Massachusetts: Indiana Utility Receipts Tax Not Required to be Added Back in Computing Massachusetts Corporate Excise

Recently, the Massachusetts Appeals Court reviewed an Appellate Tax Board decision addressing whether the Indiana Utility Receipts Tax (URT) is required to be added back in computing Massachusetts corporate excise.  The taxpayers at issue, a combined group that included two utility companies, paid Indiana adjusted gross income tax and Indiana URT for the tax years at issue. Under Massachusetts law, taxpayers must add back taxes “measured on or by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business, and capital stock taxes imposed by any state.”  In computing their corporate excise liability, the taxpayers added back the Indiana adjusted gross income tax, but not the URT.  The Commissioner, on audit, asserted that the URT was not deductible, and the matter eventually went to the Appellate Tax Board. The Board held that although the URT had some characteristics of a transaction tax, such as an exception for occasional sales and an exemption for U.S. Government transactions, it was more akin to the types of taxes that were not deductible. The taxpayers appealed.

On appeal, the Commissioner argued that the URT was a franchise tax imposed for the privilege of doing business in Indiana.  As support for this potion, the Commissioner noted that it was the Department’s long-standing policy that the types of taxes that could not be deducted were taxes imposed on a corporation’s business as a whole, as opposed to discrete events.  The Indiana URT is imposed on taxable gross receipts. The term taxable gross receipts generally means all gross receipts not exempt from tax less all allowable deductions, which includes deductions for depreciation on certain capital expenditures.  In addition, the URT is labeled an “income tax” in the Indiana Code.  Nevertheless, the Appeals Court disagreed with the Commissioner’s position and concluded that the URT was not a tax imposed on a business in its entirety. Rather, in the court’s view, the URT was imposed on specifically enumerated receipts, which included receipts from the retail sale natural gas and electricity, and was, in substance, fundamentally similar to transaction taxes on retail sales, which the court noted were deductible.  Please contact Nikhil Sequeira at 617-988-1787 with questions on Bay State Gas Co. & Affiliates v. Commissioner of Revenue.