830 CMR, § 58.2.1
Application, Massachusetts Form 355Q.
Board of assessors, board or officer assessing local property taxes.
Commissioner, the Commissioner of Revenue of the Commonwealth of Massachusetts or the Commissioner's designee duly authorized to act on the Commissioner's behalf.
Corporate headquarters, a facility where corporate staff are physically employed and where a significant portion of the corporation's financial, personnel, legal, or planning activities are handled on a regional or national basis.
Corporation, a corporation organized under or subject to M.G.L. c. 156B that is taxable under M.G.L. c. 63, or a corporation, association, or organization established under laws other than those of Massachusetts that is taxable under M.G.L. c. 63.
Corporations list or lists, for purposes of 830 CMR 58.2.1, the list or lists, including any supplements, forwarded by the Commissioner to the local boards of assessors, of all corporations known to him to be subject to taxation under M.G.L. chs. 59, 60A and 63 on January first of the current year. The list or lists will indicate those corporations which have been classified as manufacturing corporations.
Investment tax credit, the credit against corporate excise authorized by M.G.L. c. 63, § 31A.
Manufacturing corporation.
Open year, a tax year within the limitation period under M.G.L. c. 62C, §§ 26, 29 or 30, for which the Commissioner may assess tax.
Recapture, the adding back to taxes due of a portion of the investment tax credit claimed for any asset that has a useful life beyond the date the asset ceases to be in qualified use, unless the property is in qualified use for twelve consecutive years.
Sales and use tax exemption, the exemption from sales and use tax for the sale or use of certain property used in research and development, authorized by M.G.L. c. 64H, § 6(r) and (s) and 830 CMR 64H.6.4.
Secretary of State, Secretary of the Commonwealth of Massachusetts.
Example 1(a). Corporation A is a general contractor. Corporation A digs foundations and grades and otherwise prepares ground to make walkways and stairs. Corporation A then pours the cement from the trucks into molds and levels and finishes it to make foundations, walkways, and stairs. Corporation A's activities are not manufacturing for purposes of this section.
Example 1(b). Corporation B operates a supermarket. In the back room of the supermarket employees bake bread and package various items which are then placed on the shelves for sale. Corporation B's activities are not manufacturing for purposes of this section.
Example 1(c). Corporation C operates a chain of supermarkets. At its central plant in western Massachusetts, employees bake bread which is then delivered to and sold by its various supermarkets throughout Massachusetts. Corporation C's activities are manufacturing for purposes of this section.
Example 2. Corporation D processes scrap metal for sale. The process involves using heat and chemicals to eliminate impurities, increase density and change the composition of the material so that it will have the metallurgical and chemical tolerances required by customers, which include mills, foundries, and smelters. This operation is manufacturing.
Example 3(a). Corporation E is engaged in quarrying and crushing stone. Employees excavate gravel, load it onto trucks, and haul it to the corporation's plant. Other employees at the plant crush it and screen it for size. Larger pieces of stone are recrushed until they are no more than 11/2 inches in circumference. Employees then place the stone on a screen and add water to wash away and separate the sand formed in the crushing process, and to separate the stone into three sizes. Corporation E then sells the stone to other companies which use it to make blocks and asphalt. Corporation E is not manufacturing.
Example 3(b). Corporation F operates clothing factories. At the factories, employees operate cutting machines that cut many layers of fabric from a single pattern. Other employees sew together the different pieces of a garment at sewing machines. Other employees operate various machines that finish buttonholes, seams, and hems, attach closures and press the finished garment. Corporation F's activities are manufacturing activities.
Example 3(c). Corporation G purchases and sorts scrap metal for sale. Before the company purchases the scrap, it weighs and inspects the scrap metal, using a vibrating table to separate the metal from any dirt or ice, and then to separate various sizes and grades of metal. A magnetic belt removes iron pieces or flakes. After the scrap is purchased, it is sorted and cut, stripped, baked, or pressed into briquettes of a certain size. This process is not manufacturing.
Example 4(a). Corporation H's only Massachusetts operation is the labeling and packaging of clothing manufactured at its out-of-state plant. Corporation H is not manufacturing in Massachusetts.
Example 4(b). Corporation I receives shipments of ocean shells at its plant in Massachusetts. Each shell is cleaned and ground on an emery board wheel to remove several of the outer layers of the shell, until the shell's pearl interior is exposed. The shells are then polished and sold. Corporation I's activities are not manufacturing.
Example 5(a). Corporation L is an electrical engineering firm that does consulting. Corporation L develops computer devices which make automatic calculations for various purposes. Corporation L is hired to make only a prototype or a blueprint of a product. The process of making the product involves preliminary research, running various computer programs, and building and testing various trial prototypes, until a prototype is able to perform satisfactorily all required activities. Once the firm that has hired Corporation L approves Corporation L's product, the firm will contract with another company to mass produce and distribute the product. Corporation L is not performing manufacturing activities.
Example 5(b). Corporation XX is a computer software company engaged in writing a program to be used in a specific industry. Corporation XX has no outstanding contracts for the sale of its program, but hopes that the quality of its program when complete will generate industry-wide sales. Corporation XX is not performing manufacturing activity.
Example 6(a). Corporation KK is a computer software company which previously developed a software program that it reproduces and sells. The software is standardized, with minor deviations available upon request. The reproduction of the standardized computer program to be sold, with or without modification, is manufacturing.
Example 6(b). Corporation LL is a firm which previously developed and sold a software program. Corporation LL now exclusively provides telephone assistance and warranty service to persons that previously purchased its software. Corporation LL is not manufacturing.
Example 6(c). Corporation J is in the tailoring business. It makes alterations to suits to accommodate a customer's choice of length, etc. Corporation J is not manufacturing.
Example 6(d). Corporation ZZ is an advertising and graphic design firm which creates text, artwork, photographs, and video productions, either through its employees, or through the use of independent contractors. Corporation ZZ transfers its completed text, artwork, and photos to its clients in various forms, including paper, videotape, and disk. Corporation ZZ is not performing manufacturing activity.
Example 6(e). Corporation YY produces an advertising publication that it sells at retail. Corporation YY receives advertisements from the general public, arranges this information into page layouts, then submits the layouts to a printer for final printing. Corporation YY is not performing manufacturing activity.
Example 7(a). Corporation A's sawmill operation involves stripping bark and cutting lumber from logs. This process is an integral part of the total process of manufacturing a finished wood product, and it is manufacturing.
Example 7(b). Corporation Q makes fine powders for a wide range of uses. Customers send Corporation Q raw materials such as resins, glass, chemicals, plastics, and metals, in various sizes. Employees at the corporation mill, crush, grind, or pulverize the materials, then fine sieve them to produce fine powders. The customers use the powders to produce helicopter blades, automotive parts, medical instruments, chromatography instruments, plastics, machinery components, and other items. Corporation Q is performing manufacturing activities.
Example 8(a). Corporation RR is engaged in the business of publishing books and producing canned software games in CD ROM form. It sells these finished products to retailers who, in turn, sell the products to the general public. Corporation RR develops the idea for a book or computer program and enters into contracts for text, artwork, information, and photographs. Corporation RR then edits and digitally manipulates this property and compiles it through a multi-step process into proofs or disks, which it modifies, refines, and transfers to a master disk. Corporation RR transfers the master disk to independent companies, either in-state or out-of-state, which mass produce the printed books or prepackaged CD ROMs in accordance with the specifications of Corporation RR. The master disks have physical application in the mass production process. The books and CD ROMs are returned to Corporation RR for final sale, or are shipped by the independent companies to Corporation RR's customers at the request of Corporation RR. Corporation RR is performing manufacturing activities with respect to both its book publishing and software production businesses.
Example 8(b). Corporation SS is a computer software company that previously developed a software program that it sold and continues to sell to a number of firms in a specific industry. Pursuant to these sales, Corporation SS also sells periodic updates. The underlying software program and updates are standardized, with minor changes software, customized to individual clients. Corporation SS develops the upgraded software, tests it, and refines it. Corporation SS then transfers the software, which is complete and represents the final software to be sold, by electronic means to an independent firm for replication. The master disk has physical application in the replication process, which is performed in accordance with the specifications of Corporation SS. Upon completion, the upgrades are returned to Corporation SS for sale to its clients or are shipped by the independent firm to Corporation SS's clients at the request of Corporation SS. Corporation SS is performing manufacturing activity.
Example 9(a). Corporation R operates an electronic digital computer time-sharing system. A customer stores information in the computer by transmitting electrical impulses to the computer over telephone lines. When the customer wishes to use the stored information for a particular purpose, the customer will enter a command in the computer in the form of a program or algorithm. The computer transmits the desired results by electrical impulses over telephone lines to the customer's terminal. A printer connected to the terminal then prints out the results. Corporation R is not manufacturing.
Example 9(b). Corporation S is a broadcasting company that makes television and radio broadcasts. In its creation of live programs, films, and videotapes, light is transformed into electrical impulses. In its production of video tapes, electrical impulses are further transformed into magnetic impulses, which are stored on the tapes. In all cases the electrical signals, after a complicated process, reach the television transmitting station. The transmitter transforms the signals into electromagnetic waves. These waves are received by television antennas. In its radio broadcasts, sound is converted into electrical impulses that are sent over telephone lines to a transmitter. The transmitter transforms the electrical impulses to a radio signal and transmits them to receiving sets (radios). Corporation S is not manufacturing.
Example 10(a). Corporation M operates a restaurant. Cooks at the restaurant wash and cut meats, poultry and fish into individual portions, trim fat from the portions, and wash and cut fruits and vegetables into various sizes. The cooks then prepare entrees by baking, broiling or frying the various food products and arranging them on individual dishes. Salad makers wash, cut, and tear various vegetables and fruits, then arrange them in bowls and glasses to make individual salads and fruit cups. All foods prepared by the employees of the restaurant are served as meals to patrons of the restaurant. Corporation M is not performing manufacturing activities.
Example 10(b). Corporation N operates a plant where employees make and package frozen food to be distributed to various supermarkets for retail sale. The employees wash, cut, cook, and bake various foods. Some machines weigh and arrange portions of different foods on aluminum platters. Other machines box the platters, seal the boxes, and wrap the boxes in waxed paper. Corporation N is manufacturing.
Example 11. Corporation O operates a bakery. Bakers at the bakery mix flour, water, yeast, eggs, and other ingredients to make dough, put the dough aside to rise, shape the dough to form various pastries, add toppings and fillings, and bake the pastries. Using somewhat different methods, the bakers also make breads, rolls, muffins, and cookies. Once the baked goods are cooled, other employees fill long trays with the baked goods and place them in the display case. All the baked goods are sold at retail to consumers. Corporation O is performing manufacturing activities.
These four tests are intended to establish general, prospective standards for corporations attempting to demonstrate that their manufacturing activities are substantial. A corporation whose activities satisfy none of the four tests for substantiality may nevertheless qualify for manufacturing corporation classification by establishing, through other relevant criteria, that its manufacturing activities are substantial, and by following the procedures set forth in 830 CMR 58.2.1(7). For example, a corporation which fails to qualify under the second substantiality test because of its volume of contract labor may nonetheless be classified as a manufacturing corporation if, in the discretion of the Commissioner, the corporation's manufacturing activity is otherwise substantial. In addition, a corporation which fails to qualify under any of the four substantiality tests because of the volume of its research and development activity may likewise be classified as a manufacturing corporation if, in the discretion of the Commissioner, the corporation's manufacturing activity is otherwise substantial.
The following two examples illustrate the calculation of "gross receipts derived from manufacturing activities in Massachusetts":
Example 1. Ubiquitous Corporation is a vertically integrated manufacturer of gizmos. Ubiquitous manufactures gizmos in three stages. It purchases raw materials and manufactures phase one gizmos at its plant in New Hampshire. It then ships the phase one gizmos to its Massachusetts plant where they are transformed into phase two gizmos. Finally, Ubiquitous ships the phase two gizmos to its plant in Rhode Island where they are processed into phase three (completed) gizmos and are sold to customers for $1,000 each. The activity in each of the three states constitutes manufacturing.
Ubiquitous's cost of producing each gizmo is as follows: | |
raw materials | $75.00 |
labor, plant and equipment in NH | $200.00 |
labor, plant and equipment in MA | $150.00 |
labor, plant and equipment in RI | $100.00 |
sales and administration | $100.00 |
transportation | $50.00 |
profit | $325.00 |
sales price | $1000.00 |
Ubiquitous's gross receipts from manufacturing activities in Massachusetts are:
Example 2. Concentrated Corporation is a specialty manufacturer whose only manufacturing activity is to transform phase one gizmos into phase two gizmos. (Gizmos are produced in three phases as described in 830 CMR 58.2.1(6)(e)1.a.: Example 1.) All of Concentrated Corporation's manufacturing activities are performed in Massachusetts. Therefore, all of Concentrated Corporation's gross receipts from the sale of phase two gizmos are gross receipts from manufacturing activities in Massachusetts.
The following example illustrates the calculation of the gross receipts fraction: Example: Fraction Corporation, a cash basis taxpayer, manufactures in Massachusetts water purifiers and performs the service of chemically analyzing water for clients. In its previous tax year, it received $200,000 for sales of water purifiers in Rhode Island; $100,000 for sales of water purifiers in Massachusetts; $50,000 for chemical analyses in Rhode Island; $75,000 for chemical analyses in Massachusetts; and $1,000 in dividends in a money market account. The corporation's apportionment formula on its corporate excise return filed for its previous tax year is 6/10.
The numerator, the corporation's gross receipts derived from manufacturing in Massachusetts in its previous tax year, is $300,000. The denominator, the corporation's total gross receipts from all business activities in Massachusetts in the previous tax year, is $300,000 for sales of water purifiers plus $75,000 for chemical analyses, or $375,000, plus its dividend income multiplied by 6/10.
The percentage of Fraction Corporation's gross receipts derived from manufacturing in Massachusetts in the previous tax year is calculated as follows:
The following example illustrates the calculation of the tangible property fraction:
Example: Fraction Corporation, described in the example in 830 CMR 58.2.1(6)(e)1. owns a building located in Massachusetts containing 10,000 square feet of floor space. The area in which it manufactures water purifiers is 4,000 square feet. The area containing offices and a laboratory for personnel engaged in the chemical analysis of water is 5,000 square feet. The remaining 1,000 square feet is used for various common areas. The value of the building is $300,000. Fraction Corporation does not own or rent a business facility outside the state.
The value of Fraction Corporation's real property used in manufacturing in Massachusetts in the previous tax year is calculated as follows:
Fraction Corporation owns all of the personal property it uses. The value of the machinery used for manufacturing in Massachusetts is $150,000. The combined value of all other personal property used by the corporation in Massachusetts, including machinery used in researching and developing a prototype for a new water cooler, office furniture and equipment, and laboratory equipment and supplies, is $200,000.
The value of Fraction Corporation's tangible property used in manufacturing in Massachusetts is $120,000 in real estate and $150,000 in personal property, or
$270,000. The total value of Fraction Corporation's tangible property in Massachusetts is $300,000 in real estate and $350,000 in personal property, or
$650,000. The percentage of Fraction Corporation's tangible property used in manufacturing in Massachusetts in the previous tax year is calculated as follows:
The term does not include owners and employees performing policy-making, financial, research and development, marketing, sale, retail, or restaurant functions of a company, except to the extent that such owners or employees otherwise perform or supervise manufacturing activities.
The following example illustrates the calculation of the employees fraction: Example: Fraction Corporation, described in the examples in 830 CMR 58.2.1(6)(e)1. and 2., employs a total of 62 persons at its plant in Massachusetts. 22 persons perform all activities relating to manufacturing water purifiers. Two managers supervise the production of water purifiers. One manager makes a marketing plan and arranges for distribution of the products. 13 employees go on-site to take water samples from customers in Rhode Island and Massachusetts, and return to the laboratory to analyze them. Eight employees are engaged in researching and designing the prototype for the new water cooler. One manager supervises these employees. Ten employees are employed as secretaries, clerks, inventory persons, shippers, cleaners, bookkeepers and accountants. The corporation has five officers. The corporation does not own or rent a business facility outside the state.
In this example 24 (22 production employees and two production supervisors) of Fraction Corporation's 62 Massachusetts employees are performing manufacturing activities in Massachusetts.
The total payroll of the corporation's 24 employees performing manufacturing activities in Massachusetts is $200,000. The total payroll of the corporation's 38 employees not performing manufacturing activities in Massachusetts is $310,000.
The payroll of Fraction Corporation's employees performing manufacturing activities in Massachusetts in the previous tax year is calculated as follows:
200,000 / 510,000,
or 39%.
The following examples illustrate the recapture and denial of investment tax credit:
Example 1: H corporation, which files on a calendar year basis, places property in service on 1/1/80. The cost of the property is $100,000 and its useful life is 120 months. In 1980 a three percent investment tax credit was available to the corporation. Thus, disregarding any federal basis reduction, the corporation was allowed a credit of $3,000. As a result of a 1987 audit of the corporation, the Commissioner determines that the corporation discontinued its manufacturing activities in 1981. The Commissioner revokes the corporation's manufacturing classification or status effective 1/1/84. The property is deemed to have ceased to be in qualified use as of 1/1/84. The recapture of the investment tax credit is computed as if the property had been disposed of on that date. In this example the property on which the credit was claimed is deemed to have been in qualified use for only 48 of its 120 month useful life. Thus, the investment tax credit recaptured is 120 - 48 / 120 x $3,000 or $1,800.
Example 2: I corporation, which files on a calendar year basis, places property in service on 1/1/80. The cost of the property is $200,000 and its useful life is 120 months. In 1980 a three percent investment tax credit was available to the corporation. Thus, disregarding any federal basis reduction, the corporation was allowed a credit of $6,000. As a result of a 1987 audit of the corporation, the Commissioner determines that the corporation discontinued its manufacturing activities on 4/1/84. The Commissioner revokes the corporation's manufacturing classification or status retroactive to 4/1/84. Thus, the property is deemed to have ceased to be in qualified use as of 4/1/84. The recapture of the investment tax credit is computed as if the property was disposed of on 4/1/84. In this example, the property on which the credit was claimed is deemed to have been in qualified use for only 51 of its 120 month useful life. Thus, the investment tax credit recaptured is 120-51/120 x $6,000 or $3,450.
Example 3: J corporation, which files on a calendar year basis, is classified as a manufacturing corporation on 1/1/84. The corporation places property in service on 1/1/85 and 2/1/86 on which it was allowed credits of $3,000 and $6,000. As a result of a 6/1/87 audit, the Commissioner determines that the corporation was not engaged in manufacturing as of 1/1/85. The Commissioner revokes the corporation's manufacturing classification retroactive to 1/1/85. The denial of investment tax credit in this example is $3,000 for 1985 and $6,000 for 1986. (There is no recapture of investment tax credit in this example.)
A corporation aggrieved by its classification for the current year may appeal the classification directly to the Appellate Tax Board under M.G.L. c. 58, § 2, regardless of whether it has applied to the Commissioner for manufacturing corporation classification or received notice from the Commissioner regarding any such application. A corporation may file the appeal to the Board on or before April 30th of said year or the 30th day after the date on which the Commissioner mails the corporations list to the boards of assessors, whichever is later.
830 CMR, § 58.2.1
Amended: 8/14/92 and 12/27/96
New Regulation Promulgated: 7/9/99