November 30, 1990

Your client, ("the Partnership"), plans to form a domestic corporation (hereinafter referred to as "Newco") under G.L. c. 156B for the purpose of owning and operating a cogeneration plant. You ask whether the corporation's activities, which will consist entirely of generating electricity for sale to an out of state utility and steam for sale to a Massachusetts commercial user, will be considered manufacturing for purposes of determining Newco's status as a manufacturing corporation under G.L. c. 58, § 2, G.L. c. 63, § 38C, and 830 CMR 58.2.1. 1 Without reaching a specific conclusion with respect to Newco's status as a manufacturing corporation 2 , we rule that such activities are manufacturing within the meaning of G.L. c. 58, § 2, G.L. c. 63, § 38C, and 830 CMR 58.2.1.

Facts

The Partnership is a limited partnership formed under the laws of Delaware. The Partnership currently owns and operates a cogeneration plant. The plant burns coal to generate electricity and steam in a single production process. The Partnership sells the electricity to a [utility company] and the steam to a local commercial user.

The Partnership plans to form a new corporation, Newco, as a domestic business corporation under G.L. c. 156B. The Partnership will transfer the plant to Newco, which will continue to operate the plant and sell electricity and steam to the same purchasers as the Partnership now does. You ask whether burning coal to produce electricity and steam constitutes manufacturing for purposes of determining Newco's classification as a manufacturing corporation under G.L. c. 58, § 2, G.L. c. 63, § 38C, and 830 CMR 58.2.1.

Discussion

Classification of a corporation as a manufacturing corporation under G.L. c. 58, § 2 and G.L. c. 63, § 38C, confers upon the corporation certain tax advantages. These include 1) a local property tax exemption under G.L. c. 59, § 5(16)(3), 2) an investment tax credit under G.L. c. 63, § 31A, and 3) an exemption from sales and use tax for the purchase or use of certain research and development property under G.L. c. 64, §§ 6(r), 6(s). See 830 CMR 58.2.1(4). The operative definition of a manufacturing corporation applicable to domestic corporations is provided in G.L. c. 63, § 38C. Section 38C defines a manufacturing corporation as a "corporation organized under or subject to [C]hapter 156B [of the General Laws] which is engaged in manufacturing...." None of the statutory provisions governing manufacturing corporations provide a definition of manufacturing.

In the absence of a statutory definition, the Supreme Judicial Court (SJC) has defined manufacturing as "ordinarily and commonly denot[ing] the process of transforming raw or finished materials by hand or machinery, and through human skill and knowledge, into something possessing a new nature and name and adapted to a new use." See Commissioner of Corporations & Taxation v. Assessors of Boston, 321 Mass. 90, 94 (1947), quoted in, Westinghouse Broadcasting Co. v. Commissioner, 382 Mass. 354, 357 (1981); First Data Corp. v. State Tax Commission, 371 Mass. 444, 446 (1976).

The SJC has ruled that a hydroelectric plant that used a dam and water mills to produce electricity and steam was engaged in manufacturing within the meaning of G.L. c. 63, § 38C. Board of Assessors of Holyoke v. State Tax Commission, 355 Mass. 223, 226 (1969), citing Boston & Maine Railroad v. Billerica, 262 Mass. 439, 447-449 (1928). In Boston & Maine Railroad, which was decided before the manufacturing corporation provisions were enacted, the SJC treated the generation of electricity as manufacturing for local property tax purposes. The SJC decided that coal burning machinery used to generate electricity for use in the railroad's repair complex was used in manufacturing under a previous property tax statute that specifically imposed the local property tax on manufacturing equipment. See Boston & Maine Railroad, supra at 441 (construing G.L. c. 59, § 5, before the manufacturing corporation provisions were added by St. 1936, c. 362). In a more recent case decided under the current statutory scheme, but not involving a manufacturing corporation, the Court once again ruled that machinery used to generate electricity was used in manufacturing for local property tax purposes. See Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 565 (1956) (construing G.L. c. 59, § 5, before the section was reorganized by St. 1957, c. 541).

The decisions cited above make clear the SJC's view that the generation of electricity constitutes manufacturing for both local property tax and corporate excise purposes. Although the Boston & Maine Railroad case pre-dates the manufacturing corporation provisions, and the Boston Gas Co. decision does not involve a manufacturing corporation, the SJC views them as controlling in defining manufacturing activity for purposes of manufacturing corporation classification. See Board of Assessors of Holyoke, supra at 226. Therefore, the generation of electricity is manufacturing within the meaning of G.L. c. 63, § 38C. Furthermore, based on the Court's holding in Board of Assessors of Holyoke, supra, the generation of steam in conjunction with the manufacture of electricity is itself a manufacturing activity within the meaning of G.L. c. 63, § 38C.

Based on the foregoing, we rule that when Newco burns coal to generate steam and electricity in the same production process, it will be performing manufacturing activities for purposes of determining its classification as a manufacturing corporation under G.L. c. 58 § 2, G.L. c. 63, § 38C, and 830 CMR 58.2.1.

Conclusion

We make no determination as to whether Newco will qualify for classification as a manufacturing corporation under G.L. c. 58, § 2, G.L. c. 63, § 38C, and 830 CMR 58.2.1. We conclude, however, that Newco's activities, as you described them, will be considered manufacturing for purposes of determining Newco's classification as a manufacturing corporation.


Very truly yours,
/s/Nicholas L. Metaxas
for Stephen W. Kidder
Commissioner of Revenue
November 30, 1990
LR 90-5


Footnotes:

1 Manufacturing corporation status is available only to business corporations organized under or subject to G.L. c. 156B. See G.L. c. 63, § 38C. You state that Newco will be organized under G.L. c. 156B. You do not ask, and we do not rule on, whether a company that generates and sells electricity is properly treated as a business corporation under G.L. c. 156B or a utility corporation subject to G.L. c. 164.

2 Because of the fact intensive nature of determining a corporation's classification as a manufacturing corporation, the Department of Revenue does not issue Letter Ruling regarding a corporation's classification. See 830 CMR 62C.3.2(3)(f). Rather, a corporation that seeks classification as a manufacturing corporation must apply for that classification using the procedure set out in 830 CMR 58.2.1(7).