Alert September 09, 2008

Massachusetts Tax on Non-Filing Financial Institutions Having Economic Nexus with Massachusetts

The Massachusetts Department of Revenue (the “DOR”) announced in Technical Information Release 08-4 (“TIR 08-4”) that a non-Massachusetts financial institution that has failed to file required Massachusetts tax returns will face harsher treatment under the DOR’s non-filer “look-back” policy unless it identifies itself to the DOR as seeking to avail itself of TIR 08-4 by September 30, 2008.

Background.  When a taxpayer fails to file a required Massachusetts tax return, the DOR may make an assessment of tax at any time for any taxable period for which a return was due.  The statute does not limit the number of past due returns or past tax periods for which the DOR may assess tax.  However, the DOR, in previously issued TIR 03-17, provided a general seven-year look-back rule and a special three-year look-back rule for a non-Massachusetts corporation that voluntarily disclosed its failure to file, provided that there was a reasonable doubt that it had an obligation to file a Massachusetts return.

TIR 03-17 states as a general rule, subject to certain exceptions, that when the DOR determines that a taxpayer has failed to file required tax returns, the DOR will assess the taxpayer with respect to returns due during the most recent seven years.  However, to encourage voluntary compliance, TIR 03-17 also states that the Department, subject to certain exceptions, will limit assessments to the three most recent tax years in cases where certain non-filers, including non-Massachusetts corporations, voluntarily disclose their failure to file.  TIR 03-17 states that in cases in which a taxpayer seeks to apply the DOR’s three-year look-back policy, the DOR will nonetheless apply the seven-year policy, notwithstanding any voluntary disclosure, when an extensive level of business activity conducted in this state removes any reasonable doubt as to the taxpayer’s prior filing obligation.  Further, TIR 03-17 states that its discretionary policy is subject to exceptions based on consideration of particular facts and circumstances, in which cases the Department may require additional returns to be filed going back in excess of seven years.  In determining whether an exception applies, the DOR will consider whether the taxpayer has any basis for reasonable doubt about its obligation to file Massachusetts returns.

Changes in the Look-Back Policy.  In the new Technical Information Release, the DOR announces that the three-year look-back policy will not apply to non-Massachusetts financial institutions that are presumed under the statute to be “engaged in business in the commonwealth” because of in-state activity, including lending and ancillary loan activity, that exceeds specified amounts.  Instead of the three-year look-back period, the DOR will apply a five-year look-back period requiring tax filings for the tax years beginning with the tax year ending on or after January 1, 2003, if, by September 30, 2008, the taxpayer identifies itself to the DOR as availing itself of the terms of TIR 08-4 and files its returns and makes full payment of the tax due and applicable interest and penalties by December 31, 2008.  Notice that penalties generally are not waived under TIR 08-4 as they would be if the general voluntary disclosure provision under TIR 03-17 applied.  (The TIR also applies to certain non-Massachusetts corporations that use their intangible property within Massachusetts to generate gross receipts within the state for the corporation, including through a license or franchise.) 

The DOR observes that a taxpayer that files under the five-year look-back period may apply for an abatement if, for example, either of the two Appellate Tax Board cases on which the DOR relies in part for the TIR are reversed on appeal by the Supreme Judicial Court.  However, the DOR warns that it will not be bound by the seven-year look-back period provided for in TIR 03-17 and “will apply a look-back period that is appropriate to the circumstances” to a financial institution within the scope of the TIR that does not voluntarily file returns under the provisions of the TIR.  Accordingly, the DOR is implicitly threatening, if the entity’s facts otherwise support such an extended look-back period, to assess a financial institution for all tax years beginning on or after January 1, 1995.

Possible Action.  Even though the terms offered by TIR 08-4 are not attractive because of the relatively long five-year look-back period and the failure to waive penalties, a taxpayer may choose to make voluntary disclosure because of the threat of an extended look-back period.  If a taxpayer decides to make voluntary disclosure, it must identify itself to the DOR by September 30, 2008.