Council In the News Index

SJC to hear tax break dispute (Boston Globe)
Manufacturing firms have benefited in past

By Casey Ross, Globe Staff  |  April 6, 2010

The state’s highest court tomorrow will take up a long-running tax dispute that could determine how Massachusetts taxes start-up companies trying to design and launch new products here.

The case involves tax breaks the state gives companies under an 80-year-old law meant to encourage manufacturers to expand in Massachusetts. Onex Communications Corp. of Bedford was formed in 1999 to make a super-chip used to transmit large amounts of data. For its first three years, Onex said it was developing the design specifications for that super-chip and claimed it was exempt from sales taxes on $2.7 million in equipment purchased during the period, citing the manufacturing tax break.

But the state Department of Revenue disagreed, asserting the company’s activities during those years primarily consisted of conceptual work that did not meet the definition of manufacturing under the law. The state, which initiated the case under former Republican Governor Jane Swift, says it is owed about $294,000 in unpaid taxes, penalties, and interest.

The Massachusetts tax department has lost its argument before a state board and an appeals court, but has appealed to the state Supreme Judicial Court.

The court’s decision could reach far beyond Onex’s individual tax bill; it could establish ground rules for the taxation of scores of early-stage companies, from medical device makers, to robotics firms, to defense contractors.

“Regardless of the outcome, this case raises extremely important questions about the competitiveness of our tax code and how it’s being interpreted,’’ said Christopher Anderson, president of the Massachusetts High Technology Council, which is among business organizations following the case.

The case hinges on how broadly the state defines manufacturing — whether that term should encompass only the physical process of churning out a product, or also the intellectual and design work that precedes a product’s arrival at the assembly line.

Onex argued the latter.

The firm said the materials it purchased between 1999 and 2001 were used to develop a detailed blueprint for the production of its chip — called the Omni — which was then fabricated at a foundry operated by IBM. That work, the firm argued, is an integral part of modern manufacturing.

“The truth is, manufacturing in Massachusetts is not the Dickensian view of a world of assembly lines,’’ said lawyer Richard Jones of the firm Sullivan & Worcester, which is representing Onex. “When you’re using that view, you’re simply using the wrong definition of manufacturing for what it means in Massachusetts.’’

The state’s Appellate Tax Board agreed, ruling in September 2007 that decades of case law took a broader view of manufacturing in the state. Onex’s “blueprint was not an abstract academic treatise or work of art,’’ the tax board ruled. “It was painstakingly developed because the architecture for the Omni chip was an essential first step to fabricating the end product.’’

The state appeals court upheld the board’s ruling last year.

But in appealing the decisions, Massachusetts revenue commissioner Navjeet Bal argued the tax board erred in its ruling. In court papers, she noted Onex did not produce any “finished products’’ until after 2001, making it ineligible for the tax exemption in that earlier period.

A lawyer for the state also argued in court papers that allowing Onex to claim the exemption would create significant confusion over what companies owe in taxes in the future.

“Taxpayers and the commissioner [of revenue] would be left guessing whether a sales or use tax exemption could spring to life based on future events that may not take place for years,’’ wrote Kenneth Salinger of the attorney general’s office, which is representing the revenue department.

Casey Ross can be reached at cross@globe.com.