Genentech Dealt a Blow From Massachusetts’ Highest Court

Genentech Grows on Promise of 70+ Drug Approvals

January 16, 2017
By Mark Terry, BioSpace.com Breaking News Staff

The Massachusetts Supreme Court ruled against California-based Genentech in a tax case regarding manufacturing status.

The suit revolved around a Massachusetts corporate excise tax statute that requires companies in the state and from outside the state to pay taxes based on a statutory formula. Manufacturers get special tax treatment. But for Massachusetts-based companies, the tax is lower. For some companies, such as Genentech, they have to pay more. But much of it comes down to the definition of manufacturing.

The case states, “In this appeal from a decision of the Appellate Tax 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 [its] single-factor apportionment formula based on sales to the company violated the commerce clause of the United States Constitution.”

In short, Genentech was arguing that Massachusetts had taxed it too much by millions of dollars. Genentech argued that it was not actually a manufacturer because it doesn’t create new products by hand or machinery.

The Massachusetts Supreme Judicial Court upheld the Department of Revenue’s decision that Genentech was actually a manufacturer based on its gross receipts. The court also turned down the company’s argument that its formula was unconstitutional because it favored in-state companies over out-of-state companies.

The Boston Business Journal writes, “The formula used by the state for manufacturers is known as single sales factor. Under the formula, only a company’s in-state sales are used to calculate state taxes, not its property or payroll in Massachusetts.”

The special tax treatment is applied to manufacturers, defense contractors and mutual fund companies. The Boston Business Journal adds, “Lawmakers enabled the industries to use the formula in the 1990s, in part to prevent companies like Fidelity Investments and Raytheon (RTN) from moving jobs out of state.”

The law’s definition of manufacturing was, in part, “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 new use.”

Although Genentech was arguing they weren’t manufacturing, the courts broke down Genentech activities into four broad categories that began with altering DNA so they would produce “proteins of interest,” placing the genetically altered cells into successively larger tanks for growing, extraction and purification of the desired proteins, and formulating the bulk drug into dosage form and packaging it for sale.

There was also a fair amount of precedent. The courts noted that in a case between The Charles River Breeding Labs., Inc v. State Tax Comm’n, the “breeding and raising of partially uncontaminated laboratory animals was determined not to be manufacturing because ‘manufacturing normally involves a change of some substance, element, or material into something new or different,” and publishing, where the “complilation of information, photographs, and text, into proofs, edited, refined, and ultimately transferred to disk or CD ROM” is manufacturing.

In 2016, Massachusetts Governor Charlie Baker proposed extending the formula to all industries, but it didn’t pass. Critics have argued that the single sales factor apportionment hasn’t boosted the state’s economy the way it was designed.

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