Looking into this situation further and reading the instructions for the Massachusetts income tax forms, the state does tax all interest income at the same rate regardless of the source of the interest. However, if the interest income is from a Massachusetts source, then you are allowed an exemption amount of $100 (or $200 for Married Filing Joint). This means that you would not pay tax on up to $100 of interest income when the interest came from a Massachusetts source.
The only way to indicate that the interest is coming from a Massachusetts source is to select the check box that says 'my state does not tax all of this interest'. This indicates that there is special handling of this income item on the state tax return.
When this was tested, everything seemed to be working properly and as expected.
@jmp51
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