The Supreme Judicial Court ruled today that start-up companies that buy expensive manufacturing equipment don't have to pay tax on it even if they have not yet actually started widespread manufacturing with it.
The state has long tried to encourage manufacturers to expand by waiving "personal" property taxes on purchases of equipment used to manufacture things. The state Department of Revenue had argued that a start-up called Onex Communications hadn't actually made "a finished product" with its $2.7-million chip-making equipment and so owed $179,838.54 in taxes and penalties.
But the state's highest court says that's just silly because the company was, in fact, actively engaged in preparing to build its chips and had built some prototypes:
[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 added the revenue department's position would go against the rationale behind the tax break, by making Massachusetts more costly for new manufacturing concerns to start here - and would even allow for abuse:
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.
Onex has since been acquired by TranSwitch - the company whose employees initially left to start Onex.
Complete ruling.
