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Massachusetts: Loan originator may only deduct employee expenses

In Morello v. Commissioner, No. C314603 (Sept. 8, 2014), the Massachusetts Appellate Tax Board (MATB) determined that the Commissioner of Revenue (Commissioner) had correctly concluded that an individual working as a loan originator was not an independent contractor and did not qualify as an outside salesperson. Therefore, she could not deduct business expenses or unreimbursed employee-business expenses (from her state income tax return).


Wendy J. Morello (Ms. Morello) worked as a loan originator for Heritage Mortgage Company, Inc. (Heritage). When she filed her Massachusetts income tax returns, she deducted certain expenses on Schedule Y as unreimbursed business expenses. The expenses deducted consisted of:

  • Mileage, for commuting between her home and Heritage’s office and travel between Heritage’s office and business appointments;
  • Meal and entertainment expenses;
  • Client gifts;
  • Dry cleaning and cell phone bills; and
  • Marketing and bank fees.

The Commissioner disallowed these deductions and assessed Ms. Morello $2,902.43 in tax and accrued interest for 2005, 2006, and 2007. Ms. Morello appealed such determination to the MATB.

The issue raised to the MATB is whether Ms. Morello worked as an independent contractor for Heritage, allowing her to deduct ordinary and necessary business expenses. If Ms. Morello was not an independent contractor and worked as an employee of Heritage, then the MATB had to determine whether she qualified as an “outside salesperson” for Massachusetts tax purposes, entitling her to deduct unreimbursed employee business expenses associated with her employment at Heritage.

The MATB findings and opinion

In evaluating whether Ms. Morello worked as an employee of Heritage or as an independent contractor, the MATB found that Ms. Morello was not an independent contractor and was instead an employee of Heritage. In reaching this conclusion, the MATB relied on the following facts:

  • Ms. Morello’s state tax returns were consistent with being an employee. All income from Heritage was reported on Form W-2, she reported expenses on Schedule Y (the Massachusetts form for employee business expense deductions), not on Schedule C (as profit or loss from a business), and Heritage withheld taxes from her wages.
  • Heritage provided training, sponsorship (including a bond for liability), and the use of office equipment, such as a computer and fax machine, to Ms. Morello.
  • Heritage described Ms. Morello as an employee who worked full-time and was entitled to, but waived her right to, receive medical benefits.
  • Ms. Morello sought to establish her own “book of business” consisting of realtors and attorneys who would refer business to her, but failed to establish that she engaged in these activities on a sufficiently regular, consistent, and continuous basis as required to meet the standard of a trade or business. Ms. Morello claimed no income from building a personal book of business referrals.
  • Ms. Morello’s travel logs and other records displayed many internal inconsistencies and the Commissioner was often unable to determine whether meetings had a specific business purpose.
  • The MATB was unpersuaded by Ms. Morello’s statement that, while she was a licensed loan officer required to be sponsored by a company, she was free to disassociate herself from her sponsor and choose another sponsor at any time.

Having determined that Ms. Morello was an employee of Heritage, the MATB considered whether she qualified as an “outside salesperson” enabling her to deduct unreimbursed employee-business expenses. An analysis conducted by the Commissioner of Ms. Morello’s travel logs revealed that she spent only about 13 to 15 percent of her time working on outside sales activities for Heritage, which included client meetings and real estate closings. The MATB determined that the amount of time she spent visiting realtors and attorneys to build her own personal book of business, which activities were not at the request of Heritage, did not qualify as outside sales activities. The MATB determined that the amount of time Ms. Morello spent on qualifying outside sales activities was insufficient for her to be treated as an outside salesperson who regularly “solicited business for the employer away from the employer’s place of business.” Thus, deductions of unreimbursed employee expenses were denied by the MATB.

Lastly, the MATB determined that as an employee of Heritage, Ms. Morello was only able to deduct transportation expenses between her regular place of employment, Heritage, and her outside meetings specifically related to the performance of her job with Heritage.


There is often a fine line between being an independent contractor or employee. Therefore, if you intend to qualify as an independent contractor, it is important that any company you are working for treats you as an independent contractor. For example, in this case, it was very detrimental to Ms. Morello’s argument that she received a Form W-2 and was offered medical benefits, which are consistent with status as an employee of the company, not as an independent contractor.

Furthermore, the Morello case demonstrates the importance of being able to properly substantiate any business expenses. A reading of this case indicates that even if the MATB had determined that Ms. Morello was an independent contractor, it is likely that many of her claimed business expenses would have been denied for lack of proper substantiation.

Ohio: Air transportation operator is not a public utility and not entitled to exemption from sales tax

The Ohio Board of Tax Appeals (Board) recently determined in Epic Aviation, LLC v. Testa (Case No. 2012-1557) that an air transportation operator’s purchases of fuel were not exempt from Ohio sales tax because such company was not using or consuming the fuel “directly in the rendition of a public utility service.”

Epic Aviation, LLC (EPIC), an aviation fuel supplier, appealed a denial by the Ohio Tax Commissioner (Commissioner) on its claim for refund of sales tax paid by its customer, AirNet Systems, Inc. (AirNet). Epic based its application for refund on the exemption provided in Ohio Revised Code Section 5739.02(B)(42)(a) for purchases for use “in the rendition of a public utility service.” AirNet provides cargo air transportation services, specializing in the transport of checks for transfer among financial institutions, radio pharmaceuticals, and sensitive government documents.

The Board analyzed whether AirNet qualifies as a “public utility” under Ohio Revised Code Section 5739.01(P). The Board noted that this statute specifically provides that a "'public utility' includes a citizen of the United States holding, and required to hold, a certificate of public convenience and necessity…” While the Board agreed with AirNet that such certificate is not required in order to be a “public utility,” an Ohio Supreme Court case (Castle Aviation, Inc. v. Wilkins, 109 Ohio St.3d 290 (2006)) analyzing a similar situation required that an entity claiming public utility status show that it is subject to “special regulation and control by a government regulatory agency.”

The Board determined that AirNet was not subject to the degree of “special regulation and control” that Castle Aviation required in order for a company to qualify as a “public utility” under these statutes. In arriving at this determination, the Board explained that AirNet did not hold a certificate of public convenience and necessity and had chosen not to be subject to certain more rigorous FAA safety standards.

The Board did not find persuasive AirNet’s arguments that the nature of its operations distinguish it from Castle Aviation and that “[t]he increased regulation and control arising from the events of September 11, 2001 makes a significant difference in this case compared to the regulatory environment pre-2001 that was relevant to the Castle Aviation case.” The Board explained that the regulations to which AirNet is subject relates to the services it voluntarily provides its customers and that AirNet has undertaken these obligations through contracts with its customers. The Board determined that there is insufficient evidence that AirNet is subject to government regulation that controls its relations between it and the public as its customers.

Consequently, the Board determined that AirNet is not a “public utility” under Ohio Revised Code Section 5739.01(P) and that the application for a refund of sales tax under Ohio Revised Code Section 5739.02(B)(42)(a) (providing for an exemption from sales taxes for purchases used “in the rendition of a public utility services”) was properly denied by the Commissioner.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.