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Tax Law

Massachusetts Appeals Court Finds Indiana Utility Receipts Tax Deductible for Purposes of Massachusetts Corporate Excise Tax

On October 7, 2020, the Massachusetts Appeals Court held that a taxpayer’s deduction for payment of the Indiana utility receipts tax (“URT”) was permitted for Massachusetts corporate income tax purposes. The taxpayer who was engaged in natural gas distribution operations in Massachusetts and other states, claimed a deduction for the URT it paid to Indiana on its originally filed Massachusetts corporate income tax returns for the 2012 through 2014 tax years. Upon audit, the tax commissioner asserted that the URT could not be deducted because it was an “income tax” which is not permitted as a deduction under Mass. Gen. Laws ch. 63, § 30(4). Under Massachusetts law no deduction is permitted for “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.” Mass. Gen. Laws ch. 63, § 30(4)(iii). When the taxpayer protested the determination to the Massachusetts appellate tax board, the commissioner abandoned its argument that the URT is an income tax and instead argued that the URT is a franchise tax for the privilege of doing business and therefore not deductible under Massachusetts law. The appellate tax board ruled in favor of the commissioner, holding that the URT constituted a franchise tax and was therefore not deductible.

The appeals court reversed the decision of the appellate tax board, holding that the Indiana URT does not constitute a franchise tax imposed for the privilege of doing business in Indiana, finding instead that the URT is essentially a tax on retail sales. The Indiana URT is imposed on gross receipts received in consideration for the “retail sale of utility services for consumption.” Ind. Code § 6-2.3-1-4. Wholesale sales, occasional sales, and sales to the US government are not subject to the URT, and a deduction from gross receipts is permitted for depreciation on certain capital assets. The court found that although the Indiana URT has some unique aspects, such as the ability to deduct depreciation on certain capital expenses, the URT is in substance “fundamentally similar to transaction taxes on retail sales.” As a result, the appeals court held the Indiana URT is a deductible tax for corporate income tax purposes. Bay State Gas Co. v. Comm’r of Revenue, Dkt. No. 19-P-114 (Mass. App. Ct. Oct. 7, 2020)