Skechers USA, Inc. v. Commissioner of Revenue (May 5, 2025)

C344671Masstaxbd

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COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
SKECHERS USA, INC. 	v. 	COMMISSIONER OF REVENUE
Docket No. C344671 	Promulgated:
May 5, 2025
This 	is 	an 	appeal 	filed 	under 	the 	formal 	procedure 	pursuant
to 	G.L. 	c. 	58A, 	§ 	7 	and 	G.L. 	c. 	62C, 	§ 	39(c) 	from 	the 	refusal 	of
the 	Commissioner 	of 	Revenue 	(“Commissioner” 	or 	“appellee”) 	to
grant 	an 	abatement 	of 	corporate 	excise 	assessed 	to 	Skechers 	USA,
Inc. (“Skechers” or “appellant”) under G.L c. 63, § 38 for the tax
years ended December 31, 2015, December 31, 2016, and December 31,
2017 (collectively, “tax years at issue”).
Chairman DeFrancisco heard this appeal and was joined in the
decision 	for 	the 	appellee 	by 	Commissioners 	Good, 	Elliott, 	Metzer
and Bernier.
These findings of fact and report are made at the request of
the appellant pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.1
Michael J. Bowen, Esq., for the appellant.
Celine E. de la Foscade-Condon, Esq., and Brett M. Goldberg,
Esq., for the appellee.
1 This citation is to the regulation in effect prior to January 5, 2024.
ATB 2025-95
FINDINGS OF FACT AND REPORT
I. Introduction and Jurisdiction
At 	all 	times 	relevant 	to 	this 	appeal, 	the 	appellant 	was 	a
Delaware 	corporation 	whose 	principal 	place 	of 	business 	was 	in
Manhattan Beach, California. Founded as a footwear company in 1992,
Skechers 	employed 	thousands 	of 	people 	at 	locations 	within 	the
United States as well as at overseas offices in China and Vietnam.
The 	issue 	in 	this 	appeal 	was 	whether 	the 	appellant 	was 	a
“manufacturing 	corporation” 	within 	the 	meaning 	of 	G.L. 	c. 	63, 	§
38(l)(1) (“§ 38”) during the tax years at issue, such that it was
required 	to 	apportion 	its 	net 	income 	using 	a 	single-factor
apportionment formula.
The appellant timely filed a Massachusetts combined corporate
excise 	return 	on 	Form 	355 	for 	each 	of 	the 	tax 	years 	at 	issue. 	On
November 13, 2020, following an audit, the Commissioner issued to
the 	appellant 	a 	Notice 	of 	Intent 	to 	Assess 	additional 	corporate
excise. 	By 	Notice 	of 	Assessment 	dated 	December 	28, 	2020, 	the
Commissioner assessed to the appellant additional corporate excise
in the amount of $155,043.00, plus penalties and interest, for the
tax 	years 	at 	issue. 	On 	April 	7, 	2021, 	the 	appellant 	filed 	an
Application 	for 	Abatement 	with 	the 	Commissioner 	on 	Form 	ABT. 	By
Notice 	of 	Abatement 	Determination 	dated 	September 	28, 	2021, 	the
ATB 2025-96
Commissioner 	denied 	the 	appellant’s 	abatement 	application.2 	On
November 	9, 	2021, 	the 	appellant 	filed 	its 	Petition 	with 	the
Appellate 	Tax 	Board 	(“Board”). 	On 	the 	basis 	of 	these 	facts, 	the
Board found and ruled that it had jurisdiction to hear and decide
this appeal.
The evidence in this appeal consisted of a Statement of Agreed
Facts 	and 	stipulated 	exhibits 	offered 	by 	the 	parties, 	additional
documentary 	evidence, 	and 	the 	testimony 	of 	two 	Skechers’
employees: 	Frank 	Chuang, 	Vice 	President 	of 	Research 	and
Development, 	and 	Paul 	Curtis, 	Vice 	President 	of 	Production. 	The
testimony 	and 	documentary 	evidence 	described 	the 	way 	in 	which
Skechers footwear comes into being, and the role played by Skechers
employees 	and 	third-party 	contract 	manufacturers 	(“third-party
manufacturers” or “factories”) in that process.
II. 	The Skechers’ Shoe-Creation Process
The 	Skechers’ 	shoe-creation 	process 	begins 	with 	a 	product
development 	brief, 	which 	sets 	forth 	the 	“concept, 	[the]
inspiration, 	[the] 	direction 	of 	the 	new 	product 	for 	that 	new
season.” 	A 	product 	development 	brief 	is 	created 	by 	Skechers’
employees and a meeting to launch such a brief may be attended by
designers, 	merchandisers, 	colorists, 	and 	product 	technicians. 	A
2 Penalties for each of the tax years at issue had also been assessed but were
abated following a hearing at the Commissioner’s Office of Appeals.
ATB 2025-97
product 	development 	brief 	is 	for 	internal 	use 	only. 	It 	is 	not
shared with third-party manufacturers.
The 	second 	step 	in 	the 	process 	is 	the 	creation 	of 	a 	design
spec by Skechers’ employees. The design spec contains more detailed
information 	regarding 	almost 	every 	aspect 	of 	the 	shoe-to-be,
including: the materials to be used for various parts of the shoe;
features 	such 	as 	stitching, 	colors, 	and 	dimensions; 	and
technological aspects of the shoe. 	Additionally, the design spec
may 	specify 	a 	particular 	construction 	process, 	and 	it 	may 	also
indicate 	which 	mold 	is 	to 	be 	used. 	Skechers’ 	annual 	reports
referred 	to 	the 	design 	specs 	as 	“prototype 	blueprints” 	that 	are
“forwarded to our manufacturers for design prototypes.”
Once completed, the design specs are sent to the appellant’s
overseas offices. Skechers’ employees at the overseas offices then
identify 	which 	third-party 	manufacturer 	can 	produce 	the 	product.
Skechers 	has 	on-going 	relationships 	with 	many 	of 	the 	factories,
such that the factories have a ready understanding of what Skechers
is 	looking 	for 	in 	a 	product. 	Skechers 	generally 	allows 	the
factories 	to 	source 	their 	own 	raw 	materials 	and 	negotiate 	their
prices, so long as the suppliers satisfy Skechers’ specifications
as 	to 	testing 	and 	other 	requirements. 	However, 	there 	have 	been
instances when Skechers requires that certain suppliers be used.
The next step in the process is the creation of “spec sheets,”
which are created by the factories. Spec sheets list the materials
ATB 2025-98
to 	be 	used 	in 	each 	part 	of 	the 	shoe-to-be. 	Skechers’ 	employees
review 	the 	spec 	sheets 	and 	the 	spec 	sheets 	can 	be 	modified 	if
Skechers is not satisfied with the listed materials. 	In addition,
testing 	is 	performed 	to 	ensure 	that 	the 	materials 	selected 	meet
Skechers’ standards. This testing includes checking the durability
of the products as to wear and other physical stresses, as well as
color 	testing. 	Testing 	is 	sometimes 	performed 	by 	the 	factories,
but 	Skechers 	reviews 	the 	testing 	reports. 	If 	a 	factory 	uses
materials 	that 	Skechers 	did 	not 	approve, 	Skechers 	can 	refuse 	the
products altogether or enforce monetary sanctions.
Next 	comes 	the 	creation 	of 	the 	“pullover,” 	which 	is 	a
prototype 	shoe 	upper, 	and 	this 	takes 	place 	at 	the 	factories. 	A
pullover 	allows 	for 	fit 	testing 	and 	other 	design 	scrutiny. 	The
physical pullover is first inspected by Skechers employees at the
overseas offices, then later by designers and product technicians
at 	the 	appellant’s 	US 	offices. 	This 	part 	of 	the 	process 	is
referred 	to 	as 	the 	“initial 	line 	review,” 	and 	in 	addition 	to 	the
pullover, 	which 	relates 	to 	the 	shoe 	upper, 	the 	blueprint 	for 	the
outsole 	of 	the 	shoe 	is 	also 	reviewed. 	This 	is 	considered 	to 	be 	a
critical part of the shoe-creation process. If Skechers’ designers
and product technicians are not satisfied with the pullover, they
will 	physically 	draw 	on 	it 	to 	indicate 	to 	the 	factories 	which
changes 	need 	to 	be 	made. 	The 	factories 	then 	incorporate 	those
changes into the designs for the shoe, and during the tax years at
ATB 2025-99
issue, 	Skechers’ 	US 	employees 	frequently 	visited 	the 	overseas
offices to convey in person what changes needed to be made to the
shoe.
Up 	to 	the 	initial 	line 	review, 	Skechers 	may 	decline 	to 	move
forward 	with 	a 	prospective 	product. 	For 	products 	that 	are 	not
dropped at this stage, the next step involves the creation of the
molds to be used in the manufacturing process, including the lasts,
which 	are 	molds 	shaped 	like 	a 	human 	foot. 	Although 	the 	factories
generally 	contract 	out 	to 	other 	factories 	for 	the 	production 	of
the 	molds 	and 	lasts, 	the 	record 	showed 	that 	Skechers 	often
specifies the exact mold and last to be used, as many of them have
been 	used 	previously. 	Skechers 	likewise 	employs 	mold 	technicians
who 	work 	with 	the 	factories 	on 	the 	specifications 	for 	the 	molds.
After 	production 	has 	been 	completed, 	the 	factories 	may 	melt 	down
or 	recycle 	the 	molds 	or 	lasts, 	but 	they 	must 	get 	permission 	from
Skechers to take either action.
Following the creation and approval of the molds is the middle
line 	review. 	This 	is 	when 	sample 	shoes 	are 	created 	in 	two 	color
patterns, 	and 	then 	those 	samples 	are 	reviewed. 	Revisions 	to 	the
shoe 	design 	may 	still 	be 	made 	at 	this 	point, 	particularly 	with
respect 	to 	aesthetic 	details. 	Next 	comes 	the 	final 	line 	review.
At 	this 	point, 	the 	shoe 	is 	made 	in 	the 	full 	spectrum 	of 	colors,
and 	quality 	assurance 	is 	conducted. 	During 	quality 	assurance, 	a
ATB 2025-100
percentage 	of 	shoes 	are 	pulled 	from 	the 	manufacturing 	line 	and
inspected.
Skechers’ 	US 	employees 	review 	the 	products 	after 	both 	the
initial 	and 	middle 	line 	reviews. 	In 	addition, 	fit 	testing 	is
conducted 	throughout 	the 	shoe-creation 	process. 	Fit 	testers 	are
Skechers’ employees, although the factories may also conduct their
own 	independent 	fit 	testing. 	If 	a 	fit 	tester 	reports 	a 	problem
with 	a 	shoe, 	a 	Skechers’ 	product 	technician 	is 	notified, 	who 	in
turn 	notifies 	a 	Skechers’ 	employee 	in 	the 	overseas 	offices 	about
changes 	that 	need 	to 	be 	made. 	Skechers’ 	overseas 	employees 	will
communicate the issue to the factories.
Once the design and fit issues have been addressed, showroom
and sales samples are created. Skechers’ sales personnel can show
these to potential buyers who can then place purchase orders. The
factories then make a “confirmation sample,” which must match the
showroom 	and 	sales 	samples. 	However, 	mass 	production 	does 	not
commence 	at 	this 	point. 	Prior 	to 	mass 	production, 	Skechers’
commercialization and development teams meet with the factories to
address 	any 	issues 	not 	previously 	addressed, 	including 	design
alterations, 	if 	any, 	required 	for 	extreme 	sizes. 	Additionally,
die3 tests are performed. At this stage, the factories make cutting
dies 	for 	every 	size 	of 	a 	shoe 	and 	produce 	two 	to 	three 	pairs 	in
3 Dies are specialized tools that are used in manufacturing to cut and shape
materials into specific shapes.
ATB 2025-101
each 	size. 	Skechers’ 	quality 	assurance 	personnel 	are 	present 	at
the factories during the die tests and review the samples produced.
If the die test is not satisfactory, additional revisions will be
made. 	If 	the 	die 	test 	is 	satisfactory, 	the 	factories 	can 	proceed
into 	preproduction. 	Grade 	sheets, 	which 	contain 	measurements 	for
all 	components 	of 	a 	shoe 	for 	all 	sizes, 	are 	then 	prepared.
Skechers’ employees review and sign off on the grade sheets.
Factories 	then 	commence 	the 	first 	production 	run. 	Following
the 	first 	production 	run, 	Skechers’ 	quality 	assurance 	personnel
again 	review 	the 	products, 	and, 	if 	they 	are 	satisfactory, 	they
sign 	off 	on 	a 	report 	authorizing 	the 	factory 	to 	go 	forward 	with
additional production. During this stage of production, samples of
the 	products 	will 	be 	shipped 	to 	Skechers’ 	US 	offices 	for
inspection, 	and 	comments 	as 	to 	what 	aspects 	of 	the 	shoe 	could 	be
improved, 	if 	any, 	are 	forwarded 	to 	the 	factories. 	The 	resulting
improvements are then incorporated into the shoe.
Once a production run is completed, Skechers performs a final
inspection. 	Skechers’ 	quality 	assurance 	personnel 	continue 	to
inspect 	the 	products, 	and 	fit 	testing 	and 	additional 	quality
inspection 	likewise 	continue 	to 	this 	point. 	The 	completed,
manufactured products are then packaged into shoe boxes, designed
by 	Skechers’ 	employees, 	and 	shipped 	to 	Skechers’ 	distribution
centers, where they are again inspected.
ATB 2025-102
III (a). Skechers Was “Engaged in Manufacturing.”
On 	the 	basis 	of 	the 	record 	in 	its 	entirety, 	the 	Board
concluded 	that 	Skechers 	was 	“engaged 	in 	manufacturing” 	for
purposes of § 38. The Board found that Skechers’ activities, from
the 	initial 	conception 	of 	an 	idea 	for 	a 	shoe 	to 	its 	ultimate
creation, involved the transformation of “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.” 	G.L. 	c. 	63, 	§ 	38(l)(1). 	In 	reaching 	this
conclusion, the Board found that the materials created by Skechers
were 	physically 	useful 	in 	making 	the 	footwear 	products 	that 	it
ultimately sold. They were not valuable solely for their artistic
or intellectual content, but for the exact and precise information
they 	specified 	for 	every 	component 	of 	every 	shoe. 	Further, 	the
Board found that Skechers employees physically interacted with the
footwear products throughout the creation and production process,
including 	fit 	testing 	and 	quality 	inspection, 	and 	that 	their
feedback resulted in physical modifications to the products.
III 	(b). 	Skechers’ 	Efforts 	to 	Minimize 	its 	Role 	in 	the
Manufacturing Process Were Unavailing.
It 	was 	Skechers’ 	position 	in 	this 	appeal 	that 	it 	merely
designs, 	markets, 	and 	sells 	footwear, 	and 	is 	not 	involved 	in 	the
manufacture 	of 	footwear. 	Skechers’ 	arguments 	were 	primarily
ATB 2025-103
focused 	on 	distinguishing 	the 	facts 	in 	the 	present 	appeal 	from
those in a highly analogous appeal, Deckers Outdoors Corporation,
Inc. 	v. 	Commissioner 	of 	Revenue, 	Mass. 	ATB 	Findings 	of 	Fact 	and
Reports 	2018-227, 	238 	(“Deckers”), 	in 	which 	the 	Board 	found 	and
ruled 	that 	a 	US-based 	footwear 	company 	that 	engaged 	third-party
contract manufacturers for the mass production of its products was
likewise 	engaged 	in 	manufacturing 	for 	purposes 	of 	§ 	38. 	As 	with
the 	taxpayer 	in 	Deckers, 	the 	Board 	found 	here 	that 	Skechers’
efforts 	to 	minimize 	its 	involvement 	in 	the 	manufacturing 	of 	its
name-brand products lacked merit.
For 	example, 	in 	its 	efforts 	to 	paint 	itself 	as 	being 	very
hands-off 	with 	respect 	to 	the 	overseas 	manufacturing 	process,
Skechers made much of the fact that it utilized a quality assurance
protocol, rather than a quality control protocol. The record showed
that when Skechers switched from the quality control model to the
quality 	assurance 	approach 	around 	2010, 	the 	number 	of 	Skechers’
employees involved in that function was reduced from approximately
120 	to 	between 	seventy 	and 	seventy-five. 	The 	Board 	found 	this 	to
be 	a 	distinction 	without 	a 	difference, 	as 	the 	record 	showed 	that
quality 	inspection 	– 	regardless 	of 	its 	label 	- 	was 	conducted 	by
Skechers’ employees throughout the shoe-creation process, on-site
in 	the 	factories. 	Indeed, 	Mr. 	Curtis 	acknowledged 	that 	Skechers’
quality 	assurance 	personnel 	were 	present 	at 	the 	factories 	on 	a
“daily basis.”
ATB 2025-104
Additionally, 	the 	appellant 	argued 	that 	the 	Commissioner
ignored 	the 	guidance 	provided 	in 	his 	own 	regulation, 	which
describes 	what 	activities 	will 	and 	will 	not 	constitute
manufacturing. More specifically, 830 CMR 58.2.1(6)(b) states:
Manufacturing 	ordinarily 	involves 	the 	production 	of
products 	in 	standardized 	sizes 	and 	qualities 	and 	in
multiple 	quantities. 	Market 	research, 	research 	and
development, 	and 	design 	and 	creation 	of 	a 	prototype,
although 	prerequisites 	to 	manufacturing, 	are 	not
manufacturing.
Id.
The 	appellant 	contended 	that 	Skechers’ 	involvement 	in 	the
shoe creation process was limited to the design and creation of a
prototype, 	ending 	after 	the 	creation 	of 	that 	prototype, 	in 	other
words, 	at 	the 	initial 	line 	review. 	This 	argument 	was 	squarely
contradicted 	by 	the 	record 	evidence, 	which 	showed 	a 	near-
continuous 	back 	and 	forth 	between 	Skechers’ 	US 	employees, 	its
overseas 	employees, 	and 	the 	factories 	- 	including 	e-mail
communications and in-person visits - throughout the entire shoe-
creation process.
So, too, was the Board unpersuaded by the fact that Skechers
gave its contract manufacturers leeway in the sourcing of materials
and the ability to negotiate the prices for those materials. While
this 	business 	model 	may 	be 	different 	than 	those 	employed 	by
Skechers’ 	competitors, 	it 	in 	no 	way 	diminishes 	the 	vital 	role
played by Skechers’ employees throughout the entirety of the shoe
ATB 2025-105
creation 	process. 	The 	Board 	therefore 	rejected 	Skechers’
arguments.
III (c). Skechers Was Engaged in Manufacturing in Substantial
Part.
Finally, to be considered a § 38 manufacturer, a company must
not 	only 	“engag[e] 	in 	manufacturing,” 	but 	must 	do 	so 	“in
substantial 	part.” 	G.L. 	c. 	63, 	§ 	38(l)(1). 	The 	statute 	sets 	out
methodologies for determining substantiality, including numerical
thresholds 	based 	on 	a 	taxpayer’s 	gross 	receipts, 	tangible
property, 	and 	payroll, 	as 	well 	as 	by 	reference 	to 	the
Commissioner’s regulations.
The appellant in the present appeal did not offer evidence to
demonstrate 	that 	it 	fell 	short 	of 	the 	statutory 	thresholds
determining substantiality, instead relying solely on its position
that 	it 	did 	not 	engage 	in 	manufacturing 	to 	any 	extent. 	This
argument 	was 	negated 	by 	the 	Board’s 	findings 	that 	the 	appellant
was 	in 	fact 	“engaged 	in 	manufacturing.” 	Further, 	the 	Board 	found
that the only logical inference from the record was that Skechers
derived in excess of the 25% threshold of its gross receipts from
the 	sale 	of 	products 	that 	it 	manufactured. 	As 	the 	appellant 	had
the 	burden 	of 	proof, 	the 	Board 	ruled 	that 	the 	appellant 	did 	not
meet 	its 	burden 	of 	demonstrating 	that 	it 	was 	not 	“engaged 	in
manufacturing 	. 	. 	. 	in 	substantial 	part[.]” 	G.L. c. 63, 	§ 	38
(l)(1).
ATB 2025-106
In 	conclusion, 	based 	on 	the 	record 	in 	its 	entirety 	and 	the
reasonable 	inferences 	drawn 	therefrom, 	the 	Board 	found 	and 	ruled
that 	Skechers 	was 	a 	“manufacturing 	corporation” 	for 	purposes 	of
§ 38, 	and 	as 	such, 	it 	was 	required 	to 	use 	a 	single-factor
apportionment formula for the tax years at issue. Accordingly, the
Board issued a decision for the appellee in this appeal.
OPINION
Pursuant 	to 	§ 	38, 	a 	“manufacturing 	corporation” 	that 	has
income 	from 	business 	activity 	that 	is 	taxable 	both 	within 	and
without Massachusetts is required to apportion its net income using
a single-factor formula, based entirely on its sales, rather than
the 	three-factor 	formula 	based 	upon 	property, 	payroll, 	and 	sales
factors. 	The 	use 	of 	a 	single-factor 	formula 	based 	on 	sales 	for
businesses 	with 	little 	payroll 	or 	property 	within 	Massachusetts
tends to increase their tax liability as compared to the use of a
three-factor 	formula 	that 	non-manufacturing 	corporations 	were
entitled to use during the tax years at issue.4 That was precisely
the 	case 	for 	Skechers, 	and 	the 	issue 	presented 	for 	the 	Board’s
consideration 	was 	whether 	Skechers 	was 	a 	“manufacturing
corporation” for purposes of § 38.
4 For tax years beginning on and after January 1, 2025, all corporations
with 	income 	from 	business 	activity 	both 	within 	and 	without 	the
Commonwealth are required to use a single-factor formula based on sales.
See St. 2023, c. 50, § 31.
ATB 2025-107
Section 38 defines “manufacturing corporation” as follows:
[A] 	corporation 	that 	is 	engaged 	in 	manufacturing. 	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.
G.L. 	c. 	63, 	§ 	38(l)(1). 	The 	statutory 	definition 	closely 	follows
the 	definition 	articulated 	by 	the 	Supreme 	Judicial 	Court 	decades
ago 	in 	Boston 	& 	Me. 	R.R. 	v. 	Billerica, 	262 	Mass. 	439, 	444-45
(1928): 	“[c]hange 	wrought 	through 	the 	application 	of 	forces
directed by the human mind, which results in the transformation of
some 	pre-existing 	substance 	or 	element 	into 	something 	different,
with a new name, nature or use.” 	Because status as a manufacturing
corporation 	has 	significance 	for 	tax 	purposes 	beyond 	§ 	38, 	what
activities constitute manufacturing is a question that courts and
this 	Board 	have 	long 	and 	often 	been 	asked 	to 	consider. 	See
Commissioner of Revenue v. Houghton Mifflin Company, 423 Mass. 42,
44 	(1996) 	(noting 	that 	this 	issue 	has 	“spawned 	a 	great 	body 	of
caselaw”).
A focal point in these cases has been “whether the processes
under 	study 	‘effect[ed] 	the 	kind 	of 	change 	and 	caus[ed] 	a
correlative 	degree 	of 	refinement 	to 	the 	source 	material,’
sufficient 	to 	qualify 	as 	‘manufacturing.’” 	Houghton 	Mifflin, 	423
Mass. at 47 (quoting William F. Sullivan & Co. v. Commissioner of
Revenue, 413 Mass. 576, 581 (1992)). For example, converting frozen
ATB 2025-108
steak 	into 	cooked 	steak 	and 	crushing 	larger 	stones 	into 	smaller
stones 	were 	not 	activities 	constituting 	manufacturing.
York Steak House Sys., Inc. v. Commissioner of Revenue, 393 Mass.
424, 	426 	(1984); 	Tilcon-Warren 	Quarries, 	Inc. 	v. 	Commissioner 	of
Revenue, 	392 	Mass. 	670 	(1984). 	However, 	scouring 	raw 	waste 	wool
into 	wool 	ready 	to 	be 	spun 	into 	thread 	or 	cloth; 	converting 	cast
off pipe, appliances, automotive parts, and other metal items into
compressed 	and 	baled 	scrap 	metal; 	and 	converting 	standing 	timber
into 	cut 	lumber 	all 	constituted 	manufacturing. 	See 	Assessors 	of
Boston 	v. 	Commissioner 	of 	Corps. 	& 	Taxation, 	323 	Mass. 	730, 	748
(1949); 	William 	F. 	Sullivan 	& 	Co., 	413 	Mass. 	at 	581; 	Joseph 	T.
Rossi Corp. v. State Tax Comm’n, 369 Mass. 178, 181-82 (1975).
In 	recent 	years, 	there 	have 	been 	numerous 	opportunities 	to
consider 	scenarios 	substantially 	similar 	to 	the 	present 	appeal,
i.e., 	whether 	a 	company 	was 	“engaged 	in 	manufacturing” 	when 	it
created 	drafts, 	plans, 	designs, 	or 	blueprints 	for 	products 	and
then 	sent 	them 	off-site 	or 	to 	a 	third 	party 	for 	mass 	production.
That 	question 	has 	consistently 	been 	answered 	in 	the 	affirmative.
See 	Houghton 	Mifflin, 	423 Mass. 	at 	49 	(holding 	that 	a 	book
publisher that edited and compiled photographs, drawings, and text
onto 	discs 	and 	sent 	them 	to 	a 	third-party 	printer 	for 	the
production 	of 	books 	was 	“engaged 	in 	manufacturing”); 	The 	First
Years, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact
and Reports 2007-1004, 1013 (finding that creation of designs for
ATB 2025-109
child-care 	products, 	building 	of 	models 	and 	development 	of
specifications 	for 	molds 	produced 	by 	third 	parties, 	returned 	to
company 	for 	testing, 	and 	then 	sent 	to 	third-party 	factories 	for
production 	was 	“engaged 	in 	manufacturing”); 	Onex 	Communications
Corporation v. Commissioner of Revenue, 457 Mass. 419, 431 (2010)
(holding 	that 	the 	development 	of 	computer-edited 	blueprints
containing the technical specifications and detailed manufacturing
instructions for certain components that were then sent elsewhere
for final production constituted manufacturing); Duracell, Inc. v.
Commissioner 	of 	Revenue, 	Mass. 	ATB 	Findings 	of 	Fact 	and 	Reports
2007-903, 918 (ruling that extensive research and development and
quality 	testing 	that 	was 	incorporated 	into 	sample 	batteries 	that
were 	ultimately 	mass 	produced 	elsewhere 	constituted
manufacturing); 	Random 	House, 	Inc. 	v. 	Commissioner 	of 	Revenue,
Mass. ATB Findings of Fact and Reports 2012-973, 981 (ruling that
company 	that 	edited 	and 	formatted 	content 	that 	was 	ultimately
transmitted 	electronically 	to 	a 	third-party 	printer 	for
production, 	to 	taxpayer’s 	exact 	specifications, 	was 	“engaged 	in
manufacturing”).
Perhaps 	the 	case 	most 	directly 	analogous 	to 	the 	case 	at 	bar
is 	the 	aforementioned 	Deckers. 	The 	question 	before 	the 	Board 	in
that 	appeal 	was 	whether 	a 	California-based 	footwear 	company 	that
utilized third-party manufacturing facilities located in Asia was
ATB 2025-110
“engaged 	in 	manufacturing” 	for 	the 	purposes 	of 	§ 	38. 	Once 	again,
the Board answered that question in the affirmative.
In 	reaching 	these 	determinations, 	courts 	have 	encouraged 	a
broad 	construction 	of 	the 	phrase 	“engaged 	in 	manufacturing.” 	See
Assessors 	of 	Boston, 	323 	Mass. 	at 	748-49 	(“The 	words 	‘engaged 	in
manufacturing’ 	are 	not 	to 	be 	given 	a 	narrow 	or 	restrictive
meaning.”). See also William F. Sullivan & Co., 413 Mass. at 579.
To 	that 	end, 	processes 	which 	themselves 	do 	not 	yield 	a 	finished
product 	have 	nonetheless 	been 	found 	to 	constitute 	manufacturing,
so 	long 	as 	“‘they 	constitute 	an 	essential 	and 	integral 	part 	of 	a
total manufacturing process.’” William F. Sullivan & Co., 413 Mass.
at 	579-80 	(quoting 	Joseph 	T. 	Rossi 	Corp., 	369 	Mass. 	at 	181-82).
See also Commissioner of Revenue v. Fashion Affiliates, Inc., 387
Mass. 	543, 	545-46 	(1982) 	(holding 	that 	a 	computer 	system 	used 	to
produce 	dress 	patterns 	on 	paper 	markers, 	which 	were 	then
transferred for use onto the actual fabric for the mass production
of dresses, provided “a function that is an integral and necessary”
step in the making of dresses and thus constituted manufacturing).
See also 830 CMR 58.2.1(b)(7).
Courts 	have 	recognized 	that 	manufacturing 	involves 	a
“multiplicity of processes,” William F. Sullivan & Co., 413 Mass.
at 580, and that, in analyzing these cases, “the requisite inquiry
should 	focus 	less 	on 	the 	technical 	means 	and 	materials 	used 	by
[the 	taxpayer] 	and 	more 	on 	[the 	taxpayer’s] 	role 	in 	the 	overall
ATB 2025-111
production of the [products].” Random House, Mass. ATB Findings of
Fact 	and 	Reports 	at 	2012-985-86. 	Significant 	to 	the 	Court 	in
Houghton 	Mifflin, 	and 	described 	in 	some 	detail, 	was 	Houghton
Mifflin’s 	involvement 	in 	every 	step 	of 	the 	“book-production
process,” described as follows:
Initially, 	editors, 	ordinarily 	employed 	by 	[Houghton],
engage in extensive research and development activities
regarding 	a 	proposed 	book. 	These 	activities 	include
researching 	the 	probable 	marketability 	and 	developing
the content and format of a proposed book. [Houghton’s]
employees 	then 	design, 	write, 	and 	produce 	a 	manuscript
to 	serve 	as 	the 	content 	of 	a 	proposed 	book. 	Various
writers 	and 	editors 	working 	on 	different 	portions 	and
aspects 	of 	a 	proposed 	book 	combine 	their 	work 	on 	a
network.
Next, [Houghton’s] employees produce and then circulate
among 	the 	company’s 	marketing, 	production, 	and 	editing
personnel thumbnail sketches for further processing and
refinement. 	After 	that 	step, 	electronic-production
specialists 	transform 	the 	manuscript 	and 	thumbnail
sketches 	into 	templates 	which 	are 	analogous 	to
blueprints 	or 	page 	outlines 	without 	any 	text.
[Houghton’s] 	art 	department 	then 	creates 	drawings,
develops 	charts 	and 	graphs, 	and 	creates 	line 	art 	for
inclusion 	in 	the 	ultimate 	product. 	The 	art 	department
also selects, retrieves, and transforms photographs for
incorporation into the ultimate product.
Following 	these 	steps, 	all 	of 	the 	aforementioned 	items
are 	assembled 	into 	layouts. 	First 	proofs 	are
subsequently 	produced 	and 	marked 	for 	changes 	and
corrections, 	resulting 	in 	the 	production 	of 	second
proofs 	which 	further 	refine 	the 	product. 	The 	second
proofs are then converted into color proofs. Throughout
this process, [Houghton] uses, among other things, human
skill 	and 	knowledge 	as 	well 	as 	various 	implements,
materials, and machines or machinery such as computers,
digital 	modems, 	printers, 	photocopiers, 	writing
utensils, 	lighting 	machines, 	drawing 	equipment 	and
materials, 	graphic 	art 	tools, 	electronic 	equipment,
sophisticated software, and scanners.
ATB 2025-112
From 	the 	color 	proof 	stage 	of 	the 	process, 	[Houghton]
either 	produces 	CD 	ROM 	tapes 	which 	are 	then 	sent 	to
independent 	contractors 	for 	final 	packaging 	in 	compact
discs, 	or 	it 	sends 	the 	proofs 	(usually 	on 	computer
diskettes) 	to 	independent 	contractors 	for 	printing 	and
binding into conventional books.
Houghton Mifflin, 423 Mass. at 43-45.
Likewise, 	in 	The 	First 	Years, 	the 	Board 	noted 	that 	the
taxpayer’s employees were:
integrally 	involved 	in 	every 	step 	of 	the 	product
creation 	process, 	from 	the 	conception 	of 	an 	idea 	for 	a
new product through the completion of the final product
offered 	for 	sale 	to 	consumers. 	[The 	First 	Years]
employees 	were 	responsible 	for 	proposing 	new 	products,
conducting 	extensive 	background 	and 	consumer 	research
for any proposed new product, creating and/or overseeing
the 	creation 	of 	intricate 	preliminary 	models,
establishing 	the 	regimen 	of 	tests 	for 	a 	proposed 	new
product, 	conducting 	the 	testing 	of 	the 	product 	and
overseeing 	independent 	testing 	of 	the 	product,
overseeing the creation of the “final model,” overseeing
the 	tooling 	and 	molding 	process, 	and 	finally, 	auditing
the 	final 	product 	manufacturing 	process 	and 	conducting
quality assurance tests even during this final stage. At
any point in the process if the product did not satisfy
quality 	assurance 	tests 	conducted 	by 	or 	on 	behalf 	of
[The 	First 	Years], 	[The 	First 	Years] 	re-directed 	the
design 	of 	the 	product, 	from 	minor 	to 	significant
changes.
The First Years, Mass. ATB Findings of Fact and Reports at 2007-
1012-13.
As 	in 	all 	of 	the 	aforementioned 	cases, 	the 	evidence 	here
demonstrated 	Skechers’ 	continuous 	involvement 	in 	the 	creation 	of
its 	footwear 	products, 	from 	the 	conception 	of 	an 	idea 	for 	a 	shoe
in 	an 	initial 	product 	brief 	to 	its 	ultimate 	mass 	production. 	The
ATB 2025-113
record showed that Skechers transformed “ideas, art, information,
and photographs, by application of human knowledge, intelligence,
and skill,” Houghton Mifflin, 423 Mass. at 48, into something new,
ultimately 	resulting 	in 	a 	completed 	shoe. 	Based 	on 	these 	facts,
the Board found that the activities undertaken by Skechers amounted
to 	the 	transformation 	of 	“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.” G.L. c. 63, § 38(l)(1).
The 	appellant 	attempted 	to 	distinguish 	Skechers’ 	activities
from 	those 	of 	the 	taxpayers 	in 	these 	cases 	by 	asserting 	that
nothing 	created 	by 	Skechers 	was 	either 	physically 	useful 	in 	the
ultimate manufacture of footwear or had a tangible application in
the 	manufacturing 	process. 	Skechers’ 	creations, 	according 	to 	the
appellant, 	were 	unlike 	the 	blueprints 	created 	in
Onex Communications, 	which 	contained 	detailed 	manufacturing
instructions that were physically useful in the ultimate creation
of the end product in that case - computer chips - as well as the
CD-ROMS 	and 	computer 	diskettes 	compiled 	by 	Houghton 	Mifflin 	that
were 	ultimately 	sent 	to 	third-party 	printers 	for 	printing 	en-
masse. 	Onex 	Communications, 	457 	Mass. 	at 	431; 	Houghton 	Mifflin,
423 Mass. at 44.
The Board found this argument unpersuasive. The record amply
demonstrated the involvement of Skechers’ employees throughout the
ATB 2025-114
shoe creation process. The conception of an idea for a shoe began
at 	Skechers 	with 	a 	product 	developer, 	and 	through 	the 	various
stages of the creation process that idea was developed and refined
into 	a 	more 	precise 	and 	technical 	format. 	The 	design 	documents
created by Skechers contained detailed specifications – including
size 	specifications, 	materials, 	stitching 	styles, 	and 	the 	like.
Thus, 	the 	Board 	found 	that 	the 	materials 	produced 	by 	Skechers
throughout 	the 	process 	were 	physically 	useful 	in 	the 	creation 	of
the ultimate footwear products.
Further, 	Skechers’ 	employees 	interacted 	physically 	with 	the
products 	throughout 	the 	shoe-creation 	process, 	from 	writing
changes to be made directly on a pullover model to engaging in fit
testing 	and 	other 	quality 	testing 	at 	many 	stages 	of 	the 	creation
and 	production 	process, 	and 	their 	feedback 	was 	incorporated 	into
– 	that 	is, 	had 	a 	physical 	impact 	on 	– 	subsequent 	renditions 	of
that 	shoe, 	including 	its 	construction 	and 	design. 	See 	Duracell,
Mass. 	ATB 	Findings 	of 	Fact 	and 	Reports 	at 	2007-923. 	Skechers’
activities 	were 	not 	merely 	prerequisites 	to 	the 	manufacturing
process, 	as 	they 	occurred 	throughout 	its 	entirety, 	including
quality 	inspection 	of 	the 	mass-produced 	goods. 	See 	830 	CMR
58.2.1(b)(5). 	In 	sum, 	the 	Board 	found 	that 	Skechers’ 	activities
were 	very 	much 	like 	those 	of 	the 	taxpayers 	in 	Deckers, 	Houghton
Mifflin, 	The 	First 	Years, 	Duracell, 	Onex 	Communications, 	and
Random 	House, 	and 	it 	therefore 	found 	and 	ruled 	that 	Skechers 	was
ATB 2025-115
“engaged in manufacturing” for purposes of § 38.
The 	statute 	imposes 	one 	additional 	requirement. 	To 	be
considered 	a 	manufacturing 	corporation 	for 	purposes 	of 	§ 	38, 	a
corporation must be “engaged in manufacturing. . . in substantial
part[.]” G.L. c. 63, § 38(l)(1) (emphasis added). The statute sets
forth 	specific 	tests 	for 	determining 	whether 	a 	taxpayer’s
manufacturing 	activities 	will 	be 	considered 	“substantial.” 	A
corporation’s 	manufacturing 	activities 	will 	be 	considered
“substantial” if any one of the follow five tests is met:
1. twenty-five percent or more of its gross receipts are
derived 	from 	the 	sale 	of 	manufactured 	goods 	that 	it
manufactures;
2. twenty-five percent or more of its payroll is paid to
employees 	working 	in 	its 	manufacturing 	operations 	and
fifteen percent or more of its gross receipts are derived
from 	the 	sale 	of 	manufactured 	goods 	that 	it
manufactures;
3. twenty-five percent or more of its tangible property
is 	used 	in 	its 	manufacturing 	operations 	and 	fifteen
percent 	or 	more 	of 	its 	gross 	receipts 	are 	derived 	from
the sale of manufactured goods that it manufactures;
4. thirty-five percent or more of its tangible property
is used in its manufacturing operations; or
5. the corporation's manufacturing activities are deemed
substantial 	under 	relevant 	regulations 	promulgated 	by
the commissioner.
G.L. c. 63, § 38(l)(1).
In 	the 	present 	appeal, 	the 	appellant 	did 	not 	offer 	evidence
to 	demonstrate 	that 	it 	fell 	short 	of 	the 	applicable 	numerical
thresholds 	set 	forth 	in 	the 	statute, 	instead 	relying 	entirely 	on
ATB 2025-116
its claim that it was not engaged in manufacturing at all. Having
concluded 	that 	the 	appellant 	was 	so 	engaged, 	and 	considering 	the
evidence 	of 	record, 	the 	Board 	further 	found 	that 	the 	only
reasonable inference was that the appellant derived more than 25%
of 	its 	gross 	receipts 	from 	the 	sale 	of 	products 	that 	it
manufactured, 	thereby 	crossing 	the 	statutory 	threshold. 	In 	turn,
the 	Board 	ruled 	that 	the 	appellant 	did 	not 	meet 	its 	burden 	of
demonstrating 	that 	it 	was 	not 	“engaged 	in 	manufacturing... 	in
substantial 	part[.]” 	G.L. 	c. 	63, 	§ 	38(l)(1). 	See 	Staples 	v.
Commissioner of Corp. & Tax, 305 Mass. 20, 26 (1940) (finding that
a 	person 	who 	claims 	to 	be 	aggrieved 	by 	the 	refusal 	of 	the
Commissioner to abate a tax in whole or in part has the burden of
establishing the right to an abatement).
In 	conclusion, 	based 	on 	the 	evidence 	of 	record, 	the 	Board
found 	and 	ruled 	that 	the 	appellant 	was 	“engaged 	in 	manufacturing
. 	. 	. 	in 	substantial 	part” 	for 	purposes 	of 	§ 	38 	during 	the 	tax
years 	at 	issue, 	such 	that 	it 	was 	required 	to 	use 	a 	single-factor
apportionment 	formula. 	Accordingly, 	the 	Board 	issued 	a 	decision
for the appellee in this appeal.
THE APPELLATE TAX BOARD
By: ___________________________________
Mark J. DeFrancisco, Chairman
A true copy,
Attest: ____________________________
Clerk of the Board
ATB 2025-117

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