On November 17, 2014, the Appellate Tax Board released its Findings of Fact and Report in Genentech v. Commissioner which held that a pharmaceutical company qualified as a “manufacturer” under Massachusetts law, and was required to apportion its corporate excise tax base using the single sales factor formula for manufacturing corporations, instead of the three factor formula.

Genentech produces medicines using genetically modified cells.  It argued that its activities were not manufacturing, analogizing them to a farmer harvesting crops, and thus, it claimed the right to apportion its tax base under the three factor formula.  On the contrary, the Commissioner argued that Genentech was a manufacturer and that its manufacturing activities were “substantial” and therefore, it was required under the statute to use the single sales factor.  The ATB agreed with the Department and affirmed Department of Revenue assessments totaling over $3 million for the 1998-2004 tax years.

Genentech also argued that (1) its activities in Massachusetts were protected by P.L. 86-272; and (2) that the rules for computing the Massachusetts investment tax credit and Massachusetts research and development credit were unconstitutional under the commerce clause because the rules favor in-state taxpayers over out-of-state taxpayers by allowing a credit only for investments and research in Massachusetts.  The ATB upheld the constitutionality of the credits on the basis that the differential treatment is imposed on the taxpayer, not on goods or services crossing state lines.  For more on this issue, see our prior alert on Random House v. Commissioner, ATB Docket No. C303502 (Mass App. Tx. Bd. 2012).

We will be providing more analysis on the implications of this decision in blog posts next week.  A copy of the Genentech decision can be found here: Genentech v. Commissioner.