SJC Broadens Definition Of Manufacturing | Decision has positive implications for startup companies
A decision handed down in July by the state Supreme Judicial Court increases the chances that companies doing R&D will qualify as manufacturers.
If a company makes a prototype of a product, but doesn’t actually make the product, is the company a manufacturer?
It may sound like an obscure question, but the answer makes a dollars-and-cents difference for companies that may not know whether they qualify for state sales and use tax exemptions.
Decision Rendered
A decision handed down in July by the Massachusetts Supreme Judicial Court increases the chances that companies doing R&D work will qualify as manufacturers and that’s an important distinction because manufacturers are exempt from some use taxes in Massachusetts.
Dennis Gorman, chairman of the business and corporate practice group at Fletcher Tilton & Whipple PC in Worcester, says the ruling in Onex Communications Corporation v. Commissioner of Revenue will be welcome news for the many Massachusetts companies that focus on the early stages of making high-tech concepts into useful products.
“Frankly, I think it sends a clear message to the Department of Revenue that they’re not going to be able to go in and just beat up on these emerging market companies,” Gorman said. “The SJC is recognizing the evolution of manufacturing in Massachusetts. Let’s face it, over time we’re not making barbwire, we’re not making horseshoes, we’re making stuff that’s far more technical.”
The particulars in the Onex case, according to the Department of Revenue, are this: In 2001, a Bedford company called Onex Communications purchased computer hardware and software, lab equipment and fixtures in the process of making a new computer chip. The company did not pay any use tax on the purchases, which the DOR said was incorrect after an audit. Onex appealed the DOR’s decision to the state Appellate Tax Board, which found that Onex was a manufacturer and therefore was entitled to the exemption. The DOR appealed the case, which finally landed before the state Supreme Court.
Gorman said the Supreme Court’s decision reflects the continuation of a trend toward liberalizing the definition of manufacturing. It’s a subject he knows something about since he worked for the DOR as a sales tax auditor early in his law career in the 1970s.
“In the old days, it was rare when auditors went into companies and didn’t come out with a boatload of money,” he said.
When the state first enacted a sales tax in 1966, Gorman said, the legal language was “sort of bare-bones.” Over time, court cases and legislative changes have expanded exemptions for manufacturers.
In response to the latest decision, the DOR now says the creation of a blueprint or a computer disk is manufacturing as long as it’s necessary for the ultimate production of a product for sale. But the department also says it will continue to take the question of whether companies can be legitimately called manufacturers on a case-by-case basis.
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