Genentech, Inc. v. Commissioner of Revenue, 476 Mass. 258

Background

Genentech, a Delaware corporation with headquarters in California, develops protein-based drugs by genetically modifying cells, growing them, extracting and purifying proteins, and formulating and selling finished drugs.
For tax years 1998–2004 Genentech earned sales in Massachusetts and other states; it invested excess cash in short-term securities (money market funds, commercial paper, treasury bonds) whose redemptions generally returned principal.
Massachusetts law (G. L. c. 63, § 38(l)) treats a "manufacturing corporation" as using a single-factor apportionment (sales only) if it is "engaged in substantial part" in manufacturing; one statutory test defines "substantial" as ≥25% of gross receipts from sales of goods it manufactures.
Commissioner assessed Genentech as a manufacturing corporation for the years at issue; Genentech filed for abatement and appealed to the Appellate Tax Board (ATB).
ATB found Genentech’s drug production qualified as manufacturing, that its manufacturing was "substantial," and that applying the single-factor formula did not violate the dormant Commerce Clause; the Supreme Judicial Court affirmed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Genentech's activities constitute "manufacturing" under § 38(l)	Genentech argued its operations were not manufacturing (implicitly comparable to non-manufacturing activities like mining).	Commissioner/ATB argued genetic modification, growth, extraction, purification and formulation transform cells into new products, satisfying the statutory definition.	Court held Genentech's processes are manufacturing: genetic transformation and extraction produce a new product with new nature and use.
Whether Genentech's manufacturing was "substantial" because § 38(l)(1)'s "gross receipts" should include redemptions/returns of short-term securities	Genentech argued "gross receipts" includes all receipts (including redemption/return of capital), which would dilute the percentage of receipts from manufactured goods below 25%.	Commissioner/ATB argued returns of invested capital are not business receipts for this test; "gross receipts" should be limited to business income (sales, interest, dividends, capital gains).	Court affirmed ATB: exclude return-of-capital redemptions; more than 25% of Genentech's gross receipts derived from manufactured goods, so it met the substantial test.
Whether § 38(l)'s single-factor sales apportionment (and interaction with manufacturing-related credits) violates the dormant Commerce Clause	Genentech claimed single-factor apportionment plus inapplicability of Massachusetts investment/R&D credits discriminates against out-of-state manufacturers and burdens interstate commerce.	Commissioner argued single-factor formula is facially neutral and aimed at encouraging in-state investment; credits predate § 38(l) and are non-discriminatory incentives tied to in‑state activity.	Court held no Commerce Clause violation: single-factor formula is presumptively valid and not discriminatory as applied; credits and incentives do not render the statute unconstitutional.

Key Cases Cited

Boston & Me. R.R. v. Billerica, 262 Mass. 439 (1928) (defines manufacturing as transformation into a new product with new name, nature or use)
Assessors of Boston v. Commissioner of Corps. & Taxation, 323 Mass. 730 (1949) (roasting/processing coffee is manufacturing where raw material becomes substantially different)
The Charles River Breeding Labs., Inc. v. State Tax Comm'n, 374 Mass. 333 (1978) (breeding animals not manufacturing absent transformation to a new substance)
William F. Sullivan & Co. v. Commissioner of Revenue, 413 Mass. 576 (1992) (applying Boston & Me. R.R. concept to manufacturing analysis)
Tilcon-Warren Quarries, Inc. v. Commissioner of Revenue, 392 Mass. 670 (1984) (crushing rock held non-manufacturing where character unchanged)
Houghton Mifflin Co. v. Commissioner of Revenue, 423 Mass. 42 (1996) (compiling materials into new media can be manufacturing)
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) (four-part test for validity of state tax under Commerce Clause)
Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978) (single-factor apportionment presumptively valid)
Westinghouse Elec. Corp. v. Tully, 466 U.S. 388 (1984) (upholding formula apportionment methods)
Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318 (1977) (States may not discriminate against interstate commerce in taxation)
Oregon Waste Sys., Inc. v. Dept. of Envtl. Quality of Or., 511 U.S. 93 (1994) (state tax invalid if it discriminates against interstate commerce)