Important Appeals Court Ruling Leaves Tax Exemptions for Emerging Companies Intact – For Now


Case Imperiled Manufacturing Tax Breaks Given to Emerging Companies

S&W Press Release
August 4, 2009

Boston, MA – August 4, 2009 – Bay State manufacturing companies are breathing a collective sigh of relief after the Massachusetts Appeals Court rejected attempts by the Department of Revenue, or DOR, to limit tax exemptions that are especially important for emerging companies.

But that sigh may be a short one as the state has decided to ask the Supreme Judicial Court to hear the case.

The closely watched case hinged on whether Bedford-based Onex Communications could be considered a “manufacturing corporation” under Massachusetts law. Manufacturers are entitled to a number of state tax benefits, including exemption from sales or use taxes for purchases used in research and development, said Richard L. Jones, an attorney with Sullivan & Worcester LLP, who argued the case on Onex’s behalf.

Onex, which designs and sells integrated computer chips for use in the telecommunications industry, viewed itself as a manufacturing corporation because it developed and designed its chips with a blueprint for how to manufacture them and hired an out-of-state fabricator to produce the chips on its behalf.

But after auditing Onex’s purchases between its founding in 1999 and 2001, tax officials said that the young company owed the state $136,175, plus interest and penalties, for failing to pay sales or use taxes on items bought for R&D purposes. The DOR argued that Onex could not be considered a manufacturing company before the product in question was completed.

Onex, which has since been acquired by TranSwitch Corporation, requested an abatement, which was subsequently denied, and the case went before the Appellate Tax Board. When the board sided with Onex, the DOR appealed. In a decision issued July 13, 2009, the state appeals court upheld the tax board’s decision, ruling that Onex indeed qualified as a manufacturer.

The court criticized the DOR’s efforts to designate companies as manufacturers only after they have achieved their intended finished product. “Such a policy would place new or specialized corporations in a highly disadvantageous tax position,” the appeals court wrote.

The court said that the DOR’s interpretation of the law would unfairly burden new companies that are in the manufacturing process but have not yet produced a finished product. Distinguishing between firms with a finished product and those working toward product completion is “arbitrary and inimical” to state laws, the court.

“Much of our state’s economy is driven by companies like Onex – R&D firms that are developing and manufacturing cutting-edge products in technology, biotech and other industries,” said Jones, Onex’s attorney. “The DOR’s attempts to change the tax laws in the middle of the game would have had serious ramifications on a very important sector of our state’s industry. We’re extremely pleased that the Appeals Court understood that and that the justices found in favor of our client.”

The Massachusetts Attorney General's Office states that it will challenge the Appeals Court decision by petitioning for leave to obtain further appellate review by the Massachusetts Supreme Judicial Court (SJC). If leave for further appellate review is denied, the Appeals Court decision will stand. If granted, the SJC will hear oral argument on the case and decide whether to affirm or reverse the Appeals Court decision.

About Sullivan & Worcester LLP

Sullivan & Worcester LLP is a leading corporate law firm providing counsel to domestic and international clients ranging from Fortune 500 companies to emerging businesses. With more than 185 lawyers in Boston, New York and Washington, D.C., the firm offers services in a wide range of areas, including corporate finance, securities, litigation, mergers and acquisitions, tax, real estate, private equity and venture capital, bankruptcy, climate change, regulatory law, and employment and benefits. Sullivan & Worcester is also recognized for its representation of REITs and its deep expertise in mutual fund law.

Leah Schloss