Boston Professional Hockey Association, Inc. v. Commissioner of Revenue, SJC-09287 (MA 1/13/2005), SJC-09287

• Decision Date: 13 January 2005
• Docket Number: SJC-09287
• Citation: 443 Mass. 276
• Parties: BOSTON PROFESSIONAL HOCKEY ASSOCIATION, INC. vs. COMMISSIONER OF REVENUE (and a consolidated case 1 ).
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

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BOSTON PROFESSIONAL HOCKEY ASSOCIATION, INC. vs. COMMISSIONER OF REVENUE (and a consolidated case¹).

SJC-09287

Supreme Judicial Court of Massachusetts.

Suffolk.

October 6, 2004.

January 13, 2005.

Taxation, Corporate excise, Commissioner of revenue, Appellate Tax Board: Appeal to Supreme Judicial Court. Commissioner of Revenue.

Appeal from a decision of the Appellate Tax Board.

The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.

John Kenneth Felter (Daniel M. Forman with him) for the taxpayers.

Pierce O. Cray, Assistant Attorney General (Thomas W. Hammond with him) for Commissioner of Revenue.

Present: Marshall, C.J., Greaney, Ireland, Spina, Cowin, Sosman, & Cordy, JJ.

CORDY, J.

This is an appeal from a decision of the Appellate Tax Board (board) affirming the denial by the Commissioner of Revenue (commissioner) of applications by the taxpayers, the Boston Professional Hockey Association, Inc. (BPHA), and Jeremy M. and Margaret J. Jacobs (Jacobses), for the abatement of taxes assessed for the tax years 1991, 1992, 1993, and 1994. They contend that the board erred in ruling that one hundred per cent of the revenue BPHA received from the following sources was properly apportioned to Massachusetts: the sale of tickets to Boston Bruins hockey games (gate receipts); the licensing of local, national, and international broadcast rights; the licensing of logos and trademarks; and a limited partnership interest in the New England Sports Network, L.P. (NESN).² The appellants also claim that the board erred in excluding from the apportionment formula used to calculate BPHA's corporate excise taxes, BPHA's pro rata share of the value of the satellite transponders that NESN used to transmit its signal. See G. L. c. 63, § 38 (c). We transferred the appeal to this court on our own motion, and now affirm the board's decision in part, and reverse it in part.³

1. a. Background. BPHA is a Massachusetts Domestic subchapter S corporation with a principal place of business in Boston. It owns and operates the Boston Bruins professional hockey club (Bruins). BPHA is a member of the National Hockey League (NHL) and, as such, is governed by the NHL Constitution, bylaws, and resolutions. The NHL Constitution requires each member team to play a specific number of regular season games, approximately one-half of which must be played in opponents' home arenas. It also provides that each member team retains the revenues from gate receipts for home games only,⁴ and "irrevocably" divests itself of any rights or interests in hockey games played in the "home territory" of another member team.⁵ Art. 4.4 of the NHL Constitution.

During the tax years at issue, BPHA received the gate receipts for its home games (including the revenue from season ticket sales) and earned income from broadcast licensing agreements with the Boston Celtics Acquisitions Limited Partnership (owner and operator of WEEI-AM), New Boston Television, Inc. (owner and operator of WSBK-TV), and NESN. As a limited partner in NESN, BPHA also received a pro rata share of NESN's profits. In addition, BPHA earned revenue from the NHL and NHL-related entities for the use of Bruins logos and trademarks and for national and international broadcasting rights.

BPHA timely filed Massachusetts tax returns for 1991, 1992, 1993, and 1994. In those returns, it did not treat all of the income received from these sources as Massachusetts income. Subsequently, the commissioner notified BPHA of his intent to assess additional corporate excise taxes against it for those years, plus interest. BPHA paid the adjusted assessments and timely filed applications for abatement. The commissioner denied the applications, after which BPHA petitioned the board for relief. The board affirmed the commissioner's rulings, concluding that BPHA failed to meet its burden of proving an entitlement to abatements. This appeal followed.⁶

b. Corporate excise tax. A brief review of the Massachusetts corporate excise tax is helpful in understanding the underlying dispute. Where a corporation such as BPHA conducts business both within and outside Massachusetts, the share of its taxable net income subject to corporate excise tax in Massachusetts is calculated by utilizing the so-called "statutory method" provided in G. L. c. 63, § 38. Gillette Co. v. Commissioner of Revenue, 425 Mass. 670, 673 (1997). "Taxable net income is determined by taking the corporation's Federal net income, as defined in G. L. c. 63, § 30 (5) (b), applying statutory deductions enumerated in G. L. c. 63, § 38 (a), and multiplying the result by the three-factor apportionment formula in G. L. c. 63, § 38 (c)."⁷ Id. That formula is based on the ratio of the corporation's property, payroll, and sales in Massachusetts to its total property, payroll, and sales everywhere. More specifically, it is "a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four." G. L. c. 63, § 38 (c). The property, payroll, and sales factors are in themselves fractions. Gillette Co. v. Commissioner of Revenue, supra. The numerator of the property factor "is the average value of the corporation's real and tangible personal property owned or rented and used in" Massachusetts. G. L. c. 63, § 38 (d). The denominator "is the average value of all the corporation's real and tangible personal property owned or rented and used during the taxable year." Id. The numerator of the payroll factor is the total amount of compensation paid by the corporation in Massachusetts. The denominator is the total amount of compensation paid "everywhere" during the tax year. Id. at § 38 (e). Similarly, the numerator of the sales factor "is the total sales of the corporation in this commonwealth during the taxable year," while the denominator "is the total sales of the corporation everywhere during the taxable year." Id. at § 38 (f).

The Department of Revenue (department) promulgated detailed regulations implementing the corporate excise tax and its apportionment formula in 1995, and amended them in 1999. 830 Code Mass. Regs. § 63.38.1 (1999). Although the board's decision references both the original and the amended regulations, the parties agree that the 1995 version of the regulations, and not the amended regulations, should apply to the present matter.⁸

On appeal, BPHA challenges the commissioner's computation of BPHA's sales and property factors under the statute and its implementing regulations, and seeks to reduce the amount of each factor thereby reducing the percentage of net income subject to the Massachusetts excise tax. BPHA also contends that the commissioner's interpretation and application of the apportionment formula violates the commerce clause of the United States Constitution. We address each of these arguments in turn.

2. Sales factor. In its sales factor claim, BPHA seeks to lower the amount of the numerator by reducing the total sales of the corporation deemed to be "in this commonwealth." Specifically, BPHA maintains that the board erred in: (1) including in the numerator of BPHA's sales factor the entirety of BPHA's gate receipts, licensing fees, and pro rata share of NESN partnership income.

General Laws c. 63, § 38 (f), provides that:

"Sales, other than sales of tangible personal property, are in this commonwealth if:

"1. the income-producing activity is performed in this commonwealth; or

"2. the income-producing activity is performed both in and outside this commonwealth and a greater proportion of this income-producing activity is performed in this commonwealth than in any other state, based on costs of performance."⁹

The department's regulations elaborate further the meaning and proper application of this statutory provision by first articulating a general rule that fleshes out § 38 (f) in several respects:

"1. General Rule. Gross receipts from sales, other than sales of tangible personal property, are attributed to Massachusetts if the income-producing activity that gave rise to the receipts was performed wholly within Massachusetts. If income-producing activity is performed both within and without Massachusetts and if the costs of performing the income-producing activity are greater in Massachusetts than in any other one state, gross receipts are attributed to Massachusetts,"

830 Code Mass. Regs. § 63.38.1(9)(d)(1); then defining "[i]ncome-producing [a]ctivity" as:

"[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, except insofar as required by 830 [Code Mass. Regs. §] 63.38.1(9)(d)3.c., (relating to the licensing or sale of intangibles), income producing activity includes only the activities of the taxpayer whose income is being apportioned,"

id. at § 63.38.1(9)(d)(2); and finally establishing specific rules for use in determining when gross receipts arising from different types of "income-producing activities" (occurring within and outside the Commonwealth) are properly apportioned to Massachusetts. Id. at § 63.38.1(9)(d)(3). Two of those specific rules are relevant here. The first relates to the "rendering of personal services" (such as the performance of athletic events), and the second relates to the "licensing or sale of intangible property" (such as broadcasting or trademark rights).

With respect to personal services, the regulations provide that:

"Where personal services relating to an item of gross receipts are rendered partly within and partly without Massachusetts, the gross receipts for the performance of such services shall be attributed to Massachusetts if, based upon costs of performance, a greater proportion of the services was...