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Apportionment

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Statutory definitions often carry ambiguous terms and subtle distinctions. However small these distinctions may seem, their interpretation can mean millions in state tax.  In Massachusetts, for example, multistate corporations generally apportion their business income using a three-factor formula based on a property factor, a payroll factor, and a double-weighted sales factor.  However, certain out-of-state corporations, like “manufacturing corporations” or “mutual fund service corporations,” may be required to apportion their business income using Massachusetts’s single-sales factor apportionment formula.  In the event a single-sales factor apportionment formula applies, an out-of-state company’s Massachusetts corporate excise tax liability may increase, as none of that company’s out-of-state property and payroll expenses are accounted for in apportioning income.          

The New York State Department of Taxation and Finance (“Department”) has been releasing draft regulations to implement the extensive corporate franchise (income) tax reform that is generally effective for tax years beginning on or after January 1, 2015. Prior coverage can be found here. Recently, the Department issued new draft apportionment regulations on certain statutory categories of receipts, including receipts from sales of tangible personal property, rents and royalties, qualified financial instruments, loans, reverse repurchase agreements and securities borrowing agreements, commodities, marked to market net gains, other financial instruments, credit card and similar activities, credit card processors, services to investment companies, railroad, trucking and omnibus businesses, and advertising.

The Massachusetts Supreme Judicial Court recently held in The First Marblehead Corporation v. Commissioner of Revenue (“First Marblehead II”), 475 Mass. 159 (2016), that securitized loans of GATE Holdings Inc. (“Gate”) were properly sourced to Gate’s commercial domicile in Massachusetts for purposes of computing Gate’s property factor for Massachusetts financial institutions excise tax (“FIET”) purposes, and that the FIET, as applied to Gate, satisfies the internal consistency test.