United States: Massachusetts Supreme Judicial Court Upholds Constitutionality Of Financial Institution Excise Tax Apportionment Rules

The Massachusetts Supreme Judicial Court (MSJC) has reaffirmed its decision that the state's apportionment of loan income did not violate the internal consistency test of the dormant Commerce Clause of the U.S. Constitution.1 Specifically, at issue were the state's requirements to determine the situs of loans when computing the property factor for financial institution excise tax (FIET) apportionment purposes. The decision followed a remand from the U.S. Supreme Court2 to reconsider the case in light of its subsequent decision in Comptroller of the Treasury. v. Wynne.3


The taxpayer, Gate Holdings, Inc., which had its commercial domicile in Massachusetts, was essentially a holding company without employees or tangible assets that outsourced the servicing of student loans.4 To apportion its income for FIET purposes, Gate used an equally-weighted formula based on property, payroll and sales factors. The loan portfolio represented substantially all of Gate's property. For the 2004 through 2006 tax years at issue, Gate filed a Massachusetts return reporting an apportionment percentage of one percent, which was the average of a two percent sales factor and zero percent property factor. For purposes of the property factor, Gate assigned the loans to the location of the servicers.

After the Massachusetts Appellate Tax Board (ATB) determined that all of the loans should be assigned to Gate's commercial domicile in Massachusetts, Gate's apportionment factor rose from one percent to 51 percent, which was the average of its two percent sales factor and 100 percent property factor. The taxpayers appealed this case to the MSJC.

On January 28, 2015, the MSJC affirmed the ATB's decision and held that the fair apportionment requirement of the dormant Commerce Clause was not violated.5 The MSJC reached this conclusion after determining that the apportionment of the loan income to Massachusetts did not violate the internal or external consistency tests.6 Specifically, the internal consistency test was met because the application of the apportionment statute did not actually subject the taxpayer to double taxation. On May 18, 2015, the U.S. Supreme Court held in Wynne that the Maryland personal income tax statutes violated the internal consistency test because there hypothetically would be double taxation if each state imposed the same tax structure.7 Gate subsequently filed a petition for writ of certiorari in the U.S. Supreme Court and contended, based on Wynne, that the MSJC did not correctly apply the internal consistency test. On October 13, 2015, the U.S. Supreme Court issued a summary disposition that granted Gate's petition for certiorari, vacated the judgment, and remanded the case to the MSJC for further consideration in light of Wynne.8

FIET Apportionment

Massachusetts law sets out the rules for apportioning the taxable income of financial institutions between or among the states in which the institutions operate.9 These rules apportion income to Massachusetts for tax purposes by multiplying the taxpayer's income by an equally-weighted three-factor apportionment percentage.

In considering how to source the securitized loans held by Gate for purposes of the property factor, a Massachusetts statute provides that a loan is properly assigned to the regular place of business with which [the loan] has a preponderance of substantive contacts.10 More specifically, a loan is attributed to Massachusetts if it is properly assigned to a regular place of business of the taxpayer within the state. A loan is properly assigned to a state other than Massachusetts if it is assigned to a regular place of business in that other state and the taxpayer's records and returns generally reflect the same assignment.11 In addition, if a loan is assigned by a taxpayer to a place outside Massachusetts that is not a regular place of business, the statute creates a rebuttable presumption that the loan is properly assigned to Massachusetts if (at the time the loan was made) the taxpayer's commercial domicile was in Massachusetts.12

For purposes of the FIET, Massachusetts law defines "commercial domicile" as the headquarters of a trade or business, that is, the place from which the trade or business is principally managed and directed.13 "Regular place of business" is defined as an office at which the taxpayer carries on its business in a regular and systematic manner and which is consistently maintained, occupied and used by employees of the taxpayer.14 Because Gate had no offices or employees in Massachusetts or any other state, it had no regular place of business for purposes of assigning the securitized loans to either Massachusetts or other jurisdictions. Gate assigned loans to both Florida and Massachusetts on its originally filed tax returns, but the ATB rejected this assignment and applied the statutory commercial domicile presumption. In applying this statutory presumption, the ATB held the preponderance of substantive contacts regarding the loans was located in Massachusetts due to Gate's commercial domicile being located in the state.

Internal Consistency Test Not Violated

On remand, the MSJC again held that the assignment of Gate's securitized loans to Massachusetts for purposes of the FIET property factor did not violate the internal consistency test. In its analysis, the MSJC hypothetically assumed every state enacted a statute identical to the Massachusetts FIET apportionment statute. According to the MSJC, if each state were to enact identical legislation, Gate could not establish a regular place of business in any state for purposes of assigning the loans. Furthermore, Gate could not establish that there is another state in which the preponderance of substantive loanrelated contacts occurred. The states would then all need to apply the statutory commercial domicile presumption to determine if Gate's loans could be assigned to the state. Under the MSJC analysis, if each state had similar taxing legislation, Massachusetts would be assigned all of the loans per the statute due to Gate's commercial domicile being located in the state, and the other taxing jurisdictions would not be assigned any of the loans. Based on this analysis, the MSJC held that the state's assignment of the loans to Massachusetts for property factor purposes did not violate the internal consistency test of the dormant Commerce Clause.

In coming to this conclusion, the MSJC rejected Gate's argument that it did in fact assign loans on its returns to Florida. According to Gate, if Florida had an apportionment statute identical to the Massachusetts FIET apportionment statute, Florida would have treated the loans shown on Gate's Florida tax return as properly assigned to the state. The MSJC disagreed, noting that there would be no statutory basis under Massachusetts law for Florida to be assigned the loans. The MSJC further explained that if Florida had enacted the same legislation, it would be an erroneous application to assign any of the loans to Florida under the instant fact pattern.

Gate also argued that the commercial domicile presumption violated the internal consistency test because it deprived Gate of any way to rebut the presumption. The MSJC disagreed because the purpose of the internal consistency test is to examine a tax structure to ensure that it "would result in no more than all of the unitary business'[s] income being taxed."15 The MSJC also noted the purpose of the test is to help identify tax structures that discriminate against interstate commerce by "look[ing] to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate."16 If the Massachusetts FIET apportionment statute was enacted by every state, no more than 100 percentage of Gate's income would be subject to tax, and there would be no disadvantage to Gate from operating in interstate commerce as opposed to wholly in intrastate commerce.


In its First Marblehead decision that was released in 2015, the MSJC only applied a relatively cursory internal consistency test in determining that the application of the FIET apportionment statute did not actually subject the taxpayer to double taxation. The U.S. Supreme Court vacated this judgment and remanded the case for further consideration in light of Wynne. On remand, the MSJC explained that "[w]e understand the Supreme Court's order of remand in this case as a directive to consider further whether the Massachusetts FIET, as applied to Gate, fails the internal consistency test described and affirmed in Wynne, and thereby contravenes the dormant commerce clause." Therefore, the MSJC narrowly interpreted the U.S. Supreme Court's directive to vacate the judgment and reconsider the case.

Based on the U.S. Supreme Court's action, one would have expected the MSJC to issue a more robust opinion that thoroughly considers external consistency and other aspects of the dormant Commerce Clause analysis, as well as internal consistency. Instead, the MSJC's recent opinion is not nearly as long as its vacated 2015 opinion and only addresses the internal consistency issue. Although the recent opinion applies the correct internal consistency test by examining whether there hypothetically would be double taxation if each state imposed the same tax structure, the MSJC's new opinion seems incomplete by not applying a full analysis of whether a dormant Commerce Clause violation exists. Based on the fact that the MSJC issued such an abbreviated opinion on remand, there is a heightened (though by no means absolute) expectation that the U.S. Supreme Court may consider this case if it is appealed again.

As far as the application of the internal consistency test discussed in the Wynne decision, the MSJC did provide an analysis applying the hypothetical assumption that all states utilized similar rules to those adopted by Massachusetts to apportion loan interest for purposes of taxing financial institutions. In its analysis, the MSJC relies heavily upon the statutory commercial domicile presumption. This presumption (which is rebuttable by the taxpayer) provides that if a loan is assigned by the taxpayer to a place outside Massachusetts where the taxpayer does not have a regular place of business, it is presumed that the preponderance of substantive contacts regarding the loan occurred within Massachusetts if the taxpayer's domicile was in Massachusetts. The MSJC determined that the taxpayer failed to provide additional facts which could rebut this presumption.

It is important to remember that the FIET apportionment statute also provides that "[t]o determine the state in which the preponderance of substantive contacts relating to a loan have occurred, the facts and circumstances regarding the loan at issue shall be reviewed on a case-by-case basis and consideration shall be given to such activities as the solicitation, investigation, negotiation, approval, and administration of the loan."17 Accordingly, the First Marblehead decision cannot be read to require all taxpayers in a similar situation to the taxpayer to apportion all loan proceeds to Massachusetts for purposes of calculating the property factor. Rather, the MSJC decision is an analysis of the specific facts and circumstances surrounding the particular taxpayer, and the MSJC's reliance on the statutory commercial domicile presumption indicates taxpayers could present additional facts allowing for apportionment of interest in loans to other states outside Massachusetts.

Finally, there is an overarching point to note on internal consistency and its application in dormant Commerce Clause challenges. There is some inherent uncertainty regarding application of the internal consistency test in situations where a contested statute is at issue, as states can (and often do) interpret the same words in a statute differently. For example, the internal consistency analysis becomes problematic when differing definitions for key terms such as "commercial domicile" and differing case law precedent on reasonability may result in double taxation in that state. In applying the test, it is debatable whether courts automatically should assume that the state definitions and case history are the same in every relevant state.


1 The First Marblehead Corp. v. Commissioner of Revenue, Massachusetts Supreme Judicial Court, No. SJC-11609, Aug. 12, 2016.

2 The First Marblehead Corp. v. Commissioner of Revenue, 136 S. Ct. 317 (2015). For further discussion, see GT SALT Alert: U.S. Supreme Court Vacates and Remands Massachusetts Case for Further Consideration Based on Wynne.

3 135 S. Ct. 1787 (2015). For a discussion of Wynne, see GT SALT Alert: U.S. Supreme Court Holds Lack of County Personal Income Tax Credit for Taxes Paid to Other States Violates Commerce Clause.

4 Note that there are two taxpayers in this case. The focus of the case was the FIET liability of a taxpayer (Gate Holdings, Inc.) that was a wholly-owned subsidiary of the other taxpayer (First Marblehead Corporation) during the relevant tax years. The summary of this case primarily concerns the first taxpayer. The subsidiary was sold by the parent following the tax years at issue in this litigation.

5 The First Marblehead Corp. v. Commissioner of Revenue, 23 N.E.3d 892 (Mass. 2015). The MSJC clarified that with respect to apportionment, both the U.S. Supreme Court and the MSJC have found that the Due Process and Commerce Clauses require fairness in apportioning the income of a multistate business.

6 Id. As explained by the MSJC, "[t]he first . . . component of fairness in an apportionment formula is what might be called internal consistency – that is, the formula must be such that, if applied by every jurisdiction, it would result in no more than all of the unitary business'[s] income being taxed. The second and more difficult requirement is what might be called external consistency – the factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is generated." This appeal is limited to the internal consistency test.

7 135 S. Ct. 1787 (2015).

8 136 S. Ct. 317 (2015).

9 MASS. GEN. LAWS ch. 63, § 2A.

10 MASS. GEN. LAWS ch. 63, § 2A(e)(vi)(A)(1), (2).

11 Id.

12 MASS. GEN. LAWS ch. 63, § 2A(e)(vi)(B).

13 MASS. GEN. LAWS ch. 63, § 1.

14 Id.

15 Container Corp. v. Franchise Tax Bd., 463 U.S. 159, 169(1983).

16 Comptroller of the Treasury. v. Wynne, 135 S. Ct. 1787, quoting Oklahoma Tax Comm'n v. Jerfferson Lines, Inc., 514 U.S. 175, 185 (1995).

17 MASS. GEN. LAWS ch. 63, § 2A(e)(vi)(C).

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