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State tax allowable and non-allowable deductions

On Behalf of | Mar 6, 2022 | Uncategorized

Corporations are entitled to deductions that will be subtracted from the total gross revenue of the business. The total is the corporation’s taxable net income. For corporations in Massachusetts, some taxes are deductible under the Federal Internal Revenue Code but not deductible under the Massachusetts statute G.L. c. 63, § 30(4). 

A tax controversy case brought this issue to light as the Massachusetts Appeals Court. Their decision defined what was deductible and what was not deductible. 

Bay State Gas Company & Affiliates v. Commissioner of Revenue, 98 Mass. App. Ct. 582 (2020)

In 2020, the Massachusetts Appeals Court rendered a decision on whether Indiana’s URT was deductible under Massachusetts tax law. Bay State Gas Company, based in Massachusetts, and its affiliates provide utility services in Indiana, as well as several other states. Indiana imposed a Utilities Receipts Tax on the Indiana affiliate’s taxable gross receipts they received from providing natural gas and electricity in Indiana. 

The issue in contention was whether this tax was a consistently imposed gross receipts-based tax or an intermittently imposed tax, such as sales taxes that are imposed only when sales occur.

Corporation deductible state taxes

According to DD 99-9, transaction taxes, such as sales, local property, payroll, and occupancy taxes are deductible Massachusetts state taxes as they are in the Federal Internal Revenue Code. 

For example, The New York City Commercial Rent or Occupancy Tax (NYCOT) would be deductible because it is a transaction tax on the rental activity of the business.

Corporation nondeductible state taxes

The Federal Internal Revenue Code and G.L. c. 63, § 30(4)(iii) differ when it comes to the deduction of these kinds of taxes: 

“Taxes on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes imposed by any state.”

Indiana’s statute, Ind. Code § 6-2.3-2-1, states that the Indiana URT is to be imposed on:

“(1) the entire taxable gross receipts of a taxpayer that is a resident or a domiciliary of Indiana; and (2) the taxable gross receipts derived from activities or businesses or any other sources within Indiana by a taxpayer that is not a resident or a domiciliary of Indiana.”

The Commissioner argued that the gross receipt-based taxes that Indiana imposed were not to be deducted from net income. This was a franchise tax for the privilege of doing business and not a sales tax. The Massachusetts Appeals court agreed with the Commissioner.




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