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Massachusetts Supreme Judicial Court Says Tax Exemption Should Be Construed Broadly

In an interesting development in the ongoing debate surrounding intended tax benefits, the Massachusetts Supreme Judicial Court affirmed the Appellate Tax Board’s ruling that a taxpayer qualified for a use tax exemption and that the Commissioner was n

November 18, 2010

In an interesting development in the ongoing debate surrounding intended tax benefits, the Massachusetts Supreme Judicial Court affirmed the Appellate Tax Board’s ruling that a taxpayer qualified for a use tax exemption and that the Commissioner was not entitled to impose additional requirements on a taxpayer’s eligibility for the exemption. Onex Commc’ns. Corp.  v. Comm’r of Revenue, 457 Mass. 419, 425, 429–30 (2010). Onex involved a high technology start-up that developed cutting-edge circuits for use in the telecommunications industry. Onex bought computer software and hardware, laboratory equipment, and furniture and fixtures, and claimed a sales tax exemption on those purchases as a manufacturing corporation. After a lengthy audit, the Massachusetts Department of Revenue issued an assessment claiming that even though the purchases were used directly and exclusively in manufacturing, Onex did not qualify as a manufacturing corporation or as an R&D corporation. The Appellate Tax Board disagreed and held that Onex was engaged in manufacturing and, therefore, its purchases of personal property were exempt from use tax. The Appeals Court affirmed, and the Commissioner appealed to the Supreme Judicial Court.

Under Massachusetts law, taxpayers engaged in manufacturing may be exempt from use tax on purchases of materials, tools, fuel, machinery, and replacement parts that are used directly and exclusively in manufacturing. The crux of the Commissioner’s argument was that Onex was not a manufacturing company because it was not “engaged in manufacturing” when it purchased the property. The Commissioner argued that, in addition to the statutory requirements for qualifying as “engaged in manufacturing,” a company must also have produced at least one finished product, or the company’s inputs must have resulted in the fabrication of a finished product by some other entity. The Commissioner asserted that Onex failed the “finished product” test because, at the time of the audit, Onex had not yet produced a final version of its product.

The court began its analysis by stating that it has always construed “engaged in manufacturing” broadly, not narrowly. The court then flatly rejected the Commissioner’s proposed “finished product test,” noting that it had always relied on a traditional test for determining whether a company was engaged in manufacturing: whether the company was engaged in an “essential and integral” step in the manufacturing process.

The Onex decision is significant for two reasons. First, the Supreme Judicial Court broadly interpreted an intended tax benefit—the manufacturing sales and use tax exemption—thereby supplanting the old adage that exemptions are strictly and narrowly construed. Second, the court rejected the Department’s attempt to graft on additional requirements to a legislatively provided exemption.

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