This post is part of a series of posts discussing key issues in the Appellate Tax Board’s recent decision in Genentech, Inc. v. Commissioner.  We previously reported on this decision in our prior post.

In Genentech, Inc. v. Commissioner, the Appellate Tax Board held that the Massachusetts activities of a biotechnology company were not protected by P.L. 86-272.

Headquartered in California, Genentech is a biotechnology company that develops and sells therapeutic drugs.  Genentech argued that its activities in Massachusetts were protected by P.L. 86-272.

Genentech had several activities within Massachusetts during the years at issue:

  1. it shipped large quantities of drugs to a third-party manufacturer in Massachusetts, which encapsulated the drugs and sent them back to the taxpayer ready for commercial sale;
  2. it sent drugs to third-party clinical researchers in Massachusetts, which ran clinical trials on the taxpayer’s behalf;
  3. it owned a small amount of machinery and equipment;
  4. it employed salespeople to meet with physicians and other health care providers to promote the use of Genentech drugs (known in the industry as “detailing”);
  5. it employed “medical science liaisons” (“MSLs”) to provide in-depth scientific knowledge not possessed by its salespeople; and
  6. it employed a salesperson in its “managed care division” to provide insurance companies with information on Genentech’s drugs, with the hope that these insurance companies would provide coverage for Genentech’s products.

In addition to the machinery and equipment that it owned in Massachusetts, Genentech also retained title to the drugs that were used by the third-parties in the manufacturing and clinical research activities conducted in Massachusetts.  The ATB determined that this ownership of property in Massachusetts was by itself sufficient to take Genentech outside the protection of P.L. 86-272.  (For the one year at issue in which Genentech did not hold title to drugs within the Commonwealth, the ATB found that Genentech was, nonetheless outside the protection of P.L. 86-272 because of its ownership in medical/testing equipment located in Massachusetts.  The ATB reached this conclusion because the medical/testing equipment was not used directly in sales solicitation.)

The Board also provided some guidance on how it viewed Genentech’s other contacts with the Commonwealth.  With respect to the clinical trials, the Board did not attribute the activities of the third-party clinical researchers to Genentech—it focused only on Genentech’s ownership of the drugs used by the researchers.  Further, the Board did not view Genentech’s detailing activities as going beyond the protections of P.L. 86-272.   On the other hand, the Board specifically declined to express a view on whether the Massachusetts activities of the MSLs or the employee in the “managed care division” were protected by P.L. 86-272.

Although the decision leaves two of the most difficult issues to be addressed in the future, the decision suggests that a company can engage in detailing and clinical trials in Massachusetts without losing P.L. 86-272 protection, as long as these activities can be structured in a way that does not involve the company holding title to inventory or other property in the Commonwealth.