Massachusetts to tax “rolling stock” that is in state more than six days: understanding new Directive 23-1
The Massachusetts Department of Revenue has published Directive 23-1 formalizing its administrative position that a taxpayer whose “rolling stock” (eg, a truck or trailer) enters the state for more than six days will be subject to the full amount of use tax on the rolling stock, subject to a credit for tax paid in other jurisdictions.
Going further, the Department’s directive, issued on March 23, states that rolling stock operating under a monthly lease is subject to use tax irrespective of the amount of time the rolling stock was used or stored in Massachusetts – even if it is just in the state for one day.
Taxpayers with trucks or other rolling stock entering Massachusetts face the potential of a material exposure if sales/use tax was not paid on the initial purchase or if the sales/use tax paid was at a rate less than the Massachusetts 6.25 percent rate. While there is a proposal in the legislature to provide a rolling stock exception, and we expect taxpayer challenges to emerge, the Department is likely to take this position on audit and issue assessments against taxpayers.
Massachusetts use tax
Massachusetts is one of a handful of states that imposes sales/use tax on rolling stock. Specifically, Massachusetts imposes its use tax “upon the storage, use or other consumption in the commonwealth of tangible personal property…purchased from any vendor…at the rate of 6.25 per cent of the sales price of the property.” Mass. Gen. L. c. 64I, § 2. Massachusetts presumes that property brought into the state within six months of purchase is taxable. Mass. Gen. L. c. 64I, § 8(f).
Massachusetts regulations specifically state:
- The storage, use, or other consumption in Massachusetts of a motor vehicle, trailer, or other vehicle purchased or transferred for storage, use, or other consumption in Massachusetts, is subject to the use tax imposed by M.G.L. c. 64I, § 2, unless specifically exempt under that statute and 830 CMR 64H.25.1(5), (7), or (8).
- Every motor vehicle, trailer, or other vehicle sold or transferred for delivery in Massachusetts or brought into Massachusetts is presumed to have been sold or transferred for storage, use, or other consumption in Massachusetts, unless the vehicle is used exclusively outside of Massachusetts for a period of six months before the date it is first delivered, brought into, or used in Massachusetts.
830 CMR 64H.25.1(3)(c) (emphasis added).
Among the exemptions is a limited interstate commerce exemption as follows:
The sale or transfer of a motor vehicle, trailer, or other vehicle in any state or territory within the United States that is subsequently brought to or used in Massachusetts for purposes of interstate commerce, is exempt from Massachusetts use tax if the sale or transfer of the vehicle is exempt under the provisions of 830 CMR 64H.25.1(7)(g) [relating to out-of-state transfers with tax paid in another jurisdiction], above, or if the use of the vehicle in Massachusetts as part of interstate commerce is exempt from use tax under the Constitution or laws of the United States. For the purposes of this subsection, the use of such a vehicle in Massachusetts as part of interstate commerce is exempt from Massachusetts use tax under the Constitution or laws of the United States only if application of the use tax violates the test applied by the United States Supreme Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), or any other test subsequently developed by the courts or enacted under the laws of the United States. Under the Complete Auto Transit test, the imposition of a use tax is permissible if
- the tax is applied to an activity that has a substantial nexus with Massachusetts;
- the tax is fairly apportioned;
- the tax does not discriminate against interstate commerce; and,
- the tax is fairly related to the services provided by the taxing authority.
830 CMR 64H.25.1(7)(h)
The leading Massachusetts case addressing rolling stock is Regency Transportation, Inc. v. Commissioner of Revenue, 42 N.E. 3d 1133 (Sup. Jud. Ct. of MA, 2016). In that case, Regency Transportation had its headquarters in Massachusetts and operated a freight business with terminals in Massachusetts and New Jersey that carried freight across the country. Regency purchased vehicles from various states and accepted delivery outside Massachusetts. It paid no sales/use tax on the vehicles because they were purchased in a tax-exempt jurisdiction or Regency applied the other state’s rolling stock exemption.
The Massachusetts Supreme Judicial Court upheld the state’s assessment of use tax on the full amount of the vehicle purchase price explaining that the Massachusetts use tax did not violate the Commerce Clause or Equal Protection Clause of the Constitution. Among its reasoning, the court explained that the state’s use tax does not violate the internal consistency prong of the Commerce Clause because if every state imposed the same tax as Massachusetts, there would be no risk of multiple taxation due to the credit mechanism in the states. Moreover, the court explained that the use tax did not violate the external consistency prong of the Commerce Clause because “Regency’s tax liability reasonably reflects the in-State activity being taxed,” looking to the fact that Regency used all of its trucks and trailers in Massachusetts and stored/maintained its fleet, in part, in Massachusetts. The directive cites to Regency in its support that a use tax on rolling stock is constitutional.
On March 23, 2023, the Department published Directive 23-1, which states in part:
Where a taxpayer demonstrates that rolling stock that it owns or leases for 12 months or longer was used or stored in Massachusetts for no more than six days during a 12-month period, the Commissioner will consider the in-state use to be de minimis and will neither impose, nor require the taxpayer to pay, use tax on the use or storage of the rolling stock in Massachusetts for that period.
The directive provides several examples of its application, including:
Example 1: Trucking Company is based in New York and maintains a fleet of rolling stock that it purchased in New Jersey. In calendar year 2021, one of Trucking Company’s tractor trailers travelled through Massachusetts on 3 separate days, and another tractor trailer travelled through Massachusetts on 12 separate days. The Trucking Company’s tractor trailer that travelled through Massachusetts on 3 separate days qualifies for the de minimis use exception and therefore is not subject to use tax, while the tractor trailer that travelled through Massachusetts on 12 separate days does not qualify for the de minimis use exception and is subject to tax.
Application of, and potential challenges to, Directive 23-1
The Department’s six-day threshold is arbitrary, and while a use tax on rolling stock has been considered constitutional in Regency, its application of a six-day threshold has not. There are several obstacles the Department will face when attempting to enforce a six-day threshold.
Despite Directive 23-1 citing to Regency, the facts in Regency related to a company headquartered in the state that maintained and stored vehicles in the state – not a taxpayer headquartered outside Massachusetts and driving through a handful of times per year. Therefore, for taxpayers with dissimilar facts to Regency, there is a lack of authority supporting the Department’s position, and we expect taxpayers to challenge the directive.
One example of challenges the Department will likely face is overcoming an external consistency argument because the tax does not appear to reasonably relate to the in-state component of the activity being taxed. Specifically, if a vehicle enters the state for a week, imposing a use tax on the full amount of the vehicle does not appear to reasonably relate to a 100 percent use tax liability due to the limited nature of the vehicle’s presence.
Another example is taxing the full value of a vehicles that enters the state for seven days may violate the four-prong test in Complete Auto. At a minimum, the Department will need to overcome the argument that imposing a tax on the full amount of a vehicle that has only a limited presence in the state is fairly related to the services provided by the state (ie, the fourth prong). This challenge is amplified if the taxpayer is not headquartered in Massachusetts or otherwise does not store vehicles there as the vehicle would be taxed as if it were solely used in the state, assuming no offsetting credits, but it would only be there for a handful of days.
We expect legal challenges to work their way through the courts, but there is a practical issue with the Department’s position as well. The Department’s directive is focused on “rolling stock,” which is generally interpreted as trucks and other vehicles delivering goods in interstate commerce. However, Massachusetts currently does not statutorily define “rolling stock” or otherwise provide for any special treatment of rolling stock compared to any other tangible personal property (eg, a personal car). This means that a person who vacations in Massachusetts, or even just drives through Massachusetts, for more than six days per year could arguably be subject to use tax based on the full purchase price of their vehicle if the Department applies the same logic of Directive 23-1, noting the interstate commerce exception.
As noted above, the state legislature has introduced Senate Bill 1950 in January 2023 to exclude rolling stock from the sales/use tax, and it is unclear whether the law will pass at all or in its current form. The state’s directive provides a material risk that companies with trucks/trailers entering Massachusetts may be subject to use tax based on the full purchase price of each vehicle.
We recommend taxpayers with rolling stock entering Massachusetts to proactively consider their potential exposure and consider potential mitigation strategies. For taxpayers with large fleets, data collection will likely be a material consideration as identifying the location of each vehicle could be a time-consuming or complex process. Accordingly, we further recommend reaching out to your trusted tax advisor to consider potential options with respect to compliance and/or audit defense in Massachusetts.
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