April 24, 2009
You have requested a ruling on behalf of ****************************** (hereinafter, "the Company"), a Massachusetts corporation classified as a domestic manufacturing corporation within the meaning of G.L. c. 63, § 38C. In particular, you inquire as to whether the Company may continue to qualify as a manufacturing corporation for taxable years beginning on or after January 1, 2009 based upon the exclusion of its research and development activities from the tangible property fraction utilized to determine substantial manufacturing under the Department's Manufacturing Corporations Regulation, 830 CMR 58.2.1. Your question arises as a result of recent Massachusetts legislation, chapter 173 of the Acts of 2008 (the "Act"), which enacted "check-the-box" conformity rules in Massachusetts. Pursuant to that legislation, a subsidiary entity owned by the Company and an affiliate, which was formerly treated as a pass-through entity for purposes of Massachusetts tax law and which possessed manufacturing attributes that "flowed up" to the Company, is now to be treated as a separate corporation.
The following is a statement of facts you have provided and upon which this letter ruling is premised. The Company has approximately 10,000 employees worldwide engaged in developing manufacturing and selling biotechnology products. The Company's products address rare disorders, renal diseases, orthopedics, organ transplant, diagnostic and predictive testing and cancer. Its operations are conducted in manufacturing, warehousing, development/clinical plant, clinical laboratories and research and office facilities locating in the United States, Canada, Europe, Latin America, Asia and Australia. The Company leases all of its United States facilities except for certain properties located in ******************************************** Massachusetts; *************** New Jersey; and ******* New Mexico. The Company's principal manufacturing facilities are used for the large-scale production of therapeutic proteins and enzymes, renal products, immunosuppressive agents and biomaterials.
************************************************************** ("Subsidiary") is a Massachusetts limited partnership that has "checked the box" to be treated as a corporation for federal tax purposes pursuant to U.S. Treas. Reg. § 301.7701-3(c). The Company holds a 99% limited partnership interest in Subsidiary. The remaining 1% general partnership interest is held by *************************************************, which is, in turn, wholly-owned by the Company.
The Company and Subsidiary conduct manufacturing activities within Massachusetts at several locations where the Company manufactures biotherapeutics, biomaterial-based products, therapeutics and biosurgery products. At one facility the Company owns all of the manufacturing equipment and machinery and leases it to Subsidiary which pays rent to the Company for the use thereof. Subsidiary sells nearly all of the products it manufactures to the Company, which then sells them directly or via distributors to patients, medical facilities and medical practitioners. Subsidiary has approximately 800 employees in Massachusetts engaged in manufacturing activities.
Prior to the application of the Act, for taxable years beginning prior to January 1, 2009, the manufacturing activities of Subsidiary "flowed up" to the Company for purposes of the determination as to manufacturing classification. For such tax years, the tangible property owned by the Company and leased to Subsidiary was included in the Company's tangible property apportionment fraction for purposes of determining whether the Company qualified as a manufacturing corporation. Based on such inclusion, the Company sought and was granted manufacturing classification because its tangible property factor exceeded 35%. See 830 CMR 58.2.1(6)(d). However, pursuant to the provisions of the Act, Subsidiary is treated as a separate corporation for Massachusetts tax purposes for tax years beginning on or after January 1, 2009. Once this new treatment is accounted for, the Company's tangible property factor for its 2009 tax year falls below the 35% threshold. 
For its tax year beginning on or after January 1, 2009, the Company's tangible property fraction for purposes of determining the substantiality of manufacturing activities under 830 CMR 58.2.1(6)(d) would exceed the 35% threshold if the property that the Company uses in research and development is excluded from both the numerator and denominator of this fraction. This calculation would include in the denominator, but not the numerator, the property that the Company leases to the Subsidiary for use in manufacturing.
II. RULING REQUESTED
The Company will continue to qualify for manufacturing corporation classification notwithstanding enactment of the check-the-box conformity provision based upon its substantial manufacturing activities.
The Company may continue to maintain its manufacturing classification, for its tax year beginning on or after January 1, 2009 notwithstanding the fact that application of the Act's check the box conformity provisions will result in its tangible property fraction falling below the required 35% threshold. This ruling is based on the application of the Commissioner's discretionary authority under the Manufacturing Corporation Regulation and the Act itself as further explained herein. For immediately subsequent tax years, the Commissioner will similarly apply this discretionary authority to allow the Company to remain classified as a manufacturing corporation if it remains in substantial compliance with this ruling, as also further explained herein.
A. Manufacturing Classification
Massachusetts law provides distinct tax treatment of a corporation that is engaged in substantial manufacturing activities. A corporation may apply for and be classified as a manufacturing corporation for any year in which it is in existence and engaged in manufacturing in Massachusetts as of January 1. See 830 CMR 58.2.1(7). Such manufacturing corporations are entitled to a local property tax exemption under G.L. c. 59, § 5(16)(3). Pursuant to 830 CMR 58.2.1(5)(a) "[a] corporation that does not apply for manufacturing corporation classification but that is engaged in manufacturing as defined in 830 CMR 58.2.1(6), may be treated as having manufacturing corporation 'status.'" However, corporations with mere manufacturing corporation status are not entitled to the property tax exemption.
A corporation that has manufacturing corporation status is also entitled to an investment tax credit under G.L. c. 63, § 31A, and an exemption from sales and use tax for certain property used in research and development under G.L. c. 64H, § 6(r) and (s). A corporation engaged in manufacturing activity that has income from business activity which is taxable both in Massachusetts and in another state may also be subject to the single-sales-factor income apportionment rules as provided by G.L. c. 63, § 38(l).
In order to be subject to single sales factor apportionment treatment under § 38(l), a corporation must be "engaged in manufacturing ... in substantial part, in transforming raw or finished physical materials by hand or machinery, and through human skill and knowledge, into a new product possessing a new name, nature and adapted to a new use." G.L. c. 63, § 38(l)(1). The portion of the Department's apportionment regulation dealing with "Section 38 Manufacturers" defines "substantial manufacturing" and details the criteria utilized to determine which entities are manufacturing corporations for purposes of single sales factor apportionment. See 830 CMR 63.38.1(10).
In general, a corporation shall be treated as a manufacturer for Massachusetts tax purposes if the corporation is engaged in manufacturing and the manufacturing activities of the corporation are substantial. 830 CMR 58.2.1(6)(a). The substantial manufacturing tests in 830 CMR 58.2.1(6)(d) set out minimum percentages of a taxpayer's gross receipts, tangible property and payroll that are to be derived from manufacturing activities in order to qualify for manufacturing corporation status. When determining whether a corporation qualifies as a manufacturer, activities of a partnership owned by the corporation are attributed to the corporate partner on a pro rata basis.
The Manufacturing Corporations Regulation also provides that in some cases a corporation may be treated as a manufacturing corporation even where it fails to meet any of the four percentage tests. See 830 CMR 58.2.1(6)(d) In particular, the Regulation provides that "a corporation which fails to qualify under any of the four substantiality tests because of the volume of its research and development activity may be treated as a manufacturing corporation if, in the discretion of the Commissioner, the corporation's manufacturing activity is otherwise substantial." Id.
B. Effect of Check-the-Box Conformity on the Company's Pre-existing Manufacturing Classification
Prior to the effective date of the Act, the Company was classified as a manufacturing corporation because it met the tangible property fraction in part based upon the attributes of Subsidiary (and in particular Subsidiary's use of property leased to it by the Company), which flowed up to the Company. However, pursuant to the Act, Subsidiary is no longer treated as a disregarded entity and, therefore, its attributes no longer flow up to the Company. Consequently, the Company's manufacturing classification would terminate by reason of the Act absent a determination by the Commissioner that this classification remains in effect.
As noted above, the Commissioner has discretionary authority to classify a corporation as a manufacturing corporation when it does not meet any of the four percentage tests set forth in 830 CMR 58.2.1(6)(d) if the corporation fails to qualify because of the volume of its research and development activity. Further, the Commissioner has broad authority pursuant to section 96 of the Act, to create transitional rules with respect to the Act. 
The Company may continue to maintain its manufacturing classification for its tax year beginning on or January 1, 2009 notwithstanding the fact that application of the Act's check the box conformity provisions will result in its tangible property fraction falling below the required 35% threshold. Because the Company has previously been classified as a manufacturing corporation, would only fail to continue to be classified as a manufacturing corporation because of the provisions of the Act, and would qualify under the tangible property fraction for its 2009 tax year if its research and development activity were not included in the computation, the Commissioner will exercise her discretionary authority under the Manufacturing Corporation Regulation to allow the Company to retain its classification for the 2009 tax year. See 830 CMR 58.2.1(6)(d). The use of this discretionary authority in this case is further supported by the fact that the Commissioner also has discretion to create transitional rules with respect to the implementation of the check the box law. See § 96 of the Act.
In immediately subsequent tax years, the Commissioner will similarly apply her discretion to allow the Company to remain classified as a manufacturing corporation if it remains in substantial compliance with the manufacturing corporation requirements. In exercising this discretion, the Commissioner will, for a three year period, consider the impact that exclusion of research and development activity has upon the Company's tangible property factor as well as the Act's grant of authority to determine reasonable transition rules for entities whose tax classification is altered by the provisions thereof.
Very truly yours,
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
Information submitted by the Company reflects a tangible property factor of 26.9%.
We note that under the Commissioner's proposed regulation on combined reporting, Proposed 830 CMR 63.32B.2(7)(g), the Company and Subsidiary would be jointly evaluated for purposes of determining whether each is required to apply the single sales factor apportionment rules and also with respect to the possible sharing of an investment tax credit. Assuming that these proposed provisions become final, those rules will have legal force independent of this letter ruling.