On October 23, 2020, the Massachusetts Appellate Tax Board ruled that capital gain from a Florida S corporation’s sale of a subsidiary Massachusetts LLC was subject to Massachusetts corporate excise tax and nonresident composite tax. The taxpayer contended that the U.S. Constitution’s Due Process and Commerce Clauses forbade Massachusetts from taxing the income because the LLC’s sale did not involve a minimum connection to Massachusetts or availment of the protections and benefits of Massachusetts law. The S corporation did not have any activities in Massachusetts, and none of its shareholders were Massachusetts residents. However, the Board concluded that the increase in value of the subsidiary was “inextricably connected to and in large measure derived from property and business activities in Massachusetts.” The activities that derived the gain included improved management and staffing of a call center business and expansion of product offerings. The Board ruled that these business activities “necessarily involved availment of the protection, opportunities and benefits given by Massachusetts” and these facets “supplied the requisite connection between Massachusetts and business activities that resulted in the” capital gain.

VAS Holdings & Investments LLC v. Commissioner of Revenue, Dkt. Nos. C332269, C332270 (Mass. App. Tax Bd. Oct. 23, 2020).