Title: Genentech, Inc. v. Commissioner of Revenue

State: massachusetts

Issuer: Massachusetts Supreme Court

Document:

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SJC-12083 
 
GENENTECH, INC.  vs.  COMMISSIONER OF REVENUE. 
 
 
 
Suffolk.     October 7, 2016. - January 12, 2017. 
 
Present:  Gants, C.J., Botsford, Lenk, Hines, Gaziano, Lowy, & 
Budd, JJ. 
 
 
Taxation, Corporate excise, Manufacturing corporation.  
Constitutional Law, Taxation, Commerce clause, Interstate 
commerce. 
 
 
 
 
Appeal from a decision of the Appellate Tax Board. 
 
 
The Supreme Judicial Court on its own initiative 
transferred the case from the Appeals Court. 
 
 
 
Catherine A. Battin, of Illinois (Richard C. Call also 
present) for the taxpayer. 
 
Brett M. Goldberg (Jamie E. Szal also present) for 
Commissioner of Revenue. 
 
 
 
BOTSFORD, J.  Under the Massachusetts corporate excise tax 
statute, G. L. c. 63, corporations that generate business income 
in Massachusetts and other States pay taxes on that income 
according to a statutory formula that seeks to apportion and tax 
the corporation's income generated in the Commonwealth.  
2 
 
Beginning in 1996, for a "manufacturing corporation," the 
apportionment formula has been based solely on the corporation's 
sales, see G. L. c. 63, § 38 (l), inserted by St. 1995, c. 280, 
§ 2.  The taxpayer Genentech, Inc., is a Delaware corporation 
with a principal place of business in California and earns 
business income in the Commonwealth as well as other States.  In 
this appeal from a decision of the Appellate Tax Board (board), 
Genentech challenges the board's determination that it qualified 
as a manufacturing corporation for the tax years 1998 through 
2004 (tax years at issue); it also challenges the board's 
rejection of its claim that application of § 38 (l)'s single-
factor apportionment formula based on sales to the company 
violated the commerce clause of the United States Constitution.  
We affirm the decision of the board. 
 
Facts.  We summarize the findings of fact made by the 
board.  See G. L. c. 58A, § 13 ("The decision of the board shall 
be final as to findings of fact"). Genentech is a biotechnology 
company that develops drugs derived from proteins produced by 
living cells.  Through a four-step process, Genentech employees 
modify the genetic codes of living cells to produce "proteins of 
interest" with desired pharmacologic effects.1  First, Genentech 
scientists and other employees alter the deoxyribonucleic acid 
                                                          
 
 
1 Genentech's four-step process transforms the living cells 
into insulin, human growth hormone compounds, and a drug used 
for cancer treatment. 
3 
 
(DNA) of the selected cells to instruct them to produce a 
specific "protein of interest."  Second, employees facilitate 
the production of the protein of interest by placing the 
genetically altered cells in successively larger tanks to enable 
growth and feeding them glucose and other nutrients while 
closely monitoring their environment.  Third, the protein of 
interest is purified by separating it from the mix of cells and 
other material present through ultrafiltration and 
chromatography; Genentech must extract the protein from some 
cells by "disrupting" or breaking down the cell walls containing 
them.  Finally, following the purification process, Genentech 
employees formulate the resulting bulk drug into its final 
dosage form, and package it for sale to distributors or directly 
to physicians, hospitals, and pharmacies around the world. 
 
On the financial side of Genentech's operations, the 
company invests excess cash in short-term securities -- money 
market funds, commercial paper, and treasury bonds.  From two to 
seven employees working in Genentech's treasury department 
conduct a daily assessment of Genentech's cash needs and then 
liquidate short-term investments to free up cash or invest 
excess cash in short-term securities, as necessary.  Money 
market funds are pooled investment vehicles that aim to maintain 
a consistent net asset value of one dollar per share.  
Consequently, investors generally expect to be able to redeem 
4 
 
their shares for the amount originally invested, while also 
earning interest or dividends through the term that they hold 
shares in the money market fund.  During the tax years at issue, 
the money market funds held in Genentech's accounts maintained a 
one dollar net asset value, thus allowing Genentech to redeem 
them for the purchase price.2 
 
Genentech's receipts pertaining to the transactions 
involving the short-term assets held in a number of Genentech's 
separate accounts in Mellon Bank established there were no 
capital gains or losses generated during the tax years at issue;3 
Genentech thus was able to either redeem the securities in every 
instance for the same amount as it paid for them, or hold the 
securities to maturity.  Genentech did not include the proceeds 
it received from the redemption of its short-term securities in 
the statement of its revenue for purposes of the company's 
financial statements, in the computation of gross receipts 
reported on its Federal corporate income tax return that was 
                                                          
 
 
2 The board defined commercial paper as "a short-term debt 
instrument that is usually issued by a corporation in order to 
meet working capital needs as an alternative to a bank loan."  
The board did not further discuss commercial paper in its 
decision, and did not discuss treasury bonds at all beyond 
stating that they were a form of short-term security in which 
Genentech placed funds. 
 
 
3 Genentech maintained eleven accounts holding short-term 
assets at Mellon Bank, and Mellon Bank was responsible for 
keeping the records of all deposits, withdrawals, sales and 
purchases of securities, redemptions, and receipt of interest 
and dividends; Genentech did not keep its own records. 
5 
 
used to determine its taxable income, or in the total of its 
receipts used to compute sales factor apportionment in filling 
out the company's California excise tax returns. 
 
Procedural history.  For the tax years 1998 through 2003, 
Genentech filed its Massachusetts corporate excise returns using 
the three-factor apportionment formula based on property, 
payroll, and sales that applies to most general business 
corporations.  See G. L. c. 63, § 38 (c).4  For the 2004 tax 
year, Genentech originally filed its Massachusetts corporate 
excise tax return using the single-factor apportionment formula 
applicable to manufacturing corporations, but later filed an 
application for abatement, claiming that it was not 
substantially engaged in manufacturing and thus should have been 
entitled to apportion its income on the standard three-factor 
basis. 
 
The commissioner of revenue (commissioner) issued four 
notices of assessment to Genentech, taking the position that 
                                                          
 
 
4 As discussed infra, through 1995, G. L. c. 63, § 38, 
applied the three-factor apportionment factor set out in § 38 
(c) to manufacturing corporations.  See G. L. c. 63, § 38, as 
amended through St. 1988, c. 202.  The 1995 amendment to § 38 
added § 38 (k) and (l), which established different 
apportionment formulas for "defense corporations" and 
"manufacturing corporations," respectively, see St. 1995, 
c. 280, § 2, and, as relevant to the tax years at issue in this 
case, § 38 (l) was amended in 1996, see St. 1996, c. 151, § 209.  
The formula for manufacturing corporations is a single-factor 
formula based solely on the corporation's sales factor.  See 
G. L. c. 63, § 38 (l). 
6 
 
Genentech was engaged in substantial manufacturing activity for 
all the tax years at issue and thus required to use the single-
factor apportionment formula in § 38 (l).  Genentech filed 
several applications for abatement, all of which the 
commissioner denied.  Genentech timely filed petitions under 
formal procedure with the board for each denial.  The board 
ruled that Genentech was engaged in manufacturing for purposes 
of § 38 (l), that its manufacturing activities were 
"substantial[]," as required by § 38 (l), and that application 
of the single-factor apportionment formula to the company did 
not violate the commerce clause.  Genentech filed a timely 
appeal, and we transferred the case from the Appeals Court to 
this court on our own motion. 
 
Standard of review.  "A decision by the board will not be 
modified or reversed if the decision 'is based on both 
substantial evidence and a correct application of the law.'"  
Capital One Bank v. Commissioner of Revenue, 453 Mass. 1, 8, 
cert. denied, 557 U.S. 919 (2009), quoting Boston Professional 
Hockey Ass'n v. Commissioner of Revenue, 443 Mass. 276, 285 
(2005).  "Because the board is authorized to interpret and 
administer the tax statutes, its decisions are entitled to 
deference. . . .  Ultimately, however, the interpretation of a 
statute is a matter for the courts" (citation omitted).  Onex 
7 
 
Communications Corp. v. Commissioner of Revenue, 457 Mass. 419, 
424 (2010). 
 
Discussion.  1.  Genentech's manufacturing.  During the tax 
years at issue, a "manufacturing corporation" was defined in 
§ 38 (l) (1) in relevant part as follows: 
"In order to be engaged in manufacturing, the corporation 
must be engaged, in substantial part, in transforming raw 
or finished physical materials by hand or machinery, and 
through human skill and knowledge, into a new product 
possessing a new name, nature and adapted to a new use."5 
 
 
This court has considered whether particular activities 
conducted by a corporation qualify as "manufacturing" in a 
number of different factual contexts.6  We start with the premise 
that a critical component of manufacturing is "the implication 
of change wrought through the application of forces directed by 
the human mind, which results in the transformation of some 
                                                          
 
 
5 The regulations of the commissioner, 830 Code Mass. Regs. 
§ 58.2.1(6)(b) (1999), further provide that the "facts and 
circumstances of each case" will be examined with various 
principles serving as guidelines; principle (2), which states 
that "[i]f the process involves chemical change to property 
rather than only physical change, it is more likely to be 
manufacturing," is of particular relevance to this case. 
 
 
6 The issue has arisen often in cases involving the 
exemption from local property taxation for machinery of domestic 
manufacturing corporations under G. L. c. 59, § 5, Sixteenth 
(3).  See, e.g., William F. Sullivan & Co. v. Commissioner of 
Revenue, 413 Mass. 576 (1992); Southeastern Sand & Gravel, Inc. 
v. Commissioner of Revenue, 384 Mass. 794 (1981); Franki Found. 
Co. v. State Tax Comm'n, 361 Mass. 614 (1972).  However, our 
cases have considered the term "manufacturing corporation" to 
have the same meaning in the property tax exemption statute as 
it does in the corporate excise tax statute, G. L. c. 63.  See, 
e.g., William F. Sullivan & Co., supra at 576-577, 579-580. 
8 
 
preexisting substance or element into something different, with 
a new name, nature or use."  Boston & Me. R.R. v. Billerica, 262 
Mass. 439, 444-445 (1928).  See William F. Sullivan & Co. v. 
Commissioner of Revenue, 413 Mass. 576, 579 (1992) ("our 
decisions have embraced the basic concept of manufacturing 
articulated in Boston & Me. R.R [supra]"); The Charles River 
Breeding Labs., Inc. v. State Tax Comm'n, 374 Mass. 333, 335 
(1978) ("Manufacturing normally involves a change of some 
substance, element, or material into something new or 
different"). 
 
In cases where this court has determined that a company's 
activities did not qualify as manufacturing, we have noted the 
absence of new products "of substantially different character" 
(citation omitted).   Tilcon-Warren Quarries, Inc. v. 
Commissioner of Revenue, 392 Mass. 670, 673 (1984).  In that 
case, for example, we concluded that extracting rocks from the 
ground and crushing them into smaller, commercially usable sizes 
did not involve a change in the material's character necessary 
to qualify as manufacturing.  See id. at 672-673.  Similarly, 
the breeding and raising of partially uncontaminated laboratory 
animals was determined not to be manufacturing because 
"[m]anufacturing normally involves a change of some substance, 
element, or material into something new or different [and] [n]o 
matter how intricately it is carried on, the production of 
9 
 
partially uncontaminated animals by [the taxpayer] does not fit 
within this definition" (citation omitted).  The Charles River 
Breeding Labs., Inc., 374 Mass. at 335. 
On the other hand, we have found that a multitude of 
activities fall under the definition of manufacturing.  We have 
held, for example, that a publisher's "compilation of 
information, photographs, and text, into proofs, edited, 
refined, and ultimately transferred to disk or CD ROM" is 
manufacturing because "[t]he disks and CD ROMs possess a new 
nature and are adapted for a new use, namely the printing and 
binding of books."  Commissioner of Revenue v. Houghton Mifflin 
Co., 423 Mass. 42, 50-51 (1996).  Similarly, the transformation 
of raw green coffee beans into marketable coffee through 
roasting, grinding, packaging, and selling is manufacturing, 
given that "a raw material which was unfit for human consumption 
or any other practical use" was converted into "a finished 
product which differed substantially from the raw material in 
appearance, form and taste, and which was thereby made adaptable 
to a use for which it otherwise would not be available."  
Assessors of Boston v. Commissioner of Corps. & Taxation, 323 
Mass. 730, 741 (1949). 
 
As in the cases just cited, we conclude that Genentech 
engages in manufacturing for purposes of § 38.  Genentech argues 
its activities are comparable to mining.  Unlike the extraction 
10 
 
and crushing of rocks in the Tilcon-Warren Quarries case, 
however, Genentech is not merely paring something down to a 
smaller size.  See 392 Mass. at 673.  Nor do the cells that 
Genentech develops remain significantly unchanged.  Rather, 
Genentech scientists and other employees, by hand or machine, 
implant DNA molecules into a cell to genetically transform the 
medium to behave in ways other than what its natural genetic 
code would dictate.  Although the cells may replicate thereafter 
on their own, each genetically modified and replicated cell is 
different from the original cell in a most fundamental way.  
Moreover, the modified cell itself is far from the final 
product:  it is the "protein of interest" that Genentech 
extracts from each of the modified cells and then purifies that 
serves as the source of each drug that Genentech then markets 
and sells. 
"The words 'engaged in manufacturing' are not to be given a 
narrow or restrictive meaning."  Assessors of Boston, 323 Mass. 
at 748-749.  We agree with the board that where such a clear 
transformation has occurred, Genentech's drug production 
activities qualify as manufacturing within the meaning of § 38 
(l). 
 
2.  Substantial manufacturing and gross receipts.  Under 
§ 38 (l) (1), a corporation engaged in manufacturing only 
qualifies as a "manufacturing corporation" subject to the 
11 
 
single-factor apportionment formula based on sales in § 38 (l) 
(2) if it engages "in substantial part" in manufacturing 
activities.  Genentech claims that even if it is engaged in 
manufacturing, it still does not qualify as a manufacturing 
corporation because it does not satisfy the necessary test for 
engaging in "substantial" manufacturing.  The board rejected 
Genentech's argument, as do we. 
 
Section 38 (l) (1) sets out five alternative tests for 
measuring whether a corporation's manufacturing work is 
"substantial," and provides that only one of these tests must be 
met.7  The parties agree that the first alternative test is the 
                                                          
 
 
7 General Laws c. 63, § 38 (l) (1), provides in relevant 
part: 
 
"A manufacturing corporation's activities will be 
considered to be substantial if any one of the following 
five tests are met: 
 
"1. twenty-five per cent or more of its gross receipts are 
derived from the sale of manufactured goods that it 
manufactures; 
 
"2. twenty-five per cent or more of its payroll is paid to 
employees working in its manufacturing operations and 
fifteen per cent or more of its gross receipts are derived 
from the sale of manufactured goods that it manufactures; 
 
"3. twenty-five per cent or more of its tangible property 
is used in its manufacturing operations and fifteen per 
cent or more of its gross receipts are derived from the 
sale of manufactured goods that it manufactures; 
 
"4. thirty-five per cent or more of its tangible property 
is used in its manufacturing operations; or 
 
12 
 
most apt to Genentech; the first alternative test requires proof 
that twenty-five per cent or more of the corporation's "gross 
receipts are derived from the sale of manufactured goods that it 
manufactures."  Id. 
 
The term "gross receipts" in this first alternative is not 
defined in § 38 (l).  Generally, "where [a] statutory term is 
not defined, 'it must be understood in accordance with its 
generally accepted plain meaning.'"  Ten Local Citizens Group v. 
New England Wind, LLC, 457 Mass. 222, 229 (2010), quoting Allen 
v. Boston Redevelopment Auth., 450 Mass. 242, 256 (2007).  
Genentech argues that the commonly understood meaning of "gross 
receipts" is clear (and expansive):  the term means the total 
amount of receipts received, without deduction for expenses or 
other items.  Genentech also urges us to read § 38 (l) in 
harmony with § 38 (f), which sets out the governing definition 
of "sales factor" used in all the § 38 allocation formulas, 
whether three-factor or single-factor.  As in effect during the 
tax years at issue, § 38 (f), inserted by St. 1966, c. 698, 
§ 58, provided in relevant part: 
"The sales factor is a fraction, the numerator of which is 
the total sales of the corporation in this commonwealth 
during the taxable year, and the denominator of which is 
the total sales of the corporation everywhere during the 
taxable year.  As used in this subsection, 'sales' means 
                                                                                                                                                                                           
"5. the corporation's manufacturing activities are deemed 
substantial under relevant regulations promulgated by the 
commissioner." 
13 
 
all gross receipts of the corporation except interest, 
dividends, and gross receipts from the maturity, 
redemption, sale, exchange or other disposition of 
securities" (emphasis added). 
 
Pointing to generally applicable rules of statutory 
construction, Genentech argues that because "gross receipts" is 
defined in § 38 (f) with a specific exception for receipts from 
the redemption or other disposition of securities, whereas no 
such exception is included in § 38 (l), "gross receipts" in § 38 
(l) must be interpreted to include receipts of all transactions 
involving securities, including redemption and return at 
maturity.  See, e.g., Simmons v. Clerk-Magistrate of the Boston 
Div. of the Hous. Court Dep't, 448 Mass. 57, 65 (2006) ("[W]here 
the Legislature has employed specific language in one portion of 
a statute, but not in another, the language will not be implied 
where it is absent"). 
 
The board did not adopt the analysis Genentech advances 
here.  The board noted the volume of transactions whereby 
Genentech redeemed and reinvested cash on an almost daily basis, 
and pointed out that if Genentech's "gross receipts" were 
defined to include the receipts from the redemption or return at 
maturity of funds invested in short-term securities, the 
percentage of the company's "receipts" related to sales 
involving its drugs and other income-generating transactions was 
dramatically different, and dramatically lower, than if receipts 
14 
 
from what in substance is a return of capital were omitted.8  
Using the 2004 tax year as an example, the board pointed out 
that if Genentech's interpretation were accepted, 
"[Genentech] would have generated $39,226,839,298 in gross 
receipts, of which only $4,578,096,817 came from ordinary 
business income, such as revenue from the sale of drugs, 
royalties from the license of intellectual property, 
contract revenue, and investment income in the form of 
interest, dividends, and capital gains.  The remainder of 
those 'gross receipts' would have been derived from 
redeeming money market funds or commercial paper for their 
cash equivalent, receipts that were not included for 
accounting purposes in the measures of revenue reported to 
shareholders or included in the computation of taxable 
income.  Using these figures as a proxy would mean that 
approximately 88% of Genentech's overall business 
activities in 2004 consisted of a handful of employees in 
the treasury department managing Genentech's day-to-day 
cash flow." 
 
We agree with the board that such a result is "distortive" of 
Genentech's operations, transforming, for Massachusetts 
corporate income tax purposes, this self-described biotechnology 
                                                          
 
 
8 To include the return of capital initially invested and 
redeemed would yield the following percentages of sales from 
manufacturing as compared to excluding the return of capital for 
the years at issue: 
 
Year 
Percent of Sales 
from Manufacturing, 
Return of Capital 
Excluded 
Percent of Sales 
from Manufacturing, 
Return of Capital 
Included 
1998 
63.5% 
3.9% 
1999 
74.8% 
4.4% 
2000 
67.7% 
8.3% 
2001 
71.5% 
5.6% 
2002 
82.2% 
7.1% 
2003 
72.7% 
10.2% 
2004 
79.6% 
9.3% 
 
15 
 
company with substantial revenue derived from sales of its 
specialty drugs into essentially an investment business. 
 
Under § 38 (l) (1), gross receipts are considered for 
purposes of determining whether a company's manufacturing 
activities are a substantial enough portion of its business to 
qualify it as a "manufacturing corporation" under the corporate 
excise tax statute.  Interpreting the absence of a specific 
exception in § 38 (l) (1) for receipts from redemption or return 
at maturity of securities to mean that the return of all 
Genentech's capital invested in short-term securities is to be 
included as part of its gross business receipts runs counter to 
the reality of Genentech's business and essentially makes no 
sense.  We do not consider the meaning of "gross receipts," as 
used in § 38 (f), to be plain and unambiguous,9 but even if it 
were, this court will not interpret a statute according to the 
plain meaning of its words where to do so would lead to absurd 
                                                          
 
 
9 As noted in Microsoft Corp. v. Franchise Tax Bd., 39 Cal. 
4th 750, 763 nn.11, 12 (2006), the California Supreme Court, 
looking to various other jurisdictions, acknowledged the lack of 
consensus "over whether in a redemption of securities the full 
or net price constitutes gross receipts."  Id. at 764.  It is 
true that in the Microsoft case, the California court concluded 
that "gross receipts" as used in the tax statute before it, the 
Uniform Division of Income for Tax Purposes Act (UDITPA), 
interpreted the term to include the entire security redemption 
price.  Id. at 758-759.  However, that court ultimately relied 
on a separate provision in UDITPA that provided an alternative 
method of measuring a business's income to reject the tax result 
that would flow from applying this definition of "gross 
receipts" to the company.  See id. at 770-771. 
16 
 
or unreasonable results.  See, e.g., Bridgewater State Univ. 
Found. v. Assessors of Bridgewater, 463 Mass. 154, 158 (2012), 
and cases cited.10  The board concluded that the interpretation 
advanced by Genentech would have absurd consequences.  We agree, 
and further accept and agree with the board's interpretation of 
the term "gross receipts" in § 38 (l) (1) to be limited to 
receipts relating to business income received by Genentech, 
including, insofar as investment income is concerned, interest, 
dividends, and capital gains.  Under this interpretation, as 
reflected in note 8, supra, it is clear that during all the tax 
years at issue, more than twenty-five per cent of Genentech's 
gross receipts were "derived from the sale of manufactured goods 
that it manufactures."  G. L. c. 63, § 38 (l) (1).  Accordingly, 
Genentech qualified in each of these tax years as a 
"manufacturing corporation" as defined in § 38 (l) (1), and 
under § 38 (l) (2), was required to apportion its income under 
                                                          
 
 
10 Almost thirty years elapsed between the time the 
definition of "sales factor" in § 38 (f) was enacted, see St. 
1966, c. 698, § 58, and the establishment of the single-factor 
apportionment test for manufacturing corporations in § 38 (l), 
see St. 1995, c. 280, § 2.  In our review of the legislative 
history of § 38 (l)'s enactment, we found no indication that the 
Legislature did, in fact, intend the definition of "gross 
receipts" to include receipts from the redemption or return of 
capital invested in securities, and neither party has suggested 
otherwise.  The absence of any such indication supports our view 
that in the circumstances of this case, it is not appropriate to 
follow the rule of statutory construction to which Genentech 
points, namely, that the use of specific language in one section 
of a statute and its absence in a second section signifies an 
intentional omission in the second. 
17 
 
the single-factor formula using solely the statute's sales 
factor.11 
 
3.  The commerce clause.12  Genentech challenges the 
constitutionality of § 38 (l), arguing that as applied to it, 
the statute violates the dormant commerce clause of the United 
States Constitution.  See Art. I, § 8, cl. 3, of the United 
States Constitution.  The claim is that application of the 
statute's single-factor apportionment formula to the company, in 
combination with the unavailability of what it refers to as the 
                                                          
 
 
11 We have focused here on the first alternative test set 
out in § 38 (l) (1).  The fifth alternative test, which looks at 
whether the corporation's manufacturing activities "are deemed 
substantial under relevant regulations promulgated by the 
commissioner," also is satisfied.  The pertinent provisions in 
regulations that the commissioner has adopted to guide 
apportionment of income and classification of corporations as 
manufacturing corporations, see 830 Code Mass. Regs. 
§§ 63.38.1(10)(b)(3) (2015) and 58.2.1(6)(e) (1999) -- 
provisions that state in the regulatory text they are to be read 
together -- interpret "gross receipts" as appearing in § 38 (l) 
(1) to mean only the interest and dividends earned by a 
corporation are to be taken into account as a receipt.  Given 
that "gross receipts" is not defined in § 38, we look to the 
commissioner's regulations and give "substantial deference" to 
the expertise and statutory interpretation of the agency 
primarily responsible for administration of the statute.  
Goldberg v. Board of Health of Granby, 444 Mass. 627, 633 
(2005).  See Zoning Bd. of Appeals of Amesbury v. Housing 
Appeals Comm., 457 Mass. 748, 759-760 (2010), and cases cited. 
 
 
12 We do not address Genentech's challenge under the equal 
protection clause of the United States Constitution, because the 
record indicates that the company did not raise any such claim 
before the board.  See G. L. c. 58A, § 13 ("The court shall not 
consider any issue of law which does not appear to have been 
raised in the proceedings before the board"). 
18 
 
Commonwealth's "manufacturing credits,"13 creates a 
discriminatory and unfair tax burden that contravenes the 
commerce clause test set out in Complete Auto Transit, Inc. v. 
Brady, 430 U.S. 274, 279 (1977).  Genentech's challenge fails. 
 
a.  Background.  As stated previously, § 38 establishes 
allocation formulas for determining the amount of a business 
corporation's net income that is subject to taxation in the 
Commonwealth.  If a corporation's income is subject to income 
tax only in Massachusetts, one hundred per cent of its net 
income is taxable here, see § 38 (b), but if the income is 
taxable in one or more States in addition to the Massachusetts, 
the portion that is subject to tax here will be determined 
according to an allocation formula set out in one of the other 
subsections of § 38.  Before § 38 (l) was added to G. L. c. 63 
in 1995, the amount of income tax paid by a manufacturing 
corporation with taxable business income in several States was 
determined by use of the three-factor apportionment formula in § 
                                                          
 
13 Genentech defines as "manufacturing credits" the 
following three tax measures:  the investment tax credit (ITC) 
provided for in G. L. c. 63, § 31A; the research and development 
credit (R&D credit) in G. L. c. 63, § 38M, and the exemption 
from local property taxes on machinery in G. L. c. 59, § 5, 
Sixteenth (3).  Genentech focuses solely on the ITC and R&D 
credit in this appeal, and we do not further discuss the local 
property tax exemption for machinery.  See Mass. R. A. P. 16 (a) 
(4), as amended, 367 Mass. 921 (1978). 
 
19 
 
38 (c).14  See G. L. c. 63, § 38 (c), as amended through St. 
1996, c. 264, § 2.  The 1995 amendment to § 38 removed 
manufacturing corporations from the class of corporations 
subject to the § 38 (c) three-factor apportionment formula and 
established the single-factor formula based only on sales.  See 
St. 1995, c. 280, § 2.  The single-factor formula was 
implemented over four years, beginning in 1996; by the beginning 
of 2000, all manufacturing corporations with taxable income in 
both Massachusetts and another State were required to apportion 
their income using solely the sales factor.  See id. 
 
The "manufacturing credits" to which Genentech refers were 
enacted long before § 38 (l) was added to the corporate excise 
tax statute.  Thus, the investment tax credit (ITC), G. L. 
                                                          
 
 
14 During the tax years at issue here (and at present), the 
three-factor formula established by § 38 (c) operates as 
follows:  the taxable net income of the corporation was 
apportioned "by multiplying [the corporation's taxable net 
income] by a fraction, the numerator of which is the property 
factor plus the payroll factor plus twice times the sales 
factor, and the denominator of which is four."  G. L. c. 63, 
§ 38 (c), as amended through St. 1996, c. 264, § 2.  The 
"property factor," the "payroll factor," and the "sales factor" 
referred to in § 38 (c) are separately defined in G. L. c. 63, 
§ 38 (d), (e), and (f), respectively.  As set out in the cited 
definitional provisions, each of these factors represents a 
fraction, in which the numerator is the corporation's total 
payroll, or property, or sales, in the Commonwealth; and the 
denominator is the corporation's total payroll, or property, or 
sales, "everywhere during the taxable year." 
 
20 
 
c. 63, § 31A, was enacted in 1970, see St. 1970, c. 634, § 2;15 
and the research and development credit (R&D credit) described 
in G. L. 63, § 38M, was enacted in 1991, see St. 1991, c. 138, 
§ 130.16 
 
b.  Section 38 (l).  The United States Supreme Court "has 
long upheld, subject to certain restraints, the use of a 
formula-apportionment method to determine the percentage of a 
business' income taxable in a given jurisdiction."  Westinghouse 
Elec. Corp. v. Tully, 466 U.S. 388, 398 (1984).  The Court also 
has "repeatedly held that a single-factor formula is 
presumptively valid."  Moorman Mfg. Co. v. Bair, 437 U.S. 267, 
273 (1978).  Genentech claims, however, that the single-factor 
apportionment formula in § 38 (l), as applied to it, rebuts this 
                                                          
 
 
15 As defined in G. L. c. 63, § 31A (a), the ITC entitles a 
manufacturing corporation (among other listed types of 
corporations) to a credit against the excise tax due under G. L. 
c. 63 of one per cent of the cost of "qualifying" tangible 
property -- defined to include tangible personal property and 
other property including buildings -- "acquired, constructed, 
reconstructed, or erected during the taxable year" that was 
"situated in the Commonwealth on the last day of the taxable 
year" and depreciable under the Internal Revenue Code with a 
useful life of at least four years.  The ITC may be used in the 
year the expense is incurred, but unused portions may be carried 
forward to subsequent tax years.  G. L. c. 63, § 31A (g). 
 
 
16 General Laws c. 63, § 38M (a), provides a credit against 
a corporation's corporate excise tax due under G. L. c. 63 for 
certain qualifying research expenditures paid during the taxable 
year, limited to expenditures for research conducted in 
Massachusetts.  Like the ITC, the R&D credit may be used fully 
during the year the expenditures were incurred but unused 
portions may be carried forward.  See G. L. c. 63, § 38M (f). 
21 
 
presumption of validity because it violates the commerce clause 
test established in the Complete Auto Transit case, 430 U.S. at 
279, insofar as the formula is (1) discriminatory in relation to 
interstate commerce; (2) not fairly apportioned in relation to 
the extent of Genentech's activities in Massachusetts; and (3) 
not "fairly related to the services provided by the State."  Id.  
Genentech's complaint, however, centers virtually entirely on 
the first Complete Auto Transit test.  In particular, Genentech 
complains that by requiring the company to use § 38 (l)'s 
single-factor apportionment formula based only on sales while 
simultaneously denying it the benefit of the ITC and R&D credit, 
§ 38 (l) discriminates against the company as a foreign 
corporation whose manufacturing activities take place in a State 
other than Massachusetts (i.e., California), and therefore 
unconstitutionally burdens interstate commerce. 
 
The dormant commerce clause "denies the States the power 
unjustifiably to discriminate against or burden the interstate 
flow of articles of commerce."  Oregon Waste Sys., Inc. v. 
Department of Envtl. Quality of Or., 511 U.S. 93, 98 (1994).17  
                                                          
 
 
17 See Fulton Corp. v. Faulkner, 516 U.S. 325, 331 (1996), 
quoting Chemical Waste Mgt., Inc. v. Hunt, 504 U.S. 334, 342 
(1992) ("With respect to state taxation, one element of the 
protocol summarized in Complete Auto Transit, Inc. v. Brady, 430 
U.S. 274 [1977], treats a law as discriminatory if it "tax[es] a 
transaction or incident more heavily when it crosses state lines 
than when it occurs entirely within the State").  See also 
Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318, 332 n.12 
22 
 
We disagree with Genentech's claim, based on its reading of the 
legislative history of § 38 (l), that the statutory change in 
the excise tax apportionment formula for manufacturers in 1995 
was an intentionally discriminatory one, fueled by a purpose to 
benefit local manufacturers directly at the expense of 
manufacturers that maintain their manufacturing facilities and 
operations in other States.  Rather, we read the legislative 
history of § 38 (l) as indicating that the purpose of the change 
in the apportionment formula was designed to encourage 
manufacturers to increase the level of their investment in 
manufacturing operations in the Commonwealth by removing a tax 
"disincentive" created by the three-factor formula.18,19  The 
                                                                                                                                                                                           
(1977) (noting that State "may not discriminate between 
transactions on the basis of some interstate element").  State 
laws discriminating against interstate commerce on their face 
are "virtually per se invalid."  Oregon Waste Sys., Inc. v. 
Department of Envtl. Quality of Or., 511 U.S. 93, 98 (1994), and 
cases cited. 
 
18 See letter to Senate and House of Representatives from 
then Governor William F. Weld and then Lieutenant Governor Argeo 
Paul Cellucci, dated September 5, 1995, enclosing legislative 
proposal entitled "An Act to promote job growth in the 
Commonwealth"; memorandum to then Governor William F. Weld and 
then Lieutenant Governor, Argeo Paul Cellucci, from Gloria 
Cordes Larson and David B. Keto, "Q&A's on House No. 5617, 'An 
Act Relative to Job Creation and Economic Expansion in the 
Commonwealth,'" dated November 21, 1995 (Larson Memorandum); 
press release, "Weld, Cellucci Sign Single Sales, Limited 
Liability Bills," dated November 28, 1995. 
 
 
19 The "disincentive" that was perceived was that because a 
three-factor apportionment formula takes a corporation's 
property and payroll in Massachusetts into account, as well as 
23 
 
Supreme Court has recognized this type of business investment 
encouragement as a constitutionally appropriate goal.  See 
Trinova Corp. v. Michigan Dep't of Treasury, 498 U.S. 358, 385-
386 (1991), quoting Boston Stock Exch. v. State Tax Comm'n, 429 
U.S. 318, 336 (1977) ("It is a laudatory goal in the design of a 
tax system to promote investment that will provide jobs and 
prosperity to the citizens of the taxing State.  States are free 
to structure their tax systems to encourage the growth and 
development of interstate commerce and industry" [quotation 
omitted]). 
It is true, as Genentech points out, that when the 1995 
change in the apportionment formula for manufacturing 
corporations from one using an income allocation formula that 
includes Massachusetts property and payroll to one focusing 
solely on Massachusetts sales occurred, it may well have caused 
the amount of income apportioned to Massachusetts to decrease 
for manufacturing corporations that conducted their 
manufacturing operations in the Commonwealth, and have had the 
opposite effect on such corporations, like Genentech, with their 
                                                                                                                                                                                           
its Massachusetts sales, any increase in the company's 
manufacturing operations in the Commonwealth -- presumably 
resulting in an increase in the company's Massachusetts-based 
property and personnel -- would cause an increase in its excise 
tax apportionment factor and thereby an increase in the portion 
of its income subject to Massachusetts tax.  See Larson 
Memorandum at 2. 
 
24 
 
manufacturing facilities elsewhere.20  But the dormant commerce 
clause does not forbid a State from changing the allocation 
formula it uses to determine what share of the income generated 
by a multistate corporation operating in the taxing State is 
fairly subject to tax.  As previously stated (see note 17, 
supra), what the commerce clause forbids as discriminatory is a 
State tax measure that "tax[es] a transaction or incident more 
heavily when it crosses state lines than when it occurs entirely 
                                                          
 
 
20 The reason a manufacturing corporation with sales in 
Massachusetts and other States but with its manufacturing 
operations significantly located in Massachusetts would benefit 
from the change in allocation formulas is that the corporation's 
investment in property and payroll in the Commonwealth become 
irrelevant as factors influencing the allocation formula.  See 
note 19, supra. 
 
The reason a manufacturing corporation such as Genentech, 
with sales in the Commonwealth but manufacturing operations 
elsewhere would likely experience an increase in the amount of 
its income apportioned to Massachusetts when the apportionment 
method changed to a single-factor formula is illustrated by the 
following example.  Assume a manufacturing corporation had sales 
in the Commonwealth that amounted to ten per cent of its over-
all sales, but one hundred per cent of its manufacturing and 
other property as well as one hundred per cent of its 
manufacturing employees were located in another State.  Under 
the three-factor allocation formula in § 38 (c) that previously 
applied, the corporation's allocation factor would be 
effectively determined by dividing only twice times its sales 
factor by four: 
 
0 property factor + 0 payroll factor (0) + 2(.10 sales factor) 
4 
 
See note 14, supra.  Under the new allocation formula in § 38 
(l), however, at least beginning in 2000 and going forward, this 
same manufacturing corporation's allocation factor would be the 
.10 sales factor itself, that is, undivided by 4. 
25 
 
within the State."  Chemical Waste Mgt., Inc. v. Hunt, 504 U.S. 
334, 342 (1992), quoting Armco Inc. v. Hardesty, 467 U.S. 638, 
642, (1984).  See Boston Stock Exch., 429 U.S. at 337 (State may 
not "discriminatorily tax the products manufactured or the 
business operations performed in any other State"); id. at 332 
n.12 (State "may not discriminate between transactions on the 
basis of some interstate element").  The single-factor 
apportionment formula prescribed by § 38 (l) does not commit any 
such sin.  It uses the same apportionment formula to tax every 
multistate manufacturing corporation's income generated from its 
sales in the Commonwealth, treating every corporation, whether 
foreign or domestic, exactly the same.  More to the point, the 
formula treats the income from every sales transaction involving 
manufactured goods exactly the same, no matter where the 
corporation's manufacturing operations may be located.  Compare, 
e.g., New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 274 
(1988) (Ohio fuel tax credit for Ohio-produced fuel 
unconstitutionally discriminates against products of out-of-
State manufacturer in violation of commerce clause); Bacchus 
Imports, Ltd. v. Dias, 468 U.S. 263, 271-272 (1984) (Hawaii tax 
exemption solely for liquor produced in Hawaii 
unconstitutionally discriminatory).  The single-factor 
apportionment formula based on sales in § 38 (l), on its face or 
26 
 
as applied to Genentech, does not discriminate against 
interstate commerce. 
 
Nor does the unavailability of the ITC or the R&D credit to 
a manufacturing corporation like Genentech, that has chosen to 
conduct its manufacturing operations and perform research and 
development activities in a State other than Massachusetts, 
change this result.  It is true that these credits, if available 
to a manufacturing corporation, are available to reduce the 
corporation's excise tax burden.  But the credits were in 
existence long before § 38 was amended in 1995 to add § 38 (l) 
for manufacturing corporations; are available to a variety of 
corporations in addition to manufacturing corporations; and are 
clearly designed to encourage companies to locate operations in 
Massachusetts and thereby invest in the economy of the State.  
The commissioner points out that many States have adopted 
similar investment tax and R&D tax credits, including 
California; the record indicates that Genentech has qualified 
for and used California's equivalent credits against its 
California tax burden for many years.21  The availability of 
these credits, which are tied to investments of resources in the 
Commonwealth, are available to any manufacturing corporation, 
foreign or domestic, and operate independently of the 
                                                          
 
 
21 The record also reflects that in one or more of the tax 
years at issue here, Genentech itself qualified for and used the 
Massachusetts R&D credit. 
27 
 
corporation's interstate sales or other interstate commercial 
activities, does not violate the commerce clause.  See New 
Energy Co. of Ind., 486 U.S. at 278 ("The Commerce Clause does 
not prohibit all state action designed to give its residents an 
advantage in the marketplace, but only action of that 
description in connection with the State's regulation of 
interstate commerce.  Direct subsidization of domestic industry 
does not ordinarily run afoul of that prohibition; 
discriminatory taxation of out-of-state manufacturers does" 
[emphasis in original]).  See also Fireside Nissan, Inc. v 
Fanning, 30 F.3d 206, 216 (1st Cir. 1994). 
Decision of the Appellate  
Tax Board affirmed.