Bar News - February 18, 2015
Tax Law: How Massachusetts Apportionment Formula Affects NH Attorneys
By: Bill Beauchesne
Are you paying taxes on 200% of your income?
Consider a New Hampshire attorney with a client who is a resident of or is based in Massachusetts. The attorney has established nexus in Massachusetts (i.e. has done something within the Commonwealth other than pure solicitation of sales). The attorney has provided all services to this Massachusetts-based client in the attorney’s New Hampshire office, so 100 percent of the sales need to be apportioned to New Hampshire, because New Hampshire is a cost-of-performance state.
But because Massachusetts is a market-based state, 100 percent of the sales also need to be apportioned to Massachusetts. So, this attorney could end up paying state taxes on 200 percent of his or her income.
How could this be?
Massachusetts, like most states, uses an apportionment factor to determine the amount of taxable income that needs to be apportioned to the Commonwealth and subjected to Massachusetts state income taxes. One of the factors in determining that apportionment percentage is the “sales factor,” where Massachusetts-sourced sales are divided by the total sales.
The $800 million transportation finance bill that passed in Massachusetts in 2013 contained a number of significant tax changes, which included market-based sourcing for determining Massachusetts-source sales.
Since Jan. 1, 2014, sales, other than sales of tangible personal property, have been sourced to Massachusetts for income tax purposes, if the business’s market for the sale is in the Commonwealth. Previously, Massachusetts required the sourcing of sales in the Commonwealth based on cost-of-performance rules.
Under the new legislation, the business’s market for a sale is considered to be in the state when:
- The service is “delivered” within the state;
- leased or licensed intangible property, if and to the extent the intangible property is used in the state; and
- The sale of intangible property, where the property 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 state.
By contrast, New Hampshire uses what is known as a cost-of-performance rule, where sales from services are sourced solely to New Hampshire, if a greater proportion of the income-producing activity is performed in New Hampshire than in any other state.
But remember, all of this matters only if the attorney has “nexus” in Massachusetts, meaning he or she has done something there besides solicit sales. Consultative trips to see clients in Massachusetts and appearances in courts in Massachusetts on behalf of clients, for example, create nexus (and therefore a filing requirement) in Massachusetts.
The rules for each state are different and careful consideration should be given to tracking time, location of service performance, and location of service delivery. As always, it is important to consult with your tax adviser when potential state tax issues arise.
Bill Beauchesne is a principal with Nathan Wechsler & Company. He focuses on providing tax services to closely held S corporations, partnerships, and LLCs, in addition to providing corporate and individual tax compliance and planning.