Press Room: Tax Release
Amidst the COVID-19 Pandemic, Massachusetts Is Taxing Forgiven PPP Loans, Withholding Tax on Nonresidents and Accelerating Sales and Use Tax Collection
Update: On April 1, 2021 Massachusetts Governor Charlie Baker signed into law legislation allowing owners of pass-through entities treated as partnerships with forgiven Paycheck Protection Program (PPP) loans to receive the same tax treatment as corporations (i.e., forgiven PPP loans are excluded from gross income).
The economic turmoil created by the COVID-19 pandemic has strained state and local government budgets throughout the country. Massachusetts has responded by relying on certain aspects of its tax code as well as some initiatives aimed at preserving or raising revenue. The most notable of these relates to the state’s income tax treatment of forgiven Paycheck Protection Program (PPP) loans, enforcement of wage withholding against employees of Massachusetts businesses who telecommute from other states and the acceleration of sales and use tax filing and payment requirements in 2021.
Treatment of PPP Loan Forgiveness
The PPP loan program was established under the Coronavirus Aid Relief and Economic Security (CARES) Act. It authorizes the federal government to provide loans to businesses to maintain payroll. The loans are forgivable in full if employers retain employees at salary levels comparable to those before the COVID-19 pandemic.
Generally speaking, the forgiveness of debt is treated as taxable income to the extent a debt is forgiven. However, the CARES Act expressly excluded forgiven PPP loans from federal gross income. For purposes of Massachusetts tax, individuals and owners of pass-through entities treated as partnerships whose PPP loans are forgiven must include the amount of the debt forgiven in state taxable income and pay the appropriate tax. This is because Massachusetts has adopted the Internal Revenue Code (Code) as it was written on January 1, 2005. Per guidance from the state this would exclude the CARES Act provisions regarding the exclusion of loan forgiveness from gross income. (See PPP Coronavirus Relief Grant Funds FAQs 2021 Tax Filing and Massachusetts TIR 20-15).
The state does conform to the CARES Act for purposes of the corporate excise tax. This is because with respect to the corporate excise tax, the state adopts the Code on a rolling basis. As a result, the CARES Act exclusion of PPP loan forgiveness from gross income also applies to Massachusetts corporate excise taxpayers.
New Hampshire v. Massachusetts – Personal Income Tax Withholding
As part of its COVID-19 pandemic response, Massachusetts adopted an emergency regulation, Massachusetts TIR 20-15, to address remote workers now telecommuting from other states due to the COVID-19 pandemic. In this emergency regulation the state said it will treat all compensation received by a nonresident working outside of Massachusetts as Massachusetts-based income if the nonresident was working in Massachusetts immediately prior to the COVID-19 pandemic. The emergency regulation is in effect until 90 days after the Massachusetts state of emergency related to the COVID-19 pandemic has been lifted.
To provide further guidance the state has issued the Working Draft Directive: Personal Income Tax Guidance for Employees who Telecommuted in 2020 due to the COVID-19 State of Emergency (February 12, 2021).
In essence, nonresidents who were working in Massachusetts before the COVID-19 pandemic are still required to have Massachusetts income taxes withheld on compensation paid during the COVID-19 state of emergency even if the work was performed in another state.
The guidance concludes that nonresident telecommuting employees must continue to source their wages earned to Massachusetts. Additionally, nonresident employees who prior to the Massachusetts COVID-19 state of emergency apportioned their wages to Massachusetts must determine their Massachusetts sourced income based on either:
- The percentage of their work days present in Massachusetts during the period of January 1, 2020 through February 29, 2020, or
- The apportionment percentage used to determine wages from that employer used on the individual’s 2019 Massachusetts personal income tax return.
New Hampshire is challenging the validity of the Massachusetts emergency regulation in the U.S. Supreme Court. Specifically, New Hampshire (which does not have a personal income tax) is arguing that the Massachusetts emergency regulation taxes work that is not performed in Massachusetts. In addition, the state contends that the emergency regulation harms New Hampshire because some of its residents must pay Massachusetts income tax when that money could be spent by New Hampshire residents at New Hampshire businesses.
The case is on the U.S. Supreme Court’s docket as New Hampshire invoked the Court’s original jurisdiction, which allows states to sue one another when their sovereign interests are at stake. However, the Court has not yet decided if it will hear the case and questions have been raised as to whether New Hampshire has standing to bring suit. The Court’s current session ends in June 2021. If the Court grants certiorari to hear the case, and New Hampshire can overcome the issue of standing, a decision will be rendered by that date. (See New Hampshire v. Massachusetts - SCOTUS Blog).
Changes to Sales Tax Compliance
End of COVID-19 Relief Relating to Sales and Use Tax
As part of COVID-19 pandemic relief provided by Massachusetts, beginning with the March 2020 filing, the state allowed certain sales tax vendors (those collecting less than $150,000 in the previous 12 months) to suspend the filing of sales tax returns.
The state is ending the suspension of sales tax filings beginning with the April 2021 filing. Therefore, those vendors opting to suspend filings and payment relating to Massachusetts sales and use tax returns must file and pay all back sales and use taxes by May 20, 2021 as well as be current with filing requirements on a go-forward basis. (See MA Regulation - Sales Tax Suspension).
Sales and Use Tax Compliance Fiscal Year 2021
As part of the Fiscal Year 2021 Budget, Governor Charlie Baker approved an accelerated sales and use tax collection program for certain vendors. Effective April 1, 2021, monthly return filers whose sales and use tax exceeds $150,000 in the prior calendar year must remit the sales and use taxes for the first three weeks of the month by the 25th day of that month. Tax collected during the remainder of the month will be due with the subsequent return which needs to be filed by the 30th day of the month following the reporting period (rather than the 20th day). (See MA Fiscal Year 2021 Budget).
The Takeaway
While the federal government has responded to the economic turmoil created by the COVID-19 pandemic by enacting tax relief provisions, Massachusetts has moved in a decidedly different direction. Individuals and owners of pass-through entities taxed as partnerships are subject to the state’s income tax on forgiven PPP loans. The state is enforcing income tax withholding requirements against nonresident telecommuters working for Massachusetts employers. In addition, the state is ending its suspension of sales and use tax filings beginning in April 2021, while at the same time implementing an accelerated sales and use tax collection program for certain vendors.
Massachusetts business and individual taxpayers need to be aware of these COVID-19 related measures as they will impact 2020 and 2021 tax filings and payment obligations.