Introduction and General Discussion of Law

Corporations classified as manufacturing corporations enjoy three specific tax benefits: (a) a property tax exemption under G.L. c. 59, § 5 cl. (16)(3); (b) a corporate excise investment tax credit under G.L. c. 63, § 31A (ITC); and (c) an exemption from sales and use tax for the sale of certain property used in research and development under G.L. c. 64H, § 6(r) and (s), and 830 CMR 64H.6.4. 830 CMR 58.2.1(4). Certain corporations that are engaged in manufacturing are eligible to use the special apportionment rules found at G.L. c. 63, § 38(l).

The Commissioner of Revenue is required to issue a list of all corporations that have been classified as manufacturing corporations in order to assist local boards of assessors in the assessment of property taxes. G.L. c. 58, § 2. The classification of manufacturing corporations by the Commissioner must be followed in the assessment of property taxes. G.L. c. 59, § 5, cl. 16(5). The criteria to be reviewed for determining whether a corporation is engaged in manufacturing are found in the corporate excise statute and in the manufacturing corporations regulation. G.L. c. 63, §§ 38C, 42B; 830 CMR 58.2.1.

Manufacturing corporation classification bridges two statutory taxation schemes, namely, local property taxation and the corporate excise. G.L. c. 58, c. 59, c. 63. Whether a manufacturing corporation enjoys particular tax treatment based on its manufacturing status depends on the underlying rules of each statutory scheme. This directive sets forth these rules, particularly with respect to partnerships, limited liability companies (LLCs), and corporations that have an ownership interest in such entities. For purposes of this Directive, the term "partnership" includes a limited liability partnership, G.L. c. 108A, § 6, and a limited partnership, G.L. c. 109, § 1.

Issue 1

Can an LLC that elects to be taxed as a corporation receive manufacturing corporation classification?

Directive 1

An LLC that is taxed as a corporation under G.L. c. 63 can receive manufacturing corporation classification if it otherwise meets the requirements at 830 CMR 58.2.1.

Directive 1 Discussion

An LLC is permitted under federal law to elect to be taxed as a corporation for corporate income tax purposes. See Treas. Reg. § 301.7701. For purposes of chapter 63 of the General Laws, these entities are likewise taxed as corporations. See G.L. c. 63, §§ 30.1 (definition of "domestic corporations") [1], 30.2 (definition of "foreign corporations"). [2] Cf. TIR 97-8. Entities that are taxed as corporations for purposes of chapter 63 of the General Laws are generally eligible to be considered for manufacturing corporation status under G.L. c. 63, §§ 38C, 42B. An LLC that elects to be taxed as a corporation is eligible to be considered for manufacturing corporation classification, provided that it otherwise meets the requirements found at 830 CMR 58.2.1.

Issue 2

Can a partnership, an LLC that is taxed as a partnership, or an LLC that elects to be disregarded as an entity separate from its owner for federal income tax purposes be a manufacturing corporation?

Directive 2

No partnership, LLC that is taxed as a partnership, or LLC that elects to be disregarded as an entity separate from its corporate owner is eligible to be treated as a manufacturing corporation. [3]

Directive 2 Discussion

One necessary element for manufacturing corporation classification is that the entity be subject to taxation under chapter 63 of the General Laws. G.L. c. 63, §§ 38C, 42B. Partnerships and LLCs that elect to be taxed as partnerships are taxed under chapter 62 of the General Laws, and not under chapter 63, and thus fail to meet this essential requirement. An LLC that elects to be disregarded as an entity separate from its owner is not a corporation for purposes of the corporate excise. G.L. c. 63, §§ 30.1, 30.2, 32, 39. Such an LLC thus also fails to meet an essential requirement for being a manufacturing corporation. G.L. c. 63, §§ 38C, 42B.

Issue 3

Do the manufacturing activities of a partnership, an LLC that is taxed as a partnership, or an LLC that elects to be disregarded as an entity separate from its owner pass through to the corporate partner or corporate member in determining whether the corporate partner or corporate member is a manufacturing corporation?

Directive 3

In determining whether a corporation is a manufacturing corporation under 830 CMR 58.2.1, the corporation may take into account its pro rata share, as that term is defined in 830 CMR 63.38.1(13)(f), of the manufacturing activities of a partnership in which it is a partner or an LLC taxed as a partnership of which it is a member. A corporate owner of a single member LLC that elects to be disregarded as an entity separate from its owner may take the manufacturing activities of the LLC into account in determining whether it is a manufacturing corporation.

Directive 3 Discussion

A corporation with an interest in either a partnership or an LLC that is taxed as a partnership is required to include its distributive share of the partnership or LLC income in calculating its corporate excise. 830 CMR 63.38.1(13). See G.L. c. 62, § 17. The attributes and activities of the partnership or LLC taxed as a partnership pass through to the corporate partner or member with respect to the partner's or member's distributive share of income in determining whether the corporation is eligible for the special apportionment rules for manufacturing corporations found at G.L. c. 63, § 38 (l). The manufacturing activities of the corporation may be considered in combination with the corporation's pro rata share of the manufacturing activities of the partnership or LLC taxed as a partnership in determining whether the corporation is engaged in manufacturing. The term "pro rata share" used in this context has the meaning as set forth in 830 CMR 63.38.1(13)(f). These combined manufacturing activities may be substantial enough to allow the corporate partner or member to be classified as a manufacturing corporation. See 830 CMR 58.2.1(6).

An LLC that elects to be disregarded from its corporate owner for federal purposes is not subject to the corporate excise. Cf. TIR 97-8. In such a case, the attributes and the activities of the LLC are the attributes and the activities of its corporate owner for purposes of determining whether this owner can be classified as a manufacturing corporation.

Issue 4

(a) Is a manufacturing corporation eligible for its pro rata share of the ITC for eligible property purchased by a partnership in which the corporation is a partner where the corporation obtains its manufacturing classification based at least in part on the manufacturing activities of that partnership?

(b) Is a manufacturing corporation eligible for its pro rata share of the ITC for eligible property purchased by an LLC in which the corporation is a member where the corporation obtains its manufacturing classification based at least in part on the manufacturing activities of that LLC?

(c) Is such a manufacturing corporation eligible for the sales and use tax exemption for the purchase of property to be used in research and development by a manufacturing corporation pursuant to G.L. c. 64H, § 6(r) and (s)?

(d) Is such a manufacturing corporation eligible for the local property tax exemption on machinery owned by the corporation?

Directive 4

(a) A manufacturing corporation that is so classified based on the manufacturing activities of a partnership in which the corporation is a partner is entitled to its pro rata share, as that term is defined in 830 CMR 63.38.1(13)(f), of the ITC for eligible property purchased by the partnership. The corporation must keep records showing in detail the partnership's property investments.

(b)(1) A manufacturing corporation that is so classified based on the manufacturing activities of an LLC taxed as a partnership in which it is a member is entitled to its pro rata share, as that term is defined in 830 CMR 63.38.1(13)(f), of the ITC for property purchased by the LLC. The corporation must keep records showing in detail the LLC's property investments.

(b)(2) A manufacturing corporation that is so classified based on the manufacturing activities of an LLC that is disregarded as an entity separate from its corporate member is entitled to the ITC for eligible property purchased by the disregarded LLC.

(c) A manufacturing corporation that is so classified based on the manufacturing activities of an LLC in which it is a member or a partnership in which it is a partner is entitled to the sales and use tax exemption for purchases of property to be used in research and development by a manufacturing corporation. See G.L. c. 64H, §§ 6(r), (s). However, this exemption extends only to sales of property used by the corporation, and not to sales of property used by the LLC or partnership.

(d) A manufacturing corporation that is so classified based on the manufacturing activities of an LLC in which it is a member or a partnership in which it is a partner is allowed the local property tax exemption on machinery that the corporation itself owns, but not on machinery owned by the LLC or partnership. See Directive 5.

Directive 4 Discussion

The general rules for using the ITC include provisions that the property be "acquired by purchase" within the meaning of I.R.C. § 179(d), and that the property be "used by the corporation in the commonwealth . . . . " G.L. c. 63, § 31A. Under the partnership provisions of G.L. c. 62, § 17 (which include LLCs that are taxed as partnerships), the "character of any item of income, loss, deduction or credit included in a partner's distributive share shall be determined as if such item were realized directly by the partner from the source from which [it was] realized by the partnership or incurred in the same manner as incurred by the partnership." G.L. c. 62, § 17, 17(c). In the limited context of income, loss, deduction, or credit, the character of that income, loss, deduction, or credit will include the use of property that created the item. Cf. G.L. c. 62, § 17(c). The corporate partner is therefore eligible to use the ITC for this machinery provided that all of the other requirements of G.L. c. 63, § 31A are met.

All actions of an LLC that is disregarded as an entity separate from its corporate member are treated as actions of the corporate member for corporate excise purposes. Cf. Treas. Reg. § 301.7701. A manufacturing corporation is allowed to take the ITC for all qualifying purchases made by it, without any statutory limitation regarding its various divisions. G.L. c. 63, § 31A(i). If all other elements of the statutory test at G.L. c. 63, § 31A are met, the "used by the corporation in the commonwealth" test is satisfied based on manufacturing activities of the disregarded LLC.

Sales of machinery or replacement parts thereof, and sales of materials, tools and fuels which are consumed and used directly and exclusively in research and development by a manufacturing corporation as defined in G.L. c. 63, §§ 38C, 42B are entitled to an exemption from sales tax. G.L. c. 64H, § 6(r), (s). Purchases of property used by a partnership or LLC are not used by a manufacturing corporation and are not eligible for this exemption. Id. Such purchases may, however, be eligible for an exemption under other provisions of G.L. c. 64H, §§ 6(r), (s).

Issue 5

(a) Is property owned by an LLC that is classified as a manufacturing corporation eligible for the local property tax exemption at G.L. c. 59, § 5, cl. (16)?

(b) Is property owned by an LLC or partnership entitled to the local property tax exemption for manufacturing corporations, at G.L. c. 59, § 5, cl. (16), in the case of an LLC that does not elect to be taxed as a corporation for corporate income tax purposes, or a partnership, either of which have a manufacturing corporation member or partner?

Directive 5

(a) Property owned by an LLC that is classified as a manufacturing corporation is eligible for the local property tax exemption for manufacturing corporations at G.L. c. 59, § 5, cl. (16).

(b) Property owned by an LLC that does not elect to be taxed as a corporation for corporate income tax purposes or a partnership, either of which have a manufacturing corporation member or partner, is not eligible for the local property tax exemption for manufacturing corporations at G.L. c. 59, § 5, cl. (16). A limited exemption exists for certain LLCs that are engaged in manufacturing under G.L. c. 59, § 5, cl. (16A).

Directive 5 Discussion

Unless otherwise exempted, all personal property is subject to local property taxation, and is "taxed to the owner in the town where it is situated on January first." G.L. c. 59, § 18, cl. first. Machinery owned by a classified manufacturing corporation, including an LLC that is classified as a manufacturing corporation, is exempt from local property taxation. Cf. G.L. c. 59, § 5, cl. 16(3). Machinery owned by a business corporation or other entity is generally subject to local property taxation. G.L. c. 59, § 18. See also G.L. c. 59, § 5, cl. 16(2).

A partnership is liable for local taxes on property it owns, even if one or more of its partners is a manufacturing corporation. Cf. G.L. c. 59, § 18, cl. sixth. The exemption from local property taxation that exists for a manufacturing corporation does not extend to property owned by a partnership in which the corporation is a partner. G.L. c. 59, § 5. See generally G.L. c. 59, §§ 2, 5, 18, cl. sixth. See also Nashoba Communications Limited Partnership v. Board of Assessors of Danvers, 429 Mass. 126, 128-129 (1999)(finding that the distinction between corporations and partnerships for local property tax assessment is valid, with different benefits running to each type of entity).

A limited property tax exemption for LLCs that are engaged in manufacturing exists that corresponds to the exemption for manufacturing corporations. G.L. c. 59, § 5, cl. (16A). This exemption applies to a domestic or foreign LLC that (a) is wholly owned by members which are corporations, (b) is engaged in manufacturing in the Commonwealth, and (c) was in existence and conducting business in the Commonwealth on or before January 15, 1996. Id. The city or town in question is required to accept this exemption. Id.

Apart from the above-referenced exemption, LLCs that do not elect to be taxed as corporations for corporate income tax purposes, including LLCs with manufacturing corporation members, are not eligible for the local property tax exemption conferred upon manufacturing corporations. The federal "check-the-box" rules that permit a single member LLC to be disregarded as an entity separate from its corporate owner have an impact in Massachusetts only with respect to the corporate excise. See TIR 97-8. See also Treas. Reg. § 301.7701-1 - § 301.7701-3. In all other respects, the LLC is a valid legal entity with its own identity, liabilities, and rights to own (and be taxed on) property. See generally G.L. c. 156C. If the LLC owns property subject to local property taxation, it, and not its parent, will be assessed the tax. See Nashoba Communications Limited Partnership v. Board of Assessors of Danvers, 429 Mass. 126 (1999)(finding that local property tax benefits granted to entities in corporate form extend only to corporations).

/s/Frederick A. Laskey
Frederick A. Laskey
Commissioner of Revenue

FAL:DMS:dt

March 31, 2000

DD 00-4



[1] "[A] limited liability company formed under chapter one hundred and fifty-six C which is not classified for the taxable year as a partnership for federal income tax purposes, shall also be considered to be a corporation that is a domestic corporation for purposes of this chapter." G.L. c. 63, § 30.1.

[2] "'Foreign Corporations' . . . provided, further, that said terms shall apply to a foreign limited liability company as defined in section two of chapter one hundred and fifty-six C, which is not classified for the taxable year as a partnership for federal income tax purposes." G.L. c. 63, § 30.2.

[3] But cf. Directive 5, below, which sets forth the limited statutory tax exemption for LLCs engaged in manufacturing.