Massachusetts law changes sales factor apportionment provisions scenarios

Massachusetts’ H.5077 legislation modifying how certain taxpayers determine their sales factor in apportioning income to the Commonwealth was enacted Dec. 4, 2024.

H.5077 changes Massachusetts’ apportionment provisions by identifying instances when sales factor apportionment wouldn’t apply for certain taxpayers. Specifically, Massachusetts could require a taxpayer with insignificant revenue to apportion its taxable income or tax loss based on its property and payroll — and not its sales.

Companies in the technology, communications, and life sciences industry space with operations in Massachusetts should analyze the impact of this legislation on its tax provision, tax attributes, and cash taxes.

Background

For tax years beginning prior to 2025, corporations and partnerships apportioned income using a four-factor apportionment formula based on property, payroll, and double-weighted sales – unless the entity was a manufacturer as determined under Massachusetts law.

In October 2023 Governor Healy signed H.4104, legislation that mandated that corporations and partnerships apportion income using a single sales factor for tax years beginning on or after Jan. 1, 2025. H.5077 clarifies when certain taxpayers can’t use a single sales factor for its apportionment methodology.

What changes with h.5077

In those instances when H.5077 indicates sales factor apportionment doesn’t apply, taxpayers are required to apportion income using an equally weighted property and payroll formula.

H.5077 deems the sales factor to be inapplicable if any of the below items apply:

• Both the taxpayer’s sales factor numerator and denominator are zero
• The taxpayer’s sales denominator is less than 10% of one-third — 3.333% — of its taxable net income
• The Massachusetts Tax Commission determines the taxpayer’s sales reflected in the sales factor are insignificant in producing income.

Importantly, the legislation specifies that a taxpayer’s sales factor will not be deemed inapplicable simply because its Massachusetts sales numerator is zero.