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New ruling on capital gains tax of out-of-state corporations in Massachusetts

On Behalf of | Sep 2, 2022 | Tax Controversies

 

On May 16, 2022, the Supreme Judicial Court of Massachusetts (SJC) ruled against the Massachusetts Department of Revenue Commissioner in the VAS Holdings & Investments LLC v. Commissioner case. 

This ruling was a reversal by SJC of the Appellate Tax Board’s decision concerning restrictions on the taxation of a non-domiciliary corporation. VAS Holdings & Investments LLC had earned capital gains from selling fifty percent membership interest in an organization within Massachusetts. 

However, the tax applied on the capital gains was invalid, and this SJC decision has various implications for businesses operating in Framingham, MA, and the state. 

How this ruling could impact businesses that operate in Massachusetts

In the VAS Holdings’ appeal case, the Commissioner agreed that the capital gain by VAS Holdings was non-taxable based on the unitary business principle. However, the Commissioner added that the capital gain may still be taxable as it indicates an in-State company’s growth. 

The Supreme Court disagreed with this argument holding that the Commonwealth’s tax may be applicable on the capital gain, but the Commissioner lacks the authority to apply the capital gains tax.

The VAS Holdings & Investments LLC ruling is surprising as its interpretation of the taxation laws in Massachusetts seems to lean more favorably toward out-of-state entities. This can impact businesses in Massachusetts as it clarifies the definition of a “unitary business.” Under Massachusetts law, businesses are considered unitary if they are “sufficiently integrated with or dependent upon other activities conducted both within and without the commonwealth.” 

In this case, the court ruled that VAS Holdings & Investments LLC was not a unitary business and therefore was not subject to the nonresident composite tax. This ruling could have implications for companies operating in multiple states, as it suggests that they may not be subject to the same tax laws as businesses headquartered in Massachusetts. 

Beneficiaries of the VAS Holdings & Investments LLC ruling

While the Supreme Court ruling translates to a loss of revenue for the state of Massachusetts, it is good news for foreign investors. Typically, the beneficiaries of the ruling will be out-of-state investors exempt from taxation on the sale of their Massachusetts business. This is where a unitary business relationship is absent. 

Startups and other businesses in Framingham, MA, or other places in Massachusetts can attract investors from outside the state. 

Furthermore, investors that had paid tax under similar “investee apportionment” methodology circumstances may wish to request a refund by filing amended returns. 

 

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