ARTICLE | September 22, 2023

Authored by RSM US LLP

Executive summary: Massachusetts Department of Revenue explains rolling stock

Massachusetts Department of Revenue Directive 23-1 outlines the standard for de minimis in-state use of rolling stock (e.g., trucks, tractors or trailers). As explained in the directive, the department considers in-state use of such items de minimis if they are used in Massachusetts six days or fewer in a 12-month period. Any potential use tax can be offset by tax paid to another jurisdiction, if the tax was legally due to the other jurisdiction and other jurisdiction allows a corresponding credit with respect to sales or use tax paid to Massachusetts on property brought into that other jurisdiction. If tax has not been assessed elsewhere, then businesses may face significant use tax exposure in Massachusetts despite relatively little ‘use’ in Massachusetts.

Massachusetts ‘rolling stock’ tax treatment explained

Massachusetts subjects ‘rolling stock’ that is used in the state to the state use tax. Earlier this year, the Massachusetts Department of Revenue issued Directive 23-1 to provide a bright-line rule for determining when the in-state use of rolling stock is de minimis and not subject to tax by the department. The department will not subject rolling stock used in the state for six days or fewer during a 12-month period to Massachusetts tax. Rolling stock operated under a monthly lease does not qualify for the de minimis use exception. Rolling stock leased on a monthly basis that enters the Commonwealth will be subject to use tax on each monthly transaction, irrespective of the frequency with which the rolling stock was used or stored in Massachusetts during the 12-month period.

A taxpayer can demonstrate the frequency with which rolling stock was used or stored in Massachusetts through sufficient records that show the dates of travel into and in Massachusetts, such as GPS logs. The burden is on the taxpayer to produce adequate records to demonstrate that rolling stock was used or stored in Massachusetts for no more than six days during a 12-month period. Where a taxpayer does not have or fails to produce such records, the commissioner will not permit the taxpayer to claim the de minimis use exception, regardless of the frequency with which the rolling stock is used or stored in Massachusetts.

While the use tax can be offset by tax paid to other jurisdictions, most other states do not tax rolling stock under various interstate commerce exemptions. The combination of out-of-state exemptions and a low de minimis standard puts out-of-state businesses whose rolling stock is used in Massachusetts for relatively small time periods at risk for significant use tax assessments.

Regency Transportation, Inc. v. Commissioner of Revenue

In Regency Transportation, Inc. v. Commissioner of Revenue the Massachusetts Supreme Judicial Court ruled that the use tax on rolling stock did not violate the U.S. Constitution. The Court stated that the imposition of tax did not pose a risk of double taxation due to the credit mechanism, and that the resulting tax liability reasonably reflected the activity being taxed.

Directive 23-1 cites this decision in justifying the de minimis standard, however, the facts in Regency do not align completely with the implications of the directive. In Regency, the taxpayer was headquartered in Massachusetts and had a freight terminal in Massachusetts. The case does not address the imposition of Massachusetts use tax on an out-of-state taxpayer whose property is in the state for small periods of time. The directive provides several examples that illustrate how the department will apply the de minimis standard, demonstrating that out-of-state rolling stock traveling through Massachusetts for a brief period of time could be subject to the Massachusetts use tax.

Takeaways and observations

Businesses with rolling stock in Massachusetts may be surprised by the application of use tax considering the exemptions provided in other states. It is important that rolling stock is tracked with clear and well-documented records. Multistate businesses, especially those in the transportation and shipping industries, should have a good understanding of various state laws on rolling stock, including the Massachusetts directive. Five examples of rolling stock scenarios are provided in the directive.

Finally, several bills have been introduced in the legislature in recent years that would exempt rolling stock, however none have gained traction. A taxpayer challenge to the directive is also possible considering the application of Regency which centered on the activities of an in-state business and not rolling stock passing through the state.

This article was written by Mo Bell-Jacobs and originally appeared on 2023-09-22.
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