COMMISSIONER OF REVENUE.
Heard: October 7, 2016.
Corporate excise, Manufacturing corporation. Constitutional
Law, Taxation, Commerce clause, Interstate commerce.
from a decision of the Appellate Tax Board. The Supreme
Judicial Court on its own initiative transferred the case
from the Appeals Court.
Catherine A. Battin, of Illinois (Richard C. Call also
present) for the taxpayer.
M. Goldberg (Jamie E. Szal also present) for Commissioner of
Present: Gants, C.J., Botsford, Lenk, Hines, Gaziano, Lowy,
& Budd, JJ.
the Massachusetts corporate excise tax statute, G. L. c. 63,
corporations that generate business income in Massachusetts
and other States pay taxes on that income according to a
statutory formula that seeks to apportion and tax the
corporation's income generated in the Commonwealth.
Beginning in 1996, for a "manufacturing corporation,
" the apportionment formula has been based solely on the
corporation's sales, see G. L. c. 63, § 38 (1),
inserted by St. 1995, c. 280, § 2. The taxpayer
Genentech, Inc., is a Delaware corporation with a principal
place of business in California and earns business income in
the Commonwealth as well as other States. In this appeal from
a decision of the Appellate Tax Board (board), Genentech
challenges the board's determination that it qualified as
a manufacturing corporation for the tax years 1998 through
2004 (tax years at issue); it also challenges the board's
rejection of its claim that application of § 38 (1)
's single-factor apportionment formula based on sales to
the company violated the commerce clause of the United States
Constitution. We affirm the decision of the board.
summarize the findings of fact made by the board. See G. L.
c. 58A, § 13 ("The decision of the board shall be
final as to findings of fact"). Genentech is a
biotechnology company that develops drugs derived from
proteins produced by living cells. Through a four-step
process, Genentech employees modify the genetic codes of
living cells to produce "proteins of interest" with
desired pharmacologic effects. First, Genentech
scientists and other employees alter the deoxyribonucleic
acid (DNA) of the selected cells to instruct them to produce
a specific "protein of interest." Second, employees
facilitate the production of the protein of interest by
placing the genetically altered cells in successively larger
tanks to enable growth and feeding them glucose and other
nutrients while closely monitoring their environment. Third,
the protein of interest is purified by separating it from the
mix of cells and other material present through
ultrafiltration and chromatography; Genentech must extract
the protein from some cells by "disrupting" or
breaking down the cell walls containing them. Finally,
following the purification process, Genentech employees
formulate the resulting bulk drug into its final dosage form,
and package it for sale to distributors or directly to
physicians, hospitals, and pharmacies around the world.
financial side of Genentech's operations, the company
invests excess cash in short-term securities -- money market
funds, commercial paper, and treasury bonds. From two to
seven employees working in Genentech's treasury
department conduct a daily assessment of Genentech's cash
needs and then liquidate short-term investments to free up
cash or invest excess cash in short-term securities, as
necessary. Money market funds are pooled investment vehicles
that aim to maintain a consistent net asset value of one
dollar per share. Consequently, investors generally expect to
be able to redeem their shares for the amount originally
invested, while also earning interest or dividends through
the term that they hold shares in the money market fund.
During the tax years at issue, the money market funds held in
Genentech's accounts maintained a one dollar net asset
value, thus allowing Genentech to redeem them for the
receipts pertaining to the transactions involving the
short-term assets held in a number of Genentech's
separate accounts in Mellon Bank established there were no
capital gains or losses generated during the tax years at
issue;Genentech thus was able to either
redeem the securities in every instance for the same amount
as it paid for them, or hold the securities to maturity.
Genentech did not include the proceeds it received from the
redemption of its short-term securities in the statement of
its revenue for purposes of the company's financial
statements, in the computation of gross receipts reported on
its Federal corporate income tax return that was used to
determine its taxable income, or in the total of its receipts
used to compute sales factor apportionment in filling out the
company's California excise tax returns.
tax years 1998 through 2003, Genentech filed its
Massachusetts corporate excise returns using the three-factor
apportionment formula based on property, payroll, and sales
that applies to most general business corporations. See G. L.
c. 63, § 38 (c.) . For the 2004 tax year, Genentech
originally filed its Massachusetts corporate excise tax
return using the single-factor apportionment formula
applicable to manufacturing corporations, but later filed an
application for abatement, claiming that it was not
substantially engaged in manufacturing and thus should have
been entitled to apportion its income on the standard
commissioner of revenue (commissioner) issued four notices of
assessment to Genentech, taking the position that Genentech
was engaged in substantial manufacturing activity for all the
tax years at issue and thus required to use the single-factor
apportionment formula in § 38 (1.) . Genentech filed
several applications for abatement, all of which the
commissioner denied. Genentech timely filed petitions under
formal procedure with the board for each denial. The board
ruled that Genentech was engaged in manufacturing for
purposes of § 38 (1.), that its manufacturing activities
were "substantial , " as required by § 38
(1), and that application of the single-factor apportionment
formula to the company did not violate the commerce clause.
Genentech filed a timely appeal, and we transferred the case
from the Appeals Court to this court on our own motion.
decision by the board will not be modified or reversed if the
decision 'is based on both substantial evidence and a
correct application of the law.'" Capital One
Bank v. Commissioner of Revenue, 453
Mass. 1, 8, cert, denied, 557 U.S. 919 (2009), quoting
Boston Professional Hockey Ass'n v.
Commissioner of Revenue, 443 Mass. 276, 285 (2005).
"Because the board is authorized to interpret and
administer the tax statutes, its decisions are entitled to
deference. . . . Ultimately, however, the interpretation of a
statute is a matter for the courts" (citation omitted).
Onex Communications Corp. v.
Commissioner of Revenue, 457 Mass. 419, 424 (2010).
the tax years at issue, a "manufacturing
corporation" was defined in § 38 (1.) (1) in
relevant part as follows:
"In order to be engaged in manufacturing, the
corporation must be engaged, 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
court has considered whether particular activities conducted
by a corporation qualify as "manufacturing" in a
number of different factual contexts. We start with the
premise that a critical component of manufacturing is
"the implication of change wrought through the
application of forces directed by the human mind, which
results in the transformation of some preexisting substance
or element into something different, with a new name, nature
or use." Boston & Me. R.R. v.
Billerica, 262 Mass. 439, 444-445 (1928). See
William F. Sullivan & Co. v.
Commissioner of Revenue, 413 Mass. 576, 579 (1992)
("our decisions have embraced the basic concept of
manufacturing articulated in Boston & Me. R.R
[supra]"); The Charles River Breeding
Labs., Inc. v. State Tax Comm'n,
374 Mass. 333, 335 (1978) ("Manufacturing normally
involves a change of some substance, element, or material
into something new or different").
cases where this court has determined that a company's
activities did not qualify as manufacturing, we have noted
the absence of new products "of substantially different
character" (citation omitted). Tilcon-Warren
Quarries, Inc. v.Commissioner of
Revenue, 392 Mass. 670, 673 (1984). In that case, for
example, we concluded that extracting rocks from the ground
and crushing them into smaller, commercially usable sizes did
not involve a change in the material's character
necessary to qualify as manufacturing. See Id. at
672-673. Similarly, the breeding and raising of partially
uncontaminated laboratory animals was determined not to be
manufacturing because "[m]anufacturing normally involves
a change of some substance, element, or material into
something new or different [and] [n]o matter how intricately