Recent DOR Announcements
Seven important announcements were made recently by the Massachusetts Department of Revenue. The State Tax Practice Group continues to provide MBA members with summaries of important announcements. The full text of these releases can be found on the Department’s website. (www.ma.gov/dor). Any questions can be sent to Rick Stone, Chair of the State Tax Practice Group at rick or phone (617) 848‑9360.
Working Draft Directive 10-XX
Sales/Use Taxation of Cellular Telephones in Bundled Transactions
On December 3, 2010, the Massachusetts Department of Revenue extended the public comment period on the draft Directive, "Sales/Use Taxation of Cellular Telephones in Bundled Transactions," until December 31, 2010. The draft Directive proposes to change, prospectively, effective January 1, 2011, the Department’s rules on the taxation of cellular telephones and similar devices sold in bundled transactions with taxable telecommunications services.
A “bundled transaction” is a sale of a cellular telephone or other wireless communication device in which the customer gets a reduced price on the phone or device if he or she enters into a contract for telecommunications services at the time the phone or device is purchased, including renewals, upgrades and modifications to existing service contracts.
In Directives 93-9 and 94-2, the tax result depended on who sold the cellular phone, that is, whether the phone was sold by a retailer as part of a bundled transaction including a contract with a third party telecommunications carrier, or the phone was sold by a telecommunications carrier as part of a contractual arrangement including both the phone and telecommunications services. Directives 93-9 and 94-2 are superseded to the extent they are inconsistent with this Directive. The rules in this Directive apply to bundled transactions encompassing (i) a cellular phone or other wireless device and (ii) taxable telecommunications services. The rules do not apply to bundled transactions involving taxable and non-taxable tangible personal property, taxable property and non-taxable services, or promotional items in non-bundled transactions as described in 830 CMR 64H.1.4(1).
Directive 1: The sales price of cellular telephones or other wireless communications devices that are sold in “bundled” transactions with taxable telecommunications services, either by an independent retailer (which may include a franchisee of a telecommunications carrier) or by a telecommunications carrier, is the higher of the amount paid by the retail customer or the wholesale cost of the phone or other wireless communications device. Massachusetts sales/use tax must be paid on that sales price amount.
Directive 2: In situations where the wholesale cost of the phone or other device is used for calculating the tax (because it is higher than the amount paid by the customer), the seller may collect and remit sales tax from the customer on the amount actually paid by the customer and must remit use tax on the wholesale cost, less any sales tax paid by the customer.
Working Draft TIR 10-14: Certified Housing Development Credit
On December 9, 2010, the Department issued this draft TIR 10-14 for public comment until December 31, 2010. The draft TIR announces a new tax credit, effective January 1, 2011, for certain qualified rehabilitation expenditures with respect to a certified housing development project. The tax credit is a key component of the Commonwealth’s Certified Housing Development Program.
There is a $5 million cap on the amount of credit that may be awarded under the program in a calendar year. The following amounts count toward the $5 million cap: (1) credits granted and used to reduce tax liability during the current year; and (2) carry forwards of the credit from prior years by either a taxpayer that generated the credit or a transferee used to reduce tax liability during the current year. The $5 million cap is part of an over-all $25 million cap imposed on the Economic Development Incentive Program (EDIP) credit. The $25 million cap is reduced by only the amount of the housing development credits that are used by taxpayers to reduce their tax liability for the year.
The credit is available to a taxpayer only to the extent awarded by the Massachusetts Department of Housing and Community Development (DHCD). The DHCD may award a taxpayer a credit of up to ten percent of the costs of qualified substantial rehabilitation expenditures of the market rate units within the certified housing development projects.
Taxpayers eligible for the credit may, with prior notice to and under rules adopted by the Commissioner, transfer the credits, and the transferee will be entitled to apply the credits against its tax liability. A transferee must apply the credit against its tax liability in the year the credit is transferred. If a partnership or a limited liability company treated as a partnership for Massachusetts income tax purposes generates the credit, the credit, if transferred, must be transferred by the partnership or the limited liability company. Credits passed through to individual partners or members may not be transferred by the partners or members. The DHCD may limit a taxpayer’s ability to transfer the credit.
If the credit available for use for any taxable year exceeds the taxpayer’s or a transferee’s tax liability for that taxable year, the taxpayer or transferee may carry forward for up to five years and apply in any subsequent taxable year the portion of those credits, as reduced from year to year, which exceed the tax for the taxable year. The DHCD may limit the credit carry forward available to a taxpayer.
TIR 10-23: Interest Rate on Overpayments and Underpayments
On December 14, 2010, the Department issued TIR 10-23 announcing the quarterly interest rate on overpayments and underpayments determined by the Department. See the TIR on the Department’s website for rates. Before July 1, 2003, the interest rate on overpayments and underpayments was the same. Effective July 1, 2003, however, the interest rate paid by the Department on overpayments was reduced to the Federal short-term rate in effect for the taxable year, plus two percentage points, simple interest. The rate for underpayments has remained at the Federal short-term rate plus four percentage points, compounded daily. The announced rates are subject to change quarterly.
Repeal of Sales Tax on Alcoholic Beverages
TIR 10-24 reports that, as the result of a referendum question on the November 2, 2010 ballot, the law extending the Massachusetts sales and use tax to alcoholic beverages sold at package stores and liquor stores for off-premises consumption, which was enacted on August 1, 2009, has been repealed, effective for sales on or after January 1, 2011.
Working Draft TIR 10-XX
Individual Mandate Penalties for Tax Year 2011
On December 17, 2010, the Department issued for comment a draft TIR to announce the penalty schedule for individuals who fail to comply in 2011 with the requirements under the Massachusetts Health Care Reform Act, which require most adults 18 and over who have access to affordable health insurance to obtain it. Individuals who are deemed able to afford health insurance but fail to obtain credible coverage for more than 64 days are subject to penalties for each month of non-compliance in the tax year. The penalties, which will be imposed through the individual’s personal income tax return, shall not exceed 50% of the minimum monthly insurance premium for which an individual would have qualified through the Commonwealth Health Insurance Connector. The Connector annually establishes separate standards that determine whether individuals, married couples and families can afford health insurance, based on their incomes and affordable health insurance premiums. Individuals also have the opportunity to file appeals with the Connector asserting that hardship prevented them from purchasing health insurance (and thus that they should not be subject to tax penalties).
Working Draft Directive 10-XX
Application of "Circuit Breaker Credit" to a Life Estate
On December 17, 2010, the Department issued for public comment a draft Directive explaining the applicability of the "circuit breaker credit" to taxpayers occupying a principal residence under the terms of a life estate.
This Directive explains the applicability of a refundable credit against personal income taxes (also known as the "circuit breaker credit") when an otherwise “qualifying” taxpayer occupies his or her principal residence under the terms of a life estate. To qualify for the credit, the taxpayer or spouse, if married filing jointly, must be 65 years of age or older at the close of the tax year; the taxpayer must own or rent residential property in Massachusetts and occupy the property as his or her principal residence; the taxpayer's "total income" cannot exceed certain annual threshold amount; and for homeowners, the assessed valuation of the homeowner's personal residence as of January 1 cannot exceed an annually set maximum amount.
A life tenant, if otherwise eligible, must claim the circuit breaker credit under the “homeowner” rules described in TIR 01-3, as does the taxpayer who transfers property to a revocable grantor trust. However, if the property is put into an irrevocable trust for the benefit of others, the taxpayer must claim the credit using the “renter” rules described in TIR 01-19.
Working Draft TIR 10-20
Massachusetts Tax Year 2010 Exclusion Amounts for Employer-Provided Parking, Transit Pass and Commuter Highway Vehicle Benefits
On December 17, 2010, the Department released for public comment draft TIR 10-20 announcing the Massachusetts exclusion amount for 2010 and 2011 for employer-provided parking benefits and transit pass and commuter highway vehicle benefits. The TIR also explains the calculation of an inflation adjustment for the transit pass and commuter highway vehicle benefits that applies only for Massachusetts (and not federal) purposes.
Although the Massachusetts personal income tax generally follows the provisions of the Internal Revenue Code, as amended on January 1, 2005, a federal Act enacted subsequent to January 1, 2005, the American Recovery and Reinvestment Act of 2009 (“ARRA”), created a temporary difference between the Massachusetts and federal exclusion amount for the transit pass and commuter highway vehicle transportation benefits that applies during tax years 2009 and 2010; the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Relief Act”) extended this difference through 2011.
Certain provisions of ARRA and the 2010 Tax Relief Act effective for the months of March, 2009 through December 2011 have temporarily increased the exclusion amount for the transit pass and commuter highway vehicle benefits to equal the employer-provided parking benefit of $230 per month. For the same time period, however, the Massachusetts exclusion amount for the transit pass and commuter highway vehicle benefits remains at $120 per month; the Massachusetts exclusion amount for employer-provided parking remains at $230 per month.
For the 2010 and 2011 tax years, the IRS has calculated the inflation adjustment for the employer-provided parking benefit, which has resulted in the monthly exclusion amount for that benefit remaining unchanged at $230 per month for both federal and Massachusetts tax purposes. For the transit pass and commuter highway vehicle benefits exclusion, for Massachusetts income tax purposes, the inflation adjustment must be independently calculated under the formula provided in the January 1, 2005 Internal Revenue Code. Applying this formula for 2010 and 2011, the transit pass and commuter highway vehicle benefits exclusion for Massachusetts personal income tax purposes remains at $120 per month.
Richard M. Stone, Esq.
Chair: State Tax Practice Group
Phone: (617) 848-9360
Email: [e-mail rick]