Key Tax Provisions in the Massachusetts FY21 Budget
On December 11, 2020, Massachusetts Governor Charlie Baker signed the Commonwealth’s FY21 budget into law. While the $45.9 billion budget does not raise taxes, it includes a number of significant tax provisions summarized below.
Accelerated Sales Tax Remittance
Effective April 1, 2021, businesses whose room occupancy, meals, or sales tax liabilities exceeded $150,000 in the prior calendar year and that file monthly returns must remit any such taxes collected through the first three weeks of the month by the 25th day of that month or risk a 5% underpayment penalty. Tax collected during the remainder of the month will continue to be due with the return, which will now be due by the 30th day of the month following the reporting period (rather than the 20th day). The 5% underpayment penalty will not apply if the accelerated payment for the first three weeks is at least 70% of the aggregate tax collected during the reporting period.
In sum, instead of tracking just one payment deadline per month, monthly filers will now track two deadlines falling within five days of each other, and the Department of Revenue (DOR) will likewise monitor compliance with two deadlines as opposed to one. While the Legislature labels these measures a "modernization" of the sales tax, they do nothing to simplify it.
As a result of these changes, the Commonwealth expects to reap a one-time acceleration of approximately $267 million of revenue in FY21. Previous versions of the Governor’s budget provided for even greater acceleration, requiring daily remittance of sales tax for payments made through credit card processors. Massachusetts would have been the first state to require such daily sales tax remittance.
The Legislature has directed DOR to issue regulations and guidance to implement the newly-enacted accelerated sales tax remittance regime.
No Reinstatement of Charitable Deductions
See Section 76
Suspended since 2002 but previously scheduled to be restored in 2021, the Massachusetts charitable contribution deduction will not be reinstated next year. Eligible individuals would otherwise have been able to claim a charitable contribution deduction for the first time in nearly twenty years. The Governor’s budgetary proposal submitted to the House in January 2020 would have required a study of the reinstatement of the charitable contribution deduction, but this requirement was not included in the finalized budget. The delay of the charitable contribution deduction is estimated to generate approximately $64 million in revenue savings during the remaining six months of FY21.
Reporting Federal Partnership Audit Adjustments
New G.L. c. 62C, § 30B supplements current requirements to report federal changes and ensures that federal audit adjustments imposed at the partnership level flow through to, and are ultimately assessed at, the partner level.
Under the new federal centralized partnership audit regime, notices of adjustment and assessment are generally issued at the partnership level. Without a corresponding partnership audit regime at the state level, partners might have avoided any state tax consequences of federal partnership‑level adjustments.
The new statute requires audited partnerships to submit a detailed report to DOR within 90 days of receipt of a final determination in a federal partnership audit. The statute further requires payment of any additional state tax resulting from the determination within an additional 90 days, either directly by the partner or by the partnership on the partner’s behalf. The new regime allows an audited partnership or a partner to make estimated payments of the additional Massachusetts tax expected as a result of a pending federal partnership audit.
The Massachusetts statute largely tracks the Multistate Tax Commission’s 2018 Model Uniform Statute for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments with a few notable exceptions, including Massachusetts’ indefinite tolling of the period for assessment whenever an audited partnership fails to report a final federal determination as required.
The legislation authorizes DOR to promulgate regulations and other guidance to implement or explain its provisions, particularly with regard to determining the appropriate partnership representative and preventing the omission or duplication of state tax liabilities as a result of a federal partnership-level audit.
Study of SALT Cap Workarounds
See Section 89
The Legislature has directed DOR to evaluate the impacts of an entity-level tax on noncorporate businesses, coupled with a refundable credit for each member’s distributive share of such tax, as a potential workaround to the $10,000 federal deduction limitation for state and local taxes (SALT) under the Tax Cuts and Jobs Act. On November 9, 2020 the Internal Revenue Service confirmed in Notice 2020-75 that entity-level state taxes are not subject to the SALT cap. Seven states, including Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin, have enacted such entity-level taxes. Given the cost of the federal cap to individual taxpayers, and the questions that workaround regimes may pose for multistate businesses, interested parties should stay tuned for DOR’s report, due by March 1, 2021. One concern is that some states may not treat entity-level taxes as creditable for purposes of their resident income taxes.
New Penalty for "Zappers" and "Phantom-Ware"
See Section 32
New G.L. c. 62C, § 35F imposes a tax penalty for illegally falsifying or manipulating electronic cash register records through the use of certain specially-defined software programs (commonly referred to as "zappers" and "phantom-ware"). Those who sell such software may owe up to $25,000 and $50,000 for first and continued offenses, respectively, and those who purchase, install, transfer, maintain, repair, or possess such software may owe up to $10,000 and $25,000 for first and continued offenses, respectively. The new penalty is estimated to generate approximately $2 million of revenue during FY21.