In 2009 the Department of Revenue published 830 CMR 62B.2.2, a regulation for the purpose of ensuring collection of income taxes due from nonresident taxpayers with respect to Massachusetts source income allocated to them from pass-through entities (the “Regulation”). This requirement applies to all such entities that maintain an office or engage in business in Massachusetts that are organized and taxed as partnerships, S corporations and trusts and estates not taxed at the entity level and to their members and beneficiaries. An amended version of the Regulation became effective in August, 2013.
Entities exempted from withholding are investment partnerships that do not conduct trade or business in the state, trusts and estates required to withhold on nonresident members, publicly traded partnerships and certain entities that are prohibited from withholding under federal or state laws.
Members exempted from withholding are federally tax-exempt entities, Massachusetts residents, corporations required to file a Massachusetts tax return with respect to income that is not pass-through income and pass-through entities that must file a Massachusetts tax return in accordance with MGL c.62, upper tier entities that have only exempted members, and non-resident limited partners of qualified securities partnerships. The Commissioner of the Department of Revenue is authorized to identify additional exempt entities. In order to qualify for exemption, a member must file an exemption certificate (Form PTE-EX).[i]
Income must be withheld quarterly and paid to the commonwealth based on each member’s distributive share of the entity’s pass-through income at the rates set forth in Section (4)(c) of the Regulation.
Upper tier entities must withhold against their members after subtracting amounts withheld from lower-tier members.
The Regulation notes that the amount withheld may not be sufficient to satisfy the members’ liabilities because of timing issues and differences among required payments under applicable sections of MGL c.62 and MGL c.63 and notes that penalties and interest will nevertheless be charged against underpayments.
Affected entities are jointly and severally liable with their members for their unpaid taxes, interest and penalties. In addition, they may be liable for penalties for failure to withhold and for failure to allocate income to their members.
In order to comply with the Regulation, an entity required to withhold must register with the Massachusetts Department of Revenue on its WebFile for business, report and pay over taxes withheld, file an annual withholding return, and furnish a statement to each of its members either on the Massachusetts information schedule of a partnership return or the appropriate return for other pass-through entities. In order to qualify for an exemption a member of a pass-through entity must deliver form PTE-EX to the entity. The form remains in effect until it is revoked by the member. An entity that does not collect the certification from its members because it does not anticipate that it will have Massachusetts source income must obtain the certifications within 30 days from the date that it could reasonably foresee that it will realize Massachusetts source income.
A guide to assist pass-through entities to comply with the Regulation can be found on the Department Website. Because it is dated 2010, some caution should be used until it has been updated to ensure it conforms to the recent amendment. The amendment did not make major changes; therefore the guide should still be helpful.
[i] Nonresident members who do not otherwise qualify for exemption from withholding may also qualify by agreeing to file Massachusetts tax returns for their Massachusetts income and file quarterly payment, if required, and accept jurisdiction in Massachusetts state courts for determination or collection of taxes. This is done by selecting the appropriate box on a Form PTEX filed with the pass-through entity. Alternatively they may agree to have the pass-through entity file for them on a composite return by filing Form CRFS (Composite Return Filing Statement) with the pass-through entity.