Following in the footsteps of a number of other states, Massachusetts moved in 2013 from a statutory “cost of performance” rule for sourcing sales of services in its income apportionment formula to a “market-sourcing” approach. The change took effect with respect to taxable years beginning on or after January 1, 2014. Under the new statute, sales of services generally go into the numerator of the Massachusetts sales factor if the services are “delivered” in Massachusetts. The practical import of this rule in particular real life contexts has not been apparent to tax professionals who have been assessing its impact since the change. For this reason, guidance from the Department of Revenue (“DOR”) has been awaited with more than the usual level of interest.

On March 25, 2014, DOR released 58 pages of “working draft” regulations interpreting the new rule, and invited practitioner comments on them, to be submitted by May 1.

General Rules

The basic rule under the statute1 and regulations2 is that sales other than sales of tangible personal property are in Massachusetts if the corporation’s market for the sale is in Massachusetts. For sales of services, the market state is determined by reference to place of delivery.3 If, under the subrules that flesh out this concept, the market cannot be determined, it may be “reasonably approximated.”4 The reasonable approximation must consider all sources of information available to the taxpayer, it must be determined in good faith and applied in good faith, and it must be applied consistently with respect to similar transactions and from year to year.5 The taxpayer must maintain contemporaneous records that explain the method and the assumptions that underlie it.6