Massachusetts single-sales factor apportionment.

• Author: Joseph, Douglas A.

The "typical" apportionment formula for multi-state corporations includes three factors: gross receipts/sales, payroll and property. The ratio of each item in a particular state to its everywhere totals contributes to an overall apportionment factor. This approach is often referred to as "the Massachusetts formula." Ironically, the Massachusetts legislature recently departed from the formula that bears its name (Ch. 280, Acts 1995, effective Feb. 26, 1996). The new law will phase in a single-factor (sales) apportionment formula for defense contractors and manufacturers, but not for wholesalers, retailers or service corporations.

The rationale for Massachusetts's policy decision was fairly simple: to lower the Massachusetts tax burden of corporations investing in property and personnel in Massachusetts while increasing the burden of out-of-state taxpayers who gain economic advantages in the state without making an investment in property or personnel in the state.

Defense Contractors Section

38(k), Ch. 63, G.L.)

Defense contractors may elect to use a single-sales factor apportionment formula for tax years 1996 through 1999. To qualify for the election, the corporation must have derived more than 50% of its total gross receipts from the sale of goods it manufactured and sold to the Department of Defense or any branch of the U.S. Armed Forces during the five-year period ending Dec. 31, 1995; domestic and foreign corporations and subcontractors may qualify. Use of the single-sales factor is prohibited if the denominator of the sales factor is less than 10% of the corporation's taxable net income or otherwise insignificant in producing income.

The single-sales factor method cannot be used if the amount of payroll paid in Massachusetts or property owned or rented and used in Massachusetts drops below 90% of base amounts calculated for the tax year immediately preceding the first tax year beginning on or after Jan. 1, 1996. Use of the single-sales factor is not prohibited if the payroll or property levels drop below 90% as a result of a reduction in contracts with the U.S. Armed Forces or foreign government military or defense agencies, provided the lost business not transferred to out-of-state facilities of the same contractor. The payroll level excludes amounts paid to the 10 most highly compensated officers or employees. The base payroll level with include only compensation paid during the tax year to individuals actively employed by the...