Opinion
18-P-561
04-26-2019
COMCAST OF MASSACHUSETTS I, INC., & others v. COMMISSIONER OF REVENUE.
NOTICE: Summary decisions issued by the Appeals Court pursuant to its rule 1:28, as amended by 73 Mass. App. Ct. 1001 (2009), are primarily directed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, such decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 1:28 issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent. See Chace v. Curran, 71 Mass. App. Ct. 258, 260 n.4 (2008).
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
This is an appeal from the Appellate Tax Board (board) decision upholding the Commissioner of Revenue's (commissioner) denial of the petitioners' request to abate a deficiency assessment of corporate excise for tax years 2003-2008. We affirm.
Background. During 2003-2008, Comcast Corporation (Comcast) provided video, Internet, and telephone services to customers in thirty-nine States through its subsidiary corporations. Comcast maintains a structure where individual entities held cable franchise licenses with municipalities, rather than consolidate its entities. Each franchise agreement grants a license to provide cable television services to Comcast subscribers in a specific community. The present appeal concerns the corporate excise tax liability of thirteen subsidiaries (the subsidiaries) that provided video, Internet, and telephone services in Massachusetts between 2003 and 2008. The services were delivered to subscribers through a single converged network, located throughout the United States.
Each subsidiary is a separate corporate entity for tax purposes.
Each subsidiary joined in Comcast of Massachusetts I, Inc.'s (Mass. I) filing of Massachusetts corporate excise tax returns for the period between 2003 and 2008. In these returns, the subsidiaries included sales from video and Internet services to subscribers located in Massachusetts as part of their sales factor. The subsidiaries then determined that this was error because the costs of performing these services were greater outside of Massachusetts. The subsidiaries amended the returns to source these receipts outside of Massachusetts, and claimed that Pennsylvania was the State with the highest costs of performance. This would result in a large Massachusetts refund.
The commissioner denied the refund claim and the subsidiaries filed petitions with the board. Following a hearing, the board affirmed the commissioner's decision. This appeal followed.
Discussion. 1. Standard of review. On an appeal under G. L. c. 58A, § 13, our review is limited to whether there was a correct application of law and whether the decision was based on substantial evidence. See Kennametal, Inc. v. Commissioner of Revenue, 426 Mass. 39, 43 (1997); Koch v. Commissioner of Revenue, 416 Mass. 540, 555 (1993). "Although we resolve questions of law de novo, in doing so we give 'substantial deference' to the board's reasonable interpretation of tax statutes because the board is an agency charged with administration of tax law" (citation omitted). D & H Distrib. Co. v. Commissioner of Revenue, 477 Mass. 538, 544 (2017). See Worldwide TechServices, LLC v. Commissioner of Revenue, 479 Mass. 20, 26 (2018); Boston Professional Hockey Ass'n, Inc. v. Commissioner of Revenue, 443 Mass. 276, 285 (2005), quoting Koch, supra ("In reviewing mixed questions of fact and law, the board's expertise in tax matters must be recognized, and its decisions are due 'some deference'").
2. Analysis. "The corporate excise is based on an apportionment formula that is a composite of three factors (sales, payroll, and property)." A.W. Chesterton Co. v. Commissioner of Revenue, 37 Mass. App. Ct. 936, 936 (1994). See Gillette Co. v. Commissioner of Revenue, 425 Mass. 670, 673 (1997). The present dispute concerns the appropriate calculation of the sales factor and the determination of the subsidiaries' "income-producing activity." The sales factor is computed by dividing the "total sales of the corporation in this [C]ommonwealth during the taxable year" with the "total sales of the corporation everywhere during the taxable year." G. L. c. 63, § 38 (f). Sales are considered to occur in the Commonwealth if "1. the income-producing activity is performed in this [C]ommonwealth; or 2. the income-producing activity is performed both in and outside this [C]ommonwealth and a greater proportion of this income-producing activity is performed in this [C]ommonwealth than in any other state, based on costs of performance." G. L. c. 63, § 38 (f), as amended through St. 2008, c. 173, §§ 56 to 62. See Boston Professional Hockey Ass'n, 443 Mass. at 281. "Income-producing activity" is defined as
The Legislature changed the rules for the computation of the sales factor, effective for taxable years beginning on or after January 1, 2014. See G. L. c. 63, § 38 (f), as amended by St. 2013, c. 46, § 37. In that amendment, the determination of when sales, other than sales of tangible personal property, occurred in this Commonwealth was changed. Because the tax years at issue here are prior to 2014, we use the computation in effect prior to this amendment, as the parties did in their briefs.
"a transaction, procedure, or operation directly engaged in by a taxpayer which results in a separately identifiable item of income. In general, any activity whose performance creates an obligation of a particular customer to pay a specific consideration to the taxpayer is an income-producing activity. However . . . income-producing activity includes only the activities of the taxpayer whose income is being apportioned . . . [and] does not include activities performed on behalf of a taxpayer by another
person, such as services performed on its behalf by an independent contractor . . . ."830 Code Mass. Regs. § 63.38.1(9)(d)(2) (1999).
In 2006, this section of the regulation was amended but the quoted definition of income-producing activity remained substantially unchanged. See 830 Code Mass. Regs. § 63.38.1(9)(d)(2) (2006). In 2015, the regulation was amended again, and this definition no longer appears in the current version. See 830 Code Mass. Regs. § 63.8.1(9) (2015). However, the regulation states in pertinent part that
"[t]he provisions in this regulation generally shall apply to tax years beginning on or after the promulgation of the regulation, except to the extent that a provision (i) is subject to a specific effective date provided herein, (ii) is subject to a specific effective date created by legislation (including the rules enacted pursuant to St. 2013, c. 46, § 37, pertaining to the sales factor apportionment of sales of other than tangible personal property, which are effective for taxable years beginning on or after January 1, 2014. . . .)"830 Code Mass. Regs. § 63.38.1(14) (2015). Accordingly, we will apply the regulation in effect prior to the 2015 amendment.
There are two main approaches used to determine income-producing activity for the purpose of whether the costs of performance are greater in the Commonwealth than any other State. The first approach is the "operational" approach, where the income-producing activity of the taxpayer consists of the over-all operation that was needed to provide the service. See Interface Group v. Commissioner of Revenue, 72 Mass. App. Ct. 32, 38 (2008). In contrast, "the transactional approach to the income-producing activity requires" consideration of each individual transaction that results in the taxpayer receiving payment from a customer. Id. at 38-40. Mass. I argues that the board erred in using the transactional approach to determine the subsidiaries' income-producing activity because using this approach ignores all of the activities and costs that are needed to produce the video and Internet sales at issue. We disagree.
The regulations identify a third approach, in which income-producing activity is viewed as a "procedure." That approach is not at issue here.
The use of one approach over the other is not guaranteed and "the application of the regulation depend[s] on the facts in issue." Id. at 40. Here, the board adequately explained why it used the transactional approach and there was sufficient evidence to conclude that this was the more appropriate method to determine the subsidiaries' income-producing activity. See id., quoting Blakely v. Board of Assessors, 391 Mass. 473, 476 (1984) ("The board's decision must state adequate reasons in support of its decision so as to permit meaningful appellate review"). Contrary to Mass. I's argument, the board did not ignore activities and costs needed to produce the subsidiaries' video and Internet sales. Rather, the board considered the direct costs that were directly engaged in by the subsidiaries, as required by the regulations. See 830 Code Mass. Regs. § 63.38(1)(9)(d)(2)(4) (1999). The subsidiaries themselves did not directly engage in any operations, such as day-to-day activities. Rather, the subsidiaries relied on Comcast to provide the resources that the subsidiaries did not have. The board simply looked to Comcast's structure and how the thirteen subsidiaries relied upon the Comcast national network and resources to fulfill the terms of its licenses. Compare Interface Group, 72 Mass. App. Ct. at 39 (transactional approach could not be used because it "trivializes the Massachusetts-based work that went into assembling and marketing the tour packages to produce value"). In other words, because the subsidiaries were dependent on Comcast, the operational approach could not be used because there were no operations engaged in by each subsidiary. Each franchise agreement is a separate transaction used to deliver services. The board simply bound Comcast to its separate-entity structure for tax purposes. Compare Boston Professional Hockey Ass'n, 443 Mass. at 286 (board's finding, that Boston Professional Hockey Association's "income-producing activity was the operation of an NHL franchise rather than the playing of individual games[,] fits comfortably within the text of the regulation").
Mass. I next argues that, regardless, the board wrongly applied the transactional approach because it identified the wrong transaction, incorrectly determined that the subsidiaries' activities took place solely in Massachusetts, and incorrectly determined that the costs of performance were higher in Massachusetts.
First, we conclude that the board properly determined that the transaction engaged in by each subsidiary was to function as cable franchise licensees. Mass. I argues that this does not meet the definition of a "transaction" because the franchise agreements did not result in a "separately identifiable item of income" or create an obligation to pay a specific consideration. See 830 Code Mass. Regs. § 63.38.1(9)(d)(2) (1999). We disagree.
The income-producing activity only includes transactions directly engaged in by a taxpayer. See 830 Code Mass. Regs. § 63.38.1(9)(d)(2) (1999) ("income-producing activity does not include activities performed on behalf of a taxpayer by another person, such as services performed on its behalf by an independent contractor . . ."). Here, each franchise license was a separate transaction between a subsidiary and a city or town, and this transaction granted the right to deliver the video and Internet services to subscribers within that city or town. As previously stated, the subsidiaries did not perform any of the services on its own. The only activity that each subsidiary directly engaged in was entering into a franchise agreement, and it was through these agreements that Comcast's services could be delivered to subscribers in Massachusetts. This makes the transaction that resulted in video and Internet services, the entering into and being a party to, the franchise agreement.
Next, we conclude that, during the tax years in question, Massachusetts was the only location where the subsidiaries' income-producing activity took place. The franchise agreements were with cities and towns located solely in Massachusetts, and the only direct costs incurred as a result of functioning as licensees were the franchise fees. Entering a franchise agreement ultimately resulted in the subsidiary receiving income, in the form of payments from subscribers located in the city or town. This finding and interpretation "fits comfortably within the text of the regulation that 'an income-producing activity is a transaction, procedure, or operation directly engaged in by a taxpayer which results in a separately identifiable item of income'" (emphasis omitted). Boston Professional Hockey Ass'n, 443 Mass. at 286, quoting 830 Code Mass. Regs. § 63.38.1(9)(d)(2) (1999).
Because the board determined that the income-producing activity solely occurred in Massachusetts, it did not have to look at costs of performance. See G. L. c. 63, § 38 (f), as amended through St. 2008, c. 173, §§ 56 to 62. Regardless, the board went a step further, and conducted an analysis as if the "income-producing activity [was] performed both in and outside this [C]ommonwealth" by looking at costs of performance to determine whether "a greater proportion of this income-producing activity [was] performed in this [C]ommonwealth." Id. "Costs of performance" are the taxpayer's "direct costs determined in a manner consistent with generally accepted accounting principles . . . [and] do not include costs of independent contractors or services by subcontractors." 830 Code Mass. Regs. § 63.38.1(9)(d)(4) (1999). The board did not credit Mass. I's analysis of its costs of performance because that analysis fails to consider its direct costs, and instead used all of the activities of Comcast's national operations. The subsidiaries simply did not directly incur the costs relied on by Mass. I in its argument. The board's interpretation of "direct costs" was reasonable and supported by the testimony at the hearing. See Boston Professional Hockey Ass'n, 443 Mass. at 289-290. See also D & H Distrib. Co., 477 Mass. at 544 ("the taxpayer bears the burden of proving that he or she is entitled to an abatement as a matter of law"). Thus, even assuming that the subsidiaries' income-producing activity occurred both in and outside of the Commonwealth, the costs of performance were greater in Massachusetts.
The board was also entitled to reject Mass. I's argument that the subsidiaries incurred costs in New Hampshire because their corporate officers performed certain subsidiary-related services out of Comcast's New Hampshire divisional headquarters. The board could properly find that those officers were essentially Comcast division-level employees and, "except for signing necessary legal papers, there is no evidence that any of them ever acted in their capacity as officers of [the subsidiaries]."
Therefore, we cannot conclude that there was an improper application of the law or an unreasonable application based on the facts presented. See Kennametal, 426 Mass. at 44.
Decision of the Appellate Tax Board affirmed.
By the Court (Desmond, Sacks & Lemire, JJ.),
The panelists are listed in order of seniority.
/s/
Clerk Entered: April 26, 2019.