United States

Massachusetts: Taxpayer was Considered a Manufacturer Required to Use Single-Sales Factor Formula

Jan 23, 2017
From KPMG TaxWatch

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Recently, the Massachusetts Supreme Judicial Court, reviewing a decision of the Appellate Tax Board, held that a taxpayer was a manufacturer required to use single-sales factor apportionment. The taxpayer, a California-headquartered company, was engaged in the research, development, production, and sale of various drugs.  Although it had no office in Massachusetts, the taxpayer had several Massachusetts-based employees and owned various types of property in the Commonwealth for the tax years at issue. Under Massachusetts law, manufacturing corporations use a single-sales factor formula, while all other corporations use a three-factor formula. The taxpayer had filed original returns using both the three-factor formula and the single-sales factor formula, but later took the position that it was not a manufacturer and therefore should have used the three-factor formula for all the relevant tax years. After the Board ruled that the taxpayer had nexus with Massachusetts and was a manufacturer required to use single-sales factor apportionment for all open tax years, the taxpayer appealed.

The court first addressed whether the taxpayer was engaged in manufacturing when it produced biologically-derived pharmaceutical products. Under Massachusetts law, manufacturing generally involves a change of some substance, element, or material into something new or different. The taxpayer argued that its activities were akin to mining, an activity not considered manufacturing, because it harvested naturally reproducing cells. The court rejected this argument, observing that although the cells reproduced on their own, the taxpayer engaged in various processes that transformed the cells significantly. Having determined that the taxpayer was manufacturing, the court next addressed whether the taxpayer was “substantially” engaged in manufacturing so that it was required to use the single-sales factor apportionment formula. The applicable test looked at whether 25 percent or more the taxpayer’s gross receipts were derived from the sale of goods that it manufactured. The dispute centered on whether certain treasury function receipts should be included in the measure of gross receipts, which was not defined by statute. The taxpayer argued that the term should be broadly defined to encompass revenue from any source and that if the Legislature had intended to exclude treasury function receipts, it would have specifically done so, as it did in the statute addressing gross receipts included in the sales factor. The court, however, rejected the taxpayer’s position, observing that to include the treasury function receipts would have absurd consequences. When receipts related to the return of capital were excluded, more than 25 percent of the taxpayer’s receipts were derived from the sale of drugs it manufactured. As such, the court concluded that the taxpayer was substantially engaged in manufacturing and was required to use the manufacturing apportionment formula. Finally, the court rejected the taxpayer’s argument that requiring it to use the single-sales factor, but denying it the benefit of the Investment Tax Credit and the R&D credit, which are only available to taxpayers that engage in certain activities in the Commonwealth, was discriminatory. In the court’s view, there was no discrimination because single-sales factor apportionment applied to every manufacturing corporation, domestic or foreign, and the credits were available to any taxpayer engaged in qualifying activities in Massachusetts. Please contact George Burns at 617-988-6759 with questions on Genentech, Inc. v. Commissioner of Revenue.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.