Massachusetts offers significant tax benefits to businesses engaged in qualified manufacturing activities in the state. These benefits include favorable corporate income tax apportionment, significant tax credits, sales tax exemptions, and local property tax exemptions.
Recent case law expanded the definition of manufacturing for state tax purposes to include remotely accessed software. Additionally, activities not typically associated with traditional manufacturing, including oversight activities such as creating drafts, planning, or managing third-party contractors, might qualify under the state’s definition of manufacturing.
Crowe observation
Typically, businesses seeking a manufacturing classification for property tax purposes are traditional producers of tangible personal property that have a significant presence within the state. However, state law developments over the past decade mean that more businesses might be eligible for manufacturing classification and, therefore, manufacturer tax benefits.
Definition of manufacturing
Manufacturing for Massachusetts tax purposes generally is defined as the process of substantially transforming raw or finished materials by hand or machinery, and through human knowledge, into a product possessing a new name, nature, and adopted to a new use. A business performing substantial manufacturing activities within the state could qualify for state manufacturing tax benefits if it meets any one of the following criteria:
- The business derives 25% of its receipts from products manufactured in Massachusetts.
- One-quarter of the business’s payroll is comprised of employees located in Massachusetts performing manufacturing activities. If so, the business must derive 15% of its receipts from products made in Massachusetts.
- Of the business’s Massachusetts property value, 25% is associated with tangible property used in the manufacturing process. If so, the business must derive 15% of its receipts from products made in Massachusetts.
- Of the business’s Massachusetts property value, 35% is associated with tangible property used in the manufacturing process.
In 2010, the Massachusetts Supreme Judicial Court determined in Onex Communications Corp. v. Commissioner of Revenue that a company is engaged in manufacturing if it performs activities that are essential and integral to the manufacturing process. Essential and integral activities are not limited to the actual manufacture and production of products. Massachusetts has interpreted this term to include creation of a blueprint as an essential and integral step in the manufacturing process, along with producing limited quantities of a finished product.
Crowe observation
Depending on a taxpayer’s particular facts and circumstances, under the court’s analysis, a business that contracts with a third-party producer could be classified as a manufacturer if it designs and creates a prototype that is an essential and integral step in the production of a product for ultimate sale, even if the company does not produce the finished product.
In 2011, the Massachusetts Department of Revenue issued Letter Ruling 11-8, extending the manufacturing classification to activities such as “product development, establishing testing protocols, overseeing the production of tooling and molds, and conducting quality assurance testing.”
In 2021, the Massachusetts Appellate Tax Board decision in Akamai Technologies, Inc. v. Commissioner of Revenue expanded the type of products that are considered tangible personal property for purposes of obtaining manufacturing classification status. In Akamai, a vendor that sold remotely accessed software that it developed sought to be classified as a manufacturer. Although manufacturing classification includes development and sale of standardized software, in this case the state argued that because the customer remotely accessed the software from the vendor’s servers rather than downloading or installing it, the vendor was not eligible to be classified as a manufacturing corporation.
The board agreed with the vendor that remotely accessed software developed by the vendor is tangible personal property and not a service for purposes of the manufacturing classification. Part of the rationale for the board’s conclusion was that remotely accessed software allowed customers to input their own information, manipulate the software, and run reports without interaction of the vendor.
Looking ahead
Massachusetts law continues to evolve in ways that could be favorable for many businesses that previously might have thought they were not eligible for the state’s manufacturing corporation status. Manufacturing corporations are eligible for significant state tax benefits and could be entitled to refunds for taxes paid in prior years. Companies doing business in Massachusetts should consult their tax adviser to review their in-state activities to consider whether they qualify for Massachusetts tax benefits under the state’s manufacturing definition.
