Massachusetts businesses burdened with tax changes in 2009

In 2008, Governor Patrick signed into law a bill that drastically changes the way many corporations will file their 2009 Massachusetts tax returns. In the past, Massachusetts viewed subsidiaries or affiliated corporations as separate entities for tax purposes. Those that did business in the state were required to file a Massachusetts tax return. However, starting in 2009, this practice has been eliminated and the state now requires “combined reporting”.

Under this new method, affiliated corporations with 50 percent or greater common ownership will be required to file a unitary combined tax return. In this system, the income of all corporations in the group (including those not doing business in the state) is aggregated. Transactions between these entities, or intercompany transactions, are eliminated. The total income of the group (or unit) is then allocated to the state based apportionment factors.

A unitary group will include all corporations under common ownership that are engaged in a “unitary” business. Corporations are considered under common ownership if more than 50% of their voting stock is controlled by the same beneficial owners. A unitary business is defined broadly to include two or more corporations whose business activities are interrelated and result in mutual benefit or a sharing of value between the corporations. As you would expect, the law specifies the Legislature’s intent that the term “unitary” be construed to the broadest extent permissible under the U.S. Constitution.

The bill was entitled “An Act Relative to Tax Fairness and Business Competitiveness”. This may be a misnomer since the reason for this change was to extract more taxes from businesses. Not many people would consider increasing corporate taxes something that will make Massachusetts more business competitive. However, under the new reporting structure, it is estimated that Massachusetts will extract some $400 million in additional corporate taxes annually.

In addition to increasing the tax burden, implementation and compliance of combined reporting will be a challenge. The Department of Revenue is in charge of issuing the regulations needed to implement combined reporting. More regulations will be issued in coming months to help companies implement these rules.