Massachusetts continues to provide significant tax benefits to corporations that are engaged in manufacturing activities within the state. These benefits include:
- Single sales factor apportionment for income tax purposes
- Sales/Use Tax Exemptions
- Investment Tax Credits
- Local Personal Property Tax Exemption
A corporation can qualify for all the above tax benefits if it timely files a Form 355Q ‘Application for Manufacturing Classification’, and the state approves the application. Form 355Q filings are due by January 31 of the calendar year for which the classification is sought; application sent after January 31 will be considered for the following calendar year. A corporation classified as a manufacturing corporation must reapply and complete a new Form 355Q if it undergoes a name change, merger, or undergoes a material change in its activities.
Utilizing Form 355Q; the state seeks to determine if the applying corporation performs ‘substantial manufacturing activities’ within the state. The state seeks to evaluate:
- Does a corporation derive 25% of its receipts from product manufactured in Massachusetts?
- Is the corporation’s payroll comprised of 25% of employees located in Massachusetts performing manufacturing activities? If so, does the corporation derive 15% of its receipts from products made in Massachusetts?
- Is 25% of the property value in Massachusetts associated with tangible property used in the manufacturing process? If so, does the corporation derive 15% of its receipts from products made in Massachusetts?
- Is 35% of the property value in Massachusetts associated with tangible property used in the manufacturing process?
A corporation that is able to answer yes to any of the 4 scenarios above is considered to be performing substantial manufacturing activities within the state.
Recent court decisions in Massachusetts have allowed for an expansion on the types of activities that are considered manufacturing. For example, corporations are not required to perform each step in the manufacturing process to be classified as a manufacturer. A corporation may perform just the product development and product testing in Massachusetts; yet still be classified as a manufacturer.
The state has also expanded upon what is included in the definition of ‘products.’ In recent years Massachusetts sales tax law has changed to include the electronic delivery of software as a taxable item. In making this proclamation the Department of Revenue has also allowed for the development of prewritten software to be considered a manufacturing activity; allowing for software development companies to be classified as manufacturers.
Classification v. Status
Those taxpayers completing Form 355Q and are approved to receive the manufacturing corporation classification receive all 4 benefits listed above. However, corporations can be treated as having manufacturing corporation ‘status’ which allows for the corporation to receive all the tax benefits listed previously except for the personal property tax exemption.
A corporation who is engaged in manufacturing in the state, but does not complete the Form 355Q received manufacturing corporation ‘status’. This requires the corporation to self-evaluate its gross receipts, tangible property, and employees within the state, and self-determine if the corporation is engaged in manufacturing in Massachusetts.
In considering whether your corporation should pursue these tax benefits you should be asking:
- Do you have employees/property in Massachusetts assisting with manufacturing including those in product development/quality control?
- Are you currently paying sales/use or personal property tax on machines/equipment used in:
- Manufacturing products
- Developing software (servers, hardware cooling units, heatsinks, etc.)
- Are you currently paying Massachusetts income tax, excise tax or property tax?
If the answer to any of these is yes; your corporation should seek further information to determine if you can qualify for Massachusetts Manufacturing Classification or Status.
If you have any further questions regarding pursuit of Massachusetts Manufacturing Classification or Status please contact:
Joel Gardosik of CFGI Tax Services, LLC at firstname.lastname@example.org
Adam DoVale of CFGI Tax Services, LLC at email@example.com