In August 2013, the Massachusetts legislature passed a bill changing the state’s corporate income apportionment law effective January 1, 2014. The law sources sales, other than sales of tangible personal property, to Massachusetts if the market for the sale is in Massachusetts. In other words, the law sources certain sales to Massachusetts if the sale is delivered to a location in Massachusetts. Prior to the change, such sales were sourced to Massachusetts if the income producing activity occurred in Massachusetts; this approach is known as the cost of performance method.
To clarify how the new apportionment rule applied to various industries and types of sales, the Massachusetts Rulings and Regulations Bureau (“Bureau”) issued draft regulations in late March 2014. The Bureau issued another draft on October 30, 2014. On January 2 of this year, the Bureau issued final regulations which incorporate much of the draft regulations and make important changes.
The final regulations change the safe harbor for professional services. Generally, the regulations require businesses to source receipts from the sale of professional services based on the primary residence of individual customers and, for business customers, the state where the customer principally manages the sales contract. The draft regulations allowed businesses to source such sales based on the customer’s billing address for any year in which the business engaged in substantially similar service transactions with more than 1,000 customers and did not derive more than 5% of its sales of services from such customers. The final regulations lower the threshold from 1,000 to 250, thus making it easier for businesses to qualify for the safe harbor. The Bureau also added examples for services delivered “on behalf of a customer” and modified other rules on professional services.
Many practitioners criticize the regulations as overly complex. However, the Massachusetts Department of Revenue has said that after the first filing season it will review the regulations in light of its implementation and administration experience. Massachusetts’ adoption of market based sourcing for sales other than sales of tangible personal property comes as several states move from cost of performance to market based sourcing.