Sullivan & Worcester Successfully Represents Onex Communications in Important SJC Ruling For Manufacturers in Massachusetts


Ruling Affirms Tax Breaks for Start-Up Corporations

S&W Press Release
August 2, 2010

Boston, MA – August 2, 2010 – The Massachusetts Supreme Judicial Court (SJC) ruled on Friday, July 30, that the State Department of Revenue was relying on too narrow a definition of manufacturing when it denied Onex Communications a tax exemption meant to encourage start-up manufacturers to locate in Massachusetts. Partner Richard L. Jones of Sullivan & Worcester LLP represented company Onex Communications in the case.

The case is a big win for start-up companies in the process of manufacturing their first products. The SJC ruled that a company can be considered a manufacturing company even prior to finishing its first product. The court said manufacturing is a process, and a company can be engaged in manufacturing as long as it is performing an essential and integral part of that process, regardless of whether the product is finished.

Sullivan & Worcester’s Richard Jones, who argued on behalf of Onex, said, “We are pleased with this result for our client, as well as for other start-up manufacturers in Massachusetts. The decision has ramifications for manufacturers in the pre-production stage in the State and those that may want to locate in the Commonwealth. It reaffirms the legislature's intent to attract new businesses to Massachusetts.”

The State Department of Revenue had argued that because Onex hadn't actually made "a finished product," it could not qualify for the use tax exemption available to manufacturers on its $2.7 million in research and development purchases, and therefore owed close to $300,000 in taxes, interest and penalties.

But the SJC agreed with Onex’s argument that it was, in fact, actively engaged in preparing to build the OMNI chip, an integrated circuit for the transmission of a data and voice transmissions for the telecommunications industry. The SJC stated:

"[W]hen a company performs some type of transformative process on raw materials, we have concluded that the company was engaged in manufacturing," the court said.

The court further stated with regard to the Department of Revenue’s claim that having a finished product is a prerequisite to being a manufacturing corporation:

"Indeed, such a policy, which would place new companies in a disadvantageous tax position compared to existing companies, would tend to discourage the location of start-up companies in Massachusetts. In addition, imposing a finished product rule would allow the commissioner to set audit periods arbitrarily so that the period reviewed could exclude, even by one day, the time at which the final product was distributed and sold. Such arbitrary enforcement periods would create the possibility of abuse of discretion and unequal treatment of individual taxpayers."

About Sullivan & Worcester LLP
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Leah Schloss