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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      Percent of Sales
                from Manufacturing,   from Manufacturing,
                Return of Capital     Return of Capital
                Excluded              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.
