Massachusetts tweaks tax policies for a future including COVID-19

Updated September 29, 2021.

After Massachusetts Governor Charlie Baker issued a COVID-19 state of emergency on March 10, 2020, Massachusetts instituted tax relief measures for business and individual taxpayers. These included filing and payment due date extensions, penalty waivers, and softened nexus rules. On September 16, 2021, the Massachusetts Department of Revenue updated its COVID-19 Response and Tax Filing Season FAQs to clarify income tax, withholding tax, and sales and use tax requirements for businesses and individuals post-COVID-19 state of emergency.

Highlights: Moving forward, resident and nonresident remote employees will generally owe income tax and withholding tax on income earned in Massachusetts. The presence of one or more employees in Massachusetts will create sales and use tax nexus (i.e., an obligation to register for sales and use tax) for an out-of-state business. Finally, there are new reporting requirements for sales tax, meals tax, and room occupancy excise tax — and more reporting changes are planned for 2022.

Sales tax updates

Sales tax nexus for out-of-state businesses

In March 2020, the Department of Revenue announced that one or more employees working from home in Massachusetts solely due to COVID-19 will not create a sales and use tax collection obligation for an out-of-state business.

On September 16, 2021, the department said it’s resuming its pre-pandemic policy. Out-of-state companies with one or more employees located in Massachusetts must register for Massachusetts sales and use tax, then collect and remit sales tax as required by law.

Sales tax filing extension ending

Due to COVID-19, Massachusetts extended reporting and payment deadlines for meals tax, room occupancy excise tax, and sales and use tax due between March 20, 2020, and June 1, 2021. Vendors and property operators with cumulative liability of less than $150,000 during the 12-month period ending February 29, 2020, have until November 1, 2021, to file returns and pay the taxes due. That deadline is now looming.

The department also waived penalties for businesses with cumulative liability exceeding $150,000 (for sales and use tax, room occupancy excise tax, or meals tax), so long as they file returns and pay the taxes due by November 1, 2021. However, these businesses are still accruing interest on taxes not paid by their original due date.

New reporting requirement for sales tax and more

Massachusetts instituted new reporting requirements for certain taxpayers earlier this year. For tax periods ending after April 1, 2021, returns previously due 20 days after the close of the tax period are due 30 days after the close of the tax period; the extra 10 days apply to all tax returns filed for marijuana retail tax, meals tax, room occupancy excise tax, sales and use tax, and sales tax on services.

Also, for tax periods ending after April 1, 2021, businesses with more than $150,000 in cumulative liability for the preceding tax year are generally required to make advance payments of meals tax, room occupancy tax, and sales and use tax. This, too, applies to marijuana retail tax, meals tax, room occupancy excise tax, sales and use tax, and sales tax on services; the threshold is separately applied to each return type. Advance payments are generally due on or before the 25th of the month.

Yet the most eye-catching new requirements may be coming in 2022: Businesses registered for meals tax, room occupancy excise tax, and sales and use tax will have to report cash sales separately from credit card sales beginning January 1, 2022 (hat tip to Tax Notes for publishing the DOR News).

According to Scott Peterson, vice president of government affairs at Avalara, “No other state currently requires the information Massachusetts will be requesting.” 

The department was also planning to mandate that businesses report in-store sales separately from online sales in 2022. However, after gathering feedback from the DOR Advisory Council, the department will not ask taxpayers to provide that level of detail at this time (another hat tip to Tax Notes).

The Massachusetts Department of Revenue has yet to provide additional guidance for businesses.

Personal income tax requirements for resident employees

All wages earned by a Massachusetts resident are taxable, regardless of where those wages are earned. However, after social-distancing measures were put in place to slow the spread of COVID-19, Massachusetts adopted special income sourcing rules for employees unable to work from their usual work location due to the pandemic. 

A Massachusetts resident who worked in another state prior to the pandemic and is now telecommuting from a location in Massachusetts due to COVID-19 may claim a credit for taxes paid to that other state — “to the extent provided under M.G.L. c. 62, § 6(a) if the other state applies similar sourcing rules.” 

The credit may be claimed for taxes paid to another state in 2020 and 2021 (Department of Revenue Tax Filing Season FAQs).

Personal income tax requirements for nonresident employees

Prior to the pandemic, nonresidents were taxed on “gross income from sources within the Commonwealth,” including income derived or connected with employment, trade, or business in Massachusetts. 

Due to the COVID-19 state of emergency, the Massachusetts Department of Revenue adopted special income sourcing rules for nonresidents who 1) commuted across state lines prior to the pandemic in order to work in Massachusetts and 2) started telecommuting from a location outside Massachusetts because of COVID-19.

In TIR 20-5 (April 20, 2020), the Massachusetts Department of Revenue explained that Massachusetts personal income tax and personal income tax withholding would continue to apply to “all compensation received for personal services performed by a nonresident who, immediately prior to the Massachusetts COVID-19 state of emergency, was an employee engaged in performing such services in Massachusetts.” 

The department has now updated its guidance: After September 13, 2021, nonresident taxpayers must source their income to the location where they perform the work and apportion their wages according to the number of days they worked from Massachusetts (Tax Filing Season FAQs).

Nonresidents working at the same company as they did prior to March 10, 2020

For 2020 tax purposes, a nonresident employee who prior to the pandemic apportioned Massachusetts source income based on days spent working in Massachusetts should apportion wages for 2020 in one of two ways:

The percentage of workdays spent in Massachusetts from January 1 through February 29, 2020; or

The apportionment percentage properly used to determine the nonresident employee’s Massachusetts source income in 2019 (for employees who worked for the same in employer in 2019 and 2020 only)

Nonresident employees should use the same methods to determine their taxable wages for the period January 1, 2021, through September 13, 2021.

After September 13, 2021, a nonresident telecommuting because of COVID-19 must report wages based on the actual location where the work is performed, even if their former work location in Massachusetts has closed permanently, and even if their role within the company has changed significantly. In other words, wages earned for a workday spent in Massachusetts are subject to Massachusetts income and withholding tax, while wages earned for a workday spent outside of Massachusetts aren’t. The telecommuting rules put in place during the Massachusetts COVID-19 state of emergency “cease to be in effect as of September 13, 2021.”

A “workday” for a nonresident employee includes any day the nonresident employee is required to work, except holidays, paid or unpaid leave, sick days, or vacations. If an employee spends part of a workday in Massachusetts and part of a workday in another state, the day is treated as a Massachusetts workday “unless the nonresident can prove that he worked outside Massachusetts for more than half the day.” The updated FAQs provide two examples to help taxpayers understand.

Nonresidents working at a different company on or after March 10, 2020

A nonresident who started a new job with a Massachusetts employer on or after March 10, 2020, may apportion wages based on actual workdays in (and outside of) Massachusetts. If a nonresident has worked from home exclusively since starting the new job, none of the income is considered Massachusetts income.

Massachusetts income tax applies to wages earned during any workday (as defined above) in Massachusetts. More details about these and other requirements can be found at the Department of Revenue’s COVID-19 Response and FAQs.

Read more about how states have reshaped nexus laws for remote employees and how Pennsylvania updated remote work policies now that living in a COVID-19 world is the new normal. 

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