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TIR 06-9: Effect of the Appellate Tax Board's Decision in EUA Ocean State Corp. v. Commissioner of Revenue


This technical information release (“TIR”) is being issued in response to the decision of the Appellate Tax Board (“Board”) in EUA Ocean State Corp. v. Commissioner of Revenue, A.T.B. Nos. C258405-406, C258424-425, C258882-883, C259158-159, C259653, C262566-568 (2006).  Pursuant to that decision, receipts from the sale of electricity by a generator are to be sourced for income apportionment purposes as receipts from sales “other than sales of tangible personal property” under G.L. c. 63, § 38(f).  The Commissioner of Revenue (“Commissioner”) will apply the apportionment methodology prescribed by the Board in EUA going forward and to all taxable years within the statute of limitations for assessment or abatement.

The issue before the Board in EUA was whether sales of electricity by two general partnerships (“Partnerships”) should be treated as Massachusetts sales includible in the numerators of the corporate partners’ sales factors under G.L. c. 63, § 38(f).[1]  Each Partnership owned and operated an electric generating plant in Burrillville, Rhode Island.  The purchasers of the electricity were engaged in the wholesale and/or retail sale of electricity in Massachusetts and various other states.

Under G.L. c. 63, § 38(f), the sales factor is a “fraction, the numerator of which is the total sales of the corporation in this commonwealth during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year.”  As used in § 38(f), the term “sales” means all gross receipts of the corporation except interest, dividends, and gross receipts from the maturity, redemption, sale, exchange or other disposition of securities.”

As noted by the Board in EUA, § 38(f) provides different rules for determining whether a sale is “in this commonwealth,” depending upon the nature of what is sold.  EUA at ATB 2006-272-73.  If tangible personal property is sold, the general rule is that the sale takes place where the property is delivered to the purchaser.  A sale of tangible personal property is “in this commonwealth” under § 38(f) if the property is delivered or shipped to a purchaser in this commonwealth regardless of the f.o.b. point or other conditions of sale.  Id.  Sales other than sales of tangible personal property are generally “in this commonwealth,” in contrast, if: (1) the income-producing activity  is performed in the commonwealth; or (2) the income-producing activity is performed both in and outside the commonwealth and a greater proportion of the income-producing activity is performed in the commonwealth than in any other state, based on costs of performance.  G.L. c. 63, § 38(f).

The Board ruled in EUA that electricity is not “tangible personal property” for purposes of  G.L. c. 63, § 38(f).  “Electricity has no physical shape, form or geographic location.  It has no height, weight, volume or other dimension by which tangible property is typically measured.  Although electricity may be perceived by the senses, such as feeling a shock, it has no form or substance which can be touched.  It is of a nature similar to heat, light and sound, all of which can be sensed and even measured but, given their lack of form or substance, would not be considered ‘tangible,’” the Board stated.  EUA at ATB 2006-266-67.  Accordingly, applying the statutory methodology discussed above for sourcing sales other than sales of tangible personal property, the Board stated that the Partnerships’ sales of electricity were attributable to the state in which the Partnerships incurred the greatest proportion of their costs of performing their income-producing activity.

The electric generating plants owned and operated by the Partnerships were located in Burrillville, Rhode Island.  Accordingly, the Board ruled that all of the Partnerships’ income-producing activities were performed in Rhode Island and, thus, that all of the Partnerships’ sales of electricity were Rhode Island, not Massachusetts, sales. Consequently, the Board ruled that none of the Partnerships’ electricity sales were includible in the numerators of the partners’ sales factors under G.L. c. 63, § 38(f).  In construing the law in EUA, the Board limits its analysis to sales of electricity by generators of electricity and effectively sources such sales to the location where the electricity is generated.  The Commissioner is not appealing this decision.

The Commissioner will apply the sales factor sourcing methodology prescribed by the Board in its decision in EUA going forward and to all open taxable years within the statute of limitations for assessment or abatement.    Accordingly, in calculating the numerator of the sales factor to be included in a return of a generator, sales of electricity are to be sourced to the location where the electricity is generated This TIR supercedes and replaces all prior public or private written statements, forms, and instructions, in particular the instructions to Form P.S.1, Public Service Corporation Franchise Tax Return, to the extent they may be inconsistent with this TIR.

Subsequent to the issuance of this TIR, the Commissioner intends to propose a special industry apportionment regulation pursuant to G.L. c. 63, § 38(j).  The Commissioner anticipates that such regulation will not be limited to sales of electricity by generators as discussed in this TIR, but will address sales by the electric industry as a whole.  If adopted, the regulation would be applied prospectively.

/s/Alan LeBovidge        

Alan LeBovidge

Commissioner of Revenue

 

AL:MTF:pls

214867

June 12, 2006

TIR 06-9



[1] In general, a corporation with an interest in a partnership must include in its apportionment factors its pro rata share of the partnership’s property, payroll, and sales.  830 CMR 63.38.1(13).