Despite the Covid-19 pandemic, the Massachusetts Appellate Tax Board and state appeals courts managed to move forward in 2020, albeit remotely. The Appellate Tax Board suspended all face-to-face trials but held some evidence hearings via videoconference. The Supreme Court and the Court of Appeals also used video conferencing technology to make oral arguments on the tax complaint. The Appellate Tax Board issued 36 formal decisions in 2020, while the Supreme Judicial Court and Appeals Court issued two and three tax opinions, respectively.
It is beyond the scope of this article to cover all of the decisions reported. However, there are a few statements made during the year worth mentioning, including VAS Holdings’ excise duty appeal. Here the taxpayer alleged that a gain on the sale of a 50% interest in a Massachusetts limited company was not taxable in Massachusetts. The parties had agreed that the relationship between the taxpayer and the LLC was not uniform and that the LLC had no operational function. In its decision for the Massachusetts Department of Treasury, the Appellate Tax Board made a distinction between “division of investees” and “division of investors”.
While the investor division is based on the state activities of the taxpayer / investor, the method of dividing the investors focuses on the activities of the second company (in this case the LLC). The Board found that the LLC’s appreciation and gain on its sale were inextricably linked, and largely resulted from, the LLC’s real estate and business activities in Massachusetts. Accordingly, the Chamber came to the conclusion that there is no constitutionally inadmissible taxation of extraterritorial values. VAS Holdings & Invs. LLC v Comm’r of Revenue, App. Tax Vol., No. C332269 & C332270 (October 23, 2020)
The Massachusetts Appeals Court at Bay State Gas Co. ruled that the taxpayer was entitled to a deduction for amounts remitted to Indiana as payment of Indiana Utility Receipts Tax (URT). Massachusetts law requires corporation taxpayers to repay taxes “measured by or by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business, and capital taxes levied by any state.” The court ruled that the URT was deductible because it was a transaction tax levied on income from retail sales of gas and electricity in Indiana rather than a franchise tax for the privilege of doing business in the state. Bay State Gas Co. v Comm’r of Revenue.
Citrix Systems studied the application of sales tax to online software offerings. In Massachusetts, custom software is generally exempt from sales tax, while standardized software is generally taxable. The Supreme Court ruled that Citrix’s sale of online software offerings constituted the taxable sale of pre-written computer software under Chapter 64H Section 1 of the Massachusetts General Laws. The Court dismissed Citrix’s argument that its subscription fees were not taxable transfers of ownership, as customer transactions did not involve the transfer of software title or ownership. Citrix Sys. Inc. v Comm’r of Revenue.
The New Cingular Wireless case was one of several lawsuits filed in various states following a class action lawsuit seeking the reimbursement of sales taxes improperly collected on data charges in violation of state tax laws and the Internet Tax Freedom Act (ITFA) . The Appellate Tax Board ruled that data charges are charges for internet access and are tax protected by ITFA. The Revenue Commissioner appealed the decision, alleging that New Cingular had failed to comply with ITFA’s screening software requirements. Internet access providers must “at the time of entering into an agreement with a customer” offer screening software that enables the customer to restrict access to material on the Internet that is harmful to minors “. Internet access providers who do not meet this requirement cannot claim the protection of ITFA as data charges are taxable. The Court of Appeal concluded that New Cingular’s availability and promotion of screening software met ITFA’s screening software requirements, although New Cingular’s screening software features were not compatible with some of the devices sold by the complainant. New Cingular Wireless PCS LLC v Comm’r.
In David Pogorelc’s personal income tax case, the Massachusetts Court of Appeals ruled that a principle known as “duty of consistency” prevented the taxpayer from retrospectively challenging a previous tax position. In his 2007 Massachusetts income tax return, Pogorelc deducted losses incurred from the sale of a portion of an interest in an LLC. In 2011, he reported a gain on the sale of the principal assets held by this LLC. The taxpayer argued that he should not have realized a loss in 2007 as the transaction was merely a “fictitious” sale under Revenue Ruling 99-5. While this has not previously been applied in Massachusetts law, the duty of consistency is well established in federal tax law. It prevents a taxpayer who has already benefited from a particular position on a tax issue from later adopting an inconsistent position on the same issue in order to further his performance. Pogorelc v Commissioner of Revenue.
Covid-19 has had a devastating impact on the commercial real estate market. The natural consequence of this will be a dramatic increase in property tax valuation challenges. Recent studies show that local property taxes represent nearly 40% of the state and local taxes paid by businesses. In fact, most Massachusetts tax disputes involve property tax appeals, which typically deal with overvaluation or exemption issues.
Massachusetts has many statutory exemptions from local property taxes. Some are based on the identity or status of the taxpayer, while others target the character or use of the property. The exceptional cases decided in 2020 include United Salvage Corp. of America v Framingham (solar photovoltaic system), Trimont Foundation v Newton and the Roman Catholic Bishop of Springfield v Easthampton (charitable exemption) and Veolia Energy Boston v Boston (Manufacturing Corporation exemption).
While appeals for property tax exemption raise interesting factual and legal questions, cases of allegation of overvaluation are far more common. The cases of Western Massachusetts Electric Co. v Springfield (utilities), Digital 55 Middlesex LLC v Billerica (data center), Patrick Motor Mart v Auburn (dealership), and HCRI Massachusetts Properties Trust v Worcester (Senior Living Facility) were resolved in 2020 and illustrate the Appellate Tax Board’s analysis of various valuation issues.
It is difficult to predict what impact the Covid-19 pandemic will have on litigation over state and local tax disputes in 2021. State tax revenues can very well lead to increased auditing activity – and to the tax disputes that often follow. New and currently prepared cases need to be addressed. In the meantime, we expect the Massachusetts Appellate Tax Board to continue making decisions and relying on remote hearings until the state is back to some degree of normalcy.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Information about the author
Philip S. Olsen is a tax attorney with the Davis Malm law firm in Boston, where he focuses on state and local tax advice and litigation. He has more than 25 years of experience in litigation and the settlement of important tax disputes before courts and boards of directors. He can be contacted at [email protected].