A study just released by the University of Massachusetts Boston, has tracked the growth of the state’s film industry and found that the new manner of calculating taxable corporate income in Massachusetts was very likely to increase tax receipts materially from the film production industry. The film industry is using the data to argue against Governor Deval Patrick's proposal to cut tax credits.

According to the study, Massachusetts is among the fastest growing locations for film and television production in the United States, experiencing greater growth than some states with more generous tax credit programs.

“While the bulk of film and television production still takes place in Los Angeles and New York, other states are increasingly competing with these traditional centers through tax credit and other incentive programs,” the report’s authors state. “… Massachusetts had the fifth largest growth rate among the top 25 most active states in the country.”

As Massachusetts taxes non-residents on their income from any trade or business conducted within the state and it is clear that the residuals and profit‐shares arise out of the activities of the talent in the state, the study suggests that Massachusetts could impose its personal income tax on these earnings.

Three of the most successful and critically acclaimed films that have been made in Massachusetts have been based on books written by local authors (e.g. The Departed, Gone Baby Gone and Mystic River). The study infers that film tax credits can foster local talent with direct positive fiscal impacts via increased income tax collections from the sale of book rights, scripts and other intellectual property.

According to the study, Massachusetts is clarifying its taxation regulations, in that earnings generated from film production activities remain subject to Massachusetts taxation, regardless of when paid or how calculated. In a working draft of tax regulations issued on January 11, 2010, the Massachusetts Department of Revenue has taken the position (830 CMR 62B 2.3) that income earned by talent arising from film production activities in Massachusetts is subject to withholding taxes to the extent payable to out‐of-state individuals or their surrogates.

Massachusetts has also changed its corporate income tax laws to require companies to pay tax on income derived from activities in the state. From the beginning of 2009, affiliated companies were required to conduct a unitary business in Massachusetts to calculate their net income, and the apportionment factors used to allocate that income to Massachusetts is now on a combined, rather than separate company, basis.

The study concluded that "there was strong reason to believe that, in the case of the film production industry, the new manner of calculating corporate income taxes was very likely to increase MA tax receipts materially."

The Massachusetts film industry enjoys an annual tax credit subsidy of USD125m which started in 2006; Patrick's budget proposal is to cut this to USD50m by 2011. The study reported that "local production and post-production companies have experienced 'particularly dramatic growth' since 2006, and provide college graduates with new career paths."

Mary Fifield, spokesperson for the Massachusetts Production Coalition, told Metro West Daily News that until the 2006 state credit, Massachusetts was lucky to get USD6m of filmmakers' money. In 2009, Fifield said, the industry spent over USD400m in the state.

A comprehensive report in our Intelligence Report series examining tax-sheltering arrangements for investors, including Venture Capital, Forest Finance and Film Finance in a number of key jurisdictions, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report5.asp