable net income apportionable to the commonwealth, adjust the sales factor to properly reflect the amount which the factor ought reasonably to assign to the commonwealth.
(k) If the apportionment provisions of this section are not reasonably adapted to approximate the net income derived from business carried on within the commonwealth by any type of industry group, the commissioner may, by regulation, adopt alternative apportionment provisions to be applied to such an industry group in lieu of the foregoing provisions.
(l) In any case in which a purchasing corporation makes an election under section 338 of the Code, the target corporation shall be treated as having sold its assets for purposes of this section.
(m) The commissioner shall adopt regulations to implement subsections (d) to (i), inclusive.