Random House, Inc. v. Commissioner of Revenue (October 2, 2012)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD

RANDOM HOUSE, INC.	      	 v.	 	COMMISSIONER OF REVENUE
 							 		   
Docket No. C303502					Promulgated:
								October 2, 2012
	
				   
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 appellee, Commissioner of Revenue ("Commissioner"), to grant an abatement of corporate excise assessed to the appellant, Random House, Inc. ("Random House") for the tax years ending December 31, 2002 through and including December 31, 2004 ("tax years at issue").
Commissioner Scharaffa heard this appeal and was joined by Chairman Hammond and Commissioners Rose, Mulhern and Chmielinski in a decision for the appellee.  
These findings of fact and report are made pursuant to the appellant's request under G.L. c. 58A, § 13 and 831 CMR 1.32.  

Martin I. Eisenstein, Esq. (pro hac vice) and Stacy O. Stitham, Esq. for the appellant.	

Celine E. Jackson, Esq. and John DeLosa, Esq. for the appellee.  
FINDINGS OF FACT AND REPORT
On the basis of a Statement of Agreed Facts and the testimony and exhibits offered into evidence at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.
For each of the tax years at issue, Random House filed a Form 355 - Massachusetts Corporation Excise Return ("Form 355" or "return") reporting tax in the following amounts: 
Tax year	Tax shown on return	
2002	$ 15,629.00	
2003	$118,390.00	
2004	$ 78,490.00	

On its returns, Random House, as a corporation that had income taxable in Massachusetts and in other states, apportioned its taxable net income using the three-factor formula under G.L. c. 63, § 38(c). 
On April 18, 2006, Random House signed a consent extending the time for assessment of taxes for the tax years at issue to June 30, 2007.  On March 30, 2007, the Commissioner issued to Random House a Notice of Intent to Assess for the tax years at issue.  On May 16, 2007, the Commissioner issued to Random House a Notice of Assessment, notifying Random House that on May 15, 2007 the Commissioner had made additional assessments in the following amounts:


Tax year	Additional tax Assessment	
2002	$ 66,635.00	
2003	$101,689.00	
2004	$ 94,639.00	

The additional assessments resulted from the Commissioner's determination that Random House was a qualified manufacturing corporation pursuant to G.L. c. 63, § 38(l), and therefore, was required to use a single-factor sales formula to apportion its taxable net income to Massachusetts pursuant to G.L. c. 63, § 38(l)(2)(v).  
On September 25, 2007, Random House filed an abatement application for the tax years at issue with the Commissioner.  Random House challenged the Commissioner's classification of it as a manufacturing corporation and the Commissioner's determination that Random House should be required to use a single-factor sales formula for apportionment purposes.  On December 18, 2007, the Commissioner conducted a hearing as provided by G.L. c. 62C, § 37 in connection with the appellant's abatement application.  On April 16, 2009, the Office of Appeals of the Department of Revenue issued a letter determining, inter alia, that Random House was a manufacturing corporation within the meaning of G.L. c. 63, § 38(l) and was required to use the single-factor sales formula for apportionment as provided by G.L. c. 63, § 38(l)(2)(v).  On May 15, 2009, the Commissioner issued a Notice of Abatement Determination denying Random House's request for abatement.  On July 9, 2009, Random House filed with the Board its Petition Under Formal Procedure for the tax years at issue.  On the basis of these facts, the Board found and ruled that it had jurisdiction over this appeal.
At all times relevant to this appeal, Random House was a book publisher incorporated in New York with its principal place of business at 1745 Broadway, New York, New York.  Random House and its publishing groups published works of fiction and non-fiction in various formats including hard cover, paperback, reference and audio.  Random House estimated that during the tax years at issue, sales of printed books accounted for about 95% of its total sales, with books in audio or electronic format accounting for the remaining 5%.     
Random House presented its case through the testimony of its witnesses -- Kirk Bleemer, Vice President of Production, and Anne Davis, Executive Vice President and Chief Financial Officer -- and the production of certain documents.  
As Random House's first witness, Mr. Bleemer testified regarding the process of publishing and manufacturing books.  Mr. Bleemer explained that his role as Vice President of Production was two-fold: first, to negotiate and contract with third-party manufacturers or printers; and second, to ensure that the physical books produced by the printers met Random House's expectations.  
Mr. Bleemer described the process by which a book was published by Random House.  The process began when an independent third-party author or an author's agent contacted Random House with a story line or outline that they would "pitch" to Random House in the hopes that Random House would publish the work.  Once an author's idea had been approved for publication, Random House's editorial and design departments worked closely with the author in a collaborative process in order to complete the content.  Random House's editorial staff would modify grammar, spelling, and punctuation, send the content back to the author, and continue to collaborate with the author, through an exchange of electronic documents, until all stylistic and editorial changes were incorporated and approved.  The content was next transmitted electronically to Random House's design team, which added the design elements to the content, including decisions on where the chapters would end, whether and what designs might appear at the ends of chapters, and where the page numbers would appear.  The design team would collaborate with the author until all design elements were agreed upon.  Then, the design team would import the changes and design features into a software system of their choosing, like InDesign or Quark.  
Next, a third-party compositor would take the content and apply the elements throughout to create a layout of the book.  The author, editor, and a proof reader from within Random House would review this content for grammar, design elements and any other agreed-upon changes.  Random House would then send the electronic file back to the compositor.  If there were no further edits, Random House would authorize the compositor to send the file directly to the printer.  Mr. Bleemer explained that a software data exchange system called Mass Transit was used for transferring the files to the publisher; during the tax years at issue, Random House did not produce or transmit hard copy CDs or DVDs of the files.
Mr. Bleemer next testified concerning his knowledge of how the third-party printers printed the books.  He explained that third-party printers were responsible for translating the electronic files into printed books, either hardcover or paperback.  He testified in detail about the many steps involved, including the pre-press phase when the printer created the metal plates that incorporated the text of the book, and then the printing phase which created the final product, including the cover of the book.  All of these operations, he explained, took place within the printer's facilities and were performed on equipment owned by the printer, not Random House.  Mr. Bleemer stated that Random House did not dictate the printer's choices of which equipment to use in its printing process.  However, Mr. Bleemer made clear that Random House required the final printed product to meet its specifications, including details such as whether the book would be in hardcover or paperback, the size of the book, the size and style of type, the type of paper, and the colors of the cover.  Oftentimes, Random House would even provide the selected paper to the printer.  Mr. Bleemer described the process by which Random House set the specifications used by the third-party printers in the printing process as follows: "We are purchasing these raw materials.  This type of printing from them.  So basically we are specifying what type of materials we want used as they transform this content into a physical form, yes."
During his deposition, a transcript of which the parties entered as a joint exhibit, Mr. Bleemer also briefly explained the procedure for publication of an audio book.  The author or performer would read the content of the book, usually in a studio, and the editing process involved Random House's editing team making alterations like deleting long pauses.  Once the author and editing team at Random House agreed on the edits, Random House sent the finished product, a compact disk, by FedEx to a third-party replicator for mass production.  Mr. Bleemer thus described a collaborative process similar to the publication of a paper book -- the "same type of editing, creating and developing [was] done by Random House to ensure that the content [was] well-developed."   
Random House's next witness was Anne Davis, its Executive Vice President and Chief Financial Officer.  Ms. Davis testified to the existence and level of competition Random House faced in Massachusetts during the tax years at issue.  Ms. Davis introduced exhibits demonstrating the market shares of competing publishers and explained that publishing was a "flat" or mature market, meaning that the demand for books had not increased, while the number of publishing companies, including smaller, independent publishers, had increased.  The increase in publishing companies had thus resulted in very fierce competition for a "slice" of the industry "pie."  Ms. Davis testified that, over the years, Random House's share of that "pie" had decreased, while Massachusetts-based Houghton Mifflin's share had increased.  She concluded that, in such a competitive market, the availability of the Massachusetts investment tax credit ("ITC") to companies with in-state operations (i.e., Houghton Mifflin) and the denial of this same credit to publishers based elsewhere (i.e., Random House) put out-of-state publishers at a distinct disadvantage.  Based on Random House's tangible personal property purchases and leasehold improvements, Ms. Davis calculated the amount of ITCs to which Random House would have been entitled, if these improvements had been investments in Massachusetts instead of in New York and Maryland.  Her calculations were as follows:  $2,940,000 for 2002; $975,000 for 2003; and $207,000 for 2004.  
On cross-examination, Ms. Davis testified that she was unsure whether Random House had applied for an ITC in other states, including Maryland and New York, during the tax years at issue, explaining that Random House's parent company, Bertlemann, Inc., handled its tax preparations and filings.  On the basis of this statement, the appellee contended that Ms. Davis lacked the knowledge and expertise necessary to testify with accuracy as to Random House's tax situation during the tax years at issue. 
On the basis of the evidence of record, and to the extent that it is a finding of fact, the Board found that Random House was actively involved in processes that were fundamental and necessary to the production of tangible personal property.  While the functions performed by Random House produced electronic materials -- including the creation of electronic files that were modified and transmitted via electronic means -- these functions were integral to the entire process that transformed, through human skill and knowledge, raw physical materials into a finished product that Random House deemed worthy of publication in a highly competitive market.  Later functions were contracted out to third-party printers, which performed those functions using tangible materials, such as machinery, ink and paper.  However, Random House undisputedly set forth and retained full command over the specifications -- for example, the choice and size of paper and the style of type -- that controlled those functions.  Therefore, the Board found that, even though Random House's functions were performed through electronic means, they nonetheless were an integral part of the transformation of physical materials into the ultimate finished products.  Accordingly, on the basis of its findings, and as will be further explained in the following Opinion, the Board found and ruled that Random House was a "manufacturing corporation" for purposes of G.L. c. 63, § 38(l) during the tax years at issue.  Further, the Board found and ruled that the application of the corporate excise for manufacturers, together with the denial of the ITC, to Random House did not impermissibly interfere with its sale of books in commerce in contravention of the Commerce Clause.
On the basis of these findings, the Board ruled that Random House was a manufacturing corporation that was subject to the Massachusetts single-factor sale formula in computing its corporate excise during the tax years at issue and that Random House failed to meet the burden of proving its constitutional claim.  Accordingly, the Board issued a decision for the appellee.
OPINION
  Random House was a manufacturing corporation for purposes of the apportionment provisions of G.L. c. 63, § 38(l) (1) and was thus subject to the single-factor sales formula in the calculation of its corporate excise.

For the tax years at issue, "manufacturing corporation" for purposes of the single-factor sales formula under G.L. c. 63, § 38(l)(1) was defined as:
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.

This definition closely followed the long-recognized definition of manufacturing utilized by the Supreme Judicial Court and the Board as articulated decades ago in Boston & Me. R.R. v. Billerica, 262 Mass. 439, 444-5 (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."  Historically, the Court has deemed a broad construction of the term "manufacturing" necessary to achieve the legislative intent behind the several statutory benefits available to Massachusetts manufacturing corporations: 
"to promote the general welfare of the Commonwealth by inducing new industries to locate here and to foster the expansion and development of our own industries, so that the production of goods shall be stimulated, steady employment afforded our citizens, and a large measure of prosperity obtained."  

William F. Sullivan & Co., Inc. v. Commissioner of Revenue, 413 Mass. 576, 579 (1992) (quoting Assessors of Boston v. Commissioner of Corps. & Taxation, 323 Mass. 730, 741 (1949)).  However, as Random House points out, while traditional case law spoke of the transformation of a "substance or element,"        § 38(l)(1), which the Legislature adopted in 1995, explicitly requires that the process of manufacturing involve the transformation of "physical materials." (emphasis added).  
In this appeal, Random House specifically challenged whether a corporation that performs its part of the overall transformation of physical materials solely by the creation, manipulation and transmittal of electronic information and files should be classified as a manufacturer.  There is no requirement in the plain language of § 38(l)(1) that manufacturing must exclusively involve physical sources and processes, only that physical materials be transformed into a new product.  Indeed, the Court and the Board recognize the crucial role that electronic sources and processes are increasingly playing in the modern manufacture of tangible personal property.  See, e.g., Onex Communications Corporation v. Commissioner of Revenue, 457 Mass. 419, 431 (2010) (affirming the Board's finding that the development of the computer-edited "blueprint" containing the technical specifications and detailed manufacturing instructions of hardware and software components was an "essential and integral step in the manufacture of the OMNI chip" and thus qualified as manufacturing); The First Years, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2007-1004 (finding the creation of computer-aided designs for child-care products, building of models and development of specifications for molds produced by third parties, returned to company for testing and then transmitted to plants for production qualified as manufacturing).  The Board thus concludes initially that the requirement in § 38(l)(1) for the transformation of "physical materials" does not negate the long-standing holdings of the Court and the Board that manufacturing can involve the creation of electronic processes and products in the production process so long as they have a substantial and physical impact on the final tangible products produced.  See, e.g., Commissioner of Revenue v. Houghton Mifflin Company, 423 Mass. 42, 48 (1996) ("We have never required that source materials be tangible.") (emphasis added) (citing First Data Corp. v. State Tax Comm'n, 371 Mass. 444, 448 (1976)).  
In addressing Random House's contention that it should not be classified as a manufacturing corporation, the requisite inquiry should focus less on the technical means and materials used by Random House and more on Random House's role in the overall production of the books that it sold.  Key here is the Court's long-standing precedent that holds that "ʽprocesses which themselves do not produce a finished product for the ultimate consumer should still be deemed "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. v. State Tax Comm'n, 369 Mass. 178, 181-82 (1975)).  See, e.g., Commissioner of Revenue v. Fashion Affiliates, Inc., 387 Mass. 543, 545-46 (1982)(finding 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 qualified for the use-tax exemption for machinery used in manufacturing).  
The Court has previously ruled that publishing processes similar to those performed by Random House "produce a significant degree of change and refinement to the materials involved and that these are essential and integral steps in the manufacture of conventional books."  Houghton Mifflin Company, 423 Mass. at 49.  The appellant here contended that Random House's operations were significantly different from those of Houghton Mifflin Company's, particularly because the authors of the books were employees of Houghton Mifflin Company; further, Houghton Mifflin Company did not work with third-party compositors but instead compiled its own edits onto a CD-ROM.  See id. at 43, 50-1.  As will be explained, however, these are factual distinctions without significance to the outcome of this appeal.
There were several functions performed by Random House that were crucial to the total transformation of raw, physical materials -- including paper and ink or CDs -- into the final paper or audio books that Random House offered for sale in the marketplace.  From the initial approval of content to the subsequent implementation of modifications -- including content edits for style, grammar and punctuation, and design elements, including chapter breaks and the font and placement of page numbers -- Random House performed processes that transformed, refined, and left a lasting impression on the books that Random House deemed worthy of mass distribution in a highly competitive publishing market.  Moreover, while third-party printers managed certain aspects of their processes, like the selection of pre-press and certain printing materials, the final products always had to meet Random House's exact specifications.  As Mr. Bleemer testified, Random House was even closely involved in the selection of the physical materials to be transformed into the final products.  Throughout the entire publishing process, from processes performed internally to those performed externally, Random House never relinquished control over the outcome of the ultimate product, the finished tangible personal property.  Therefore, while Random House did not employ the authors of the books and did not produce tangible CD-ROMs, those factual distinctions were irrelevant here, based on the Board's finding that Random House's design and editorial activities, together with the exacting control over specifications that it retained throughout the entire process, resulted in a significant degree of change and refinement to the final books produced.  The Board thus found and ruled that Random House's operations were essential and integral steps in the manufacture of books and therefore, Random House was properly classified as a manufacturing corporation under § 38(l)(1).
The Commissioner's interpretation of § 38(l)(1) is stated and applied in Letter Ruling 05-05 ("L.R. 05-05").  L.R. 05-05 involved a corporation ("Company") that, like Random House, used electronic means in the manufacturing process; the Company made electronic blueprints and designs as part of the overall production of computer storage adaptors and switches.  In L.R. 05-05, the Commissioner looked for guidance to the regulation at 830 CMR 58.2.1(6), which the Commissioner found applies "by analogy" to § 38(l)(1).  Id.  That regulation provides, in pertinent part, the following guidelines as to what processes constitute manufacturing:  
A process that produces intangible property, either in whole or in part, to be used in a manufacturing process may constitute manufacturing. However, the process by which the intangible property is created must transcend the mere manipulation of information and must be a substantial and integral step in the manufacturing process. Moreover, the intangible property must have a physical application in the final manufacturing activity. 

830 CMR 58.2.1(6)(b)8 (emphasis added).  The Commissioner there also looked to Houghton Mifflin Company, 423 Mass. at 44-5, which the Commissioner declared stood for the proposition that:
it is not necessary that the property outsourced be physically transferred (i.e., it may be transmitted electronically), so long as the transmitted property represents or is incorporated into the final property to be sold.
 
With these pronouncements in mind, the Commissioner in L.R. 05-05 found that the Company's electronic blueprints and designs, which were transmitted electronically to third-party plants for production of the tangible products, were embedded in the final products and were "necessary to make these products functional."  The Commissioner thus ruled that the Company's creation and transmittal of the electronic designs "constitute[d] a substantial and integral step in the manufacturing process" and "ha[d] a physical application in the final manufacturing activity."  The Commissioner thus concluded that the Company qualified as a manufacturer under § 38(l)(1).  
In this appeal, the Board found and ruled that the Commissioner's interpretation of § 38(l)(1) was reasonable.  "A reasonable administrative interpretation of a statute by the agency charged with its enforcement, adopted contemporaneously with its enactment or amendment, is entitled to deference."  Fleet National Bank v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2006-137, 152 (citing Ace Heating Service, Inc. v. State Tax Comm'n, 371 Mass. 254, 256 (1976); FMR v. Commissioner of Revenue, 441 Mass. 810, 819 (2004)), aff'd, 448 Mass. 441 (2007).  
The Board further found and ruled that, pursuant to precedents of the Court and the Board, including Onex Communications and Houghton Mifflin, and the Commissioner's interpretation of § 38(l)(1) as stated in 830 CMR 58.2.1(6)(b) and applied in L.R. 05-05, Random House's production and transmittal of electronic files incorporating its designs and edits, together with Random House's retention of control over the exact specifications of the final product, had "physical application[s]" in the resulting paper and audio books that Random House offered for sale in the marketplace and thus were "substantial and integral step[s] in the manufacturing process" of those books.  830 CMR 58.2.1(6)(b)8.  The Board, therefore, found and ruled that Random House was properly classified as a manufacturing corporation under § 38(l)(1).  Accordingly, Random House was subject to the single-factor sales formula for apportionment for the tax years at issue.  
    Random House failed to meet its burden of proving that      the application of the corporate excise for manufacturers,   together with the denial of the ITC, impermissibly   interfered with its sale of books in contravention of the   Commerce Clause. 

G.L. c. 63, § 31A(a) provides that a manufacturing corporation shall be allowed an ITC against its corporate excise for qualifying property that is "acquired, constructed, reconstructed, or erected during the taxable year" and that is "used by the corporation in the commonwealth on the last day of the taxable year."  Section 31A(a) does not distinguish between domestic and foreign manufacturing corporations; it is available to any manufacturing corporation that makes the required investment in Massachusetts property.  In the instant appeal, it is undisputed that Random House did not make a qualified investment in Massachusetts property during the tax years at issue and therefore did not qualify for the ITC.  Random House maintains that the ITC conferred a competitive advantage on its Massachusetts-based competitors, which it claims were investing in Massachusetts, and "to the extent that nonresident businesses are taxed at a higher rate than are businesses that are located in [Massachusetts], the nonresident businesses are put at a competitive disadvantage."  Opinion of the Justices to the House of Representatives, 428 Mass. 1201, 1208 (1998) (citing Aloha Freightways, Inc. v. Commissioner of Revenue, 428 Mass. 418 (1998)).  Random House concluded that the ITC was facially discriminatory, and a facially discriminatory statutory provision is "virtually per se invalid."  Oregon Waste Systems v. Dep't of Environmental Quality of Oregon, 511 U.S. 93, 99 (1994). 
As an initial matter, the Board has jurisdiction to declare that the application of a particular statute or statutes to the facts on appeal violates the Constitution.  "In numerous cases, the Supreme Judicial Court has affirmed the Board's authority to rule on constitutional claims in determining the legality of tax assessments."  WB&T Mortgage Company, Inc. v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 2006-379, 388 (citing Mullins v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1997-973, aff'd, 428 Mass. 406 (1998); Gillette Co. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1996-362, aff'd, 425 Mass. 670 (1997); Lonstein v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1988-355, aff'd, 406 Mass. 92 (1989); and Tregor v. Assessors of Boston, Mass. ATB Findings of Fact and Reports 1978-203, aff'd, 377 Mass. 602 (1979)), aff'd, 451 Mass. 716 (2008).  "In fact, a taxpayer must raise a constitutional claim with the Board to preserve the right to appellate consideration of the issue."  WB&T Mortgage, Mass. ATB Findings of Fact and Reports at 2006-388-89 (citing New Bedford Gas & Electric Light Co. v. Assessors of Dartmouth, 368 Mass. 745, 752 (1975) ("To raise a constitutional question on appeal to this court from the board, the taxpayer must present the question to the board and, in so doing, make a proper record on appeal.  Otherwise, the taxpayer waives the right to press the constitutional argument.")).  Accordingly, the Board ruled that it has jurisdiction to rule on Random House's claim that the application of the corporate excise for manufacturers, together with the denial of the ITC, to Random House was unconstitutional under the facts of this appeal. 
The Commissioner challenged Random House's standing to raise this constitutional challenge, claiming that Random House never claimed an ITC during the tax years at issue and thus was not a "person aggrieved" by the refusal of the Commissioner to grant the ITC.  See DaimlerChrysler Corp v Cuno, 547 U.S. 332, 342 (2006) ("ʽA plaintiff must allege personal injury fairly traceable to the defendant's allegedly unlawful conduct and likely to be redressed by the requested relief.'") (quoting Allen v. Wright, 468 U.S. 737, 751 (1984)).  Even assuming that Random House had standing to raise this issue, a challenger to the constitutionality of a taxing provision faces a steep challenge.  "A tax measure is presumed valid and is entitled to the benefit of any constitutional doubt, and the burden of proving its invalidity falls on those who challenge the measure."  Opinion of the Justices to the Senate, 425 Mass. 1201, 1203-04 (1997) (citing Daley v. State Tax Commission, 376 Mass. 861, 865-66 (1978)); see also WB&T Mortgage Company, 451 Mass. at 721; The Prudential Insurance Company of America v. Commissioner of Revenue, 429 Mass. 560, 568 (1999)("the statute bears a strong presumption of validity, and the burden of proving the measure invalid rests with the party challenging it."); Aloha Freightways, 428 Mass. at 423; Andover Savings Bank v. Commissioner of Revenue, 387 Mass. 229, 235 (1982).
"The [Commerce] Clause has long been understood to have a 'negative' aspect that denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce."  Oregon Waste Systems, 511 U.S. at 98.  The appellant contends that the denial of the ITC to Random House, together with the availability of the ITC to Random House's competitors that invest in Massachusetts, discriminates against interstate commerce in contravention of the so-called Dormant Commerce Clause, because as a whole, the Massachusetts single-factor sales formula corporate excise structure taxes corporations who sell books in Massachusetts regardless of the location of their facilities, but then reduces the tax only for those who also invest in property located in state.  
The appellant's contention here is misguided.  First, "the Supreme Court has held that neither the Due Process Clause nor the Commerce Clause prohibits application of a single sales factor formula to an interstate business."  Advanced Logic Research v. Commissioner, Mass. ATB Findings of Fact and Reports 2008-19, 35 (citing  Moorman Manufacturing Co. v. Bair, 437 U.S. 267, 274 (1978)), aff'd, 74 Mass. App. Ct. 1114 (2009).  The Board thus ruled that the portion of Random House's contention that was grounded in the constitutionality of the single-factor sales formula was without merit.
Secondly, contrary to Random House's contention, the ITC at issue did not discriminate against Random House vis-à-vis its Massachusetts-based competitors on the basis of domicile.  Cf, Perini Corp. v. Commissioner of Revenue, 419 Mass. 763, 771-72 (1995) (in finding distinctions based solely on domicile, the Court rules that the statutory provisions violated the Commerce Clause).  Any corporation, domestic or foreign, is eligible to attain the benefits of the ITC by making a qualified investment in Massachusetts.  The Commissioner also points out, and the Board agreed, that virtually all of the states throughout the country employ tax credits, including an ITC, to encourage economic development within the state.  In fact, Random House's domicile state of New York has adopted an ITC similar to the one that it is challenging here.  See NY Tax Law § 210 (12-B).  While the United States Supreme Court has not yet ruled on the constitutionality of an ITC, it has declared that "[i]t 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."  Trinova Corp. v. Mich. Dep't of Treasury, 498 U.S. 358, 385 (1991).
The Board found a distinction between economic protectionist measures, which the commerce clause prohibits, and policies that are enacted to encourage economic growth, which are consistent with the commerce clause.  The former have historically included tax structures that impose a higher tax on interstate sales.  See, e.g., Boston Stock Exchange v. State Tax Commission, 429 U.S. 318, 336 (1977) (striking down a statute imposing a higher tax on stock transfers occurring out-of-state).  However, the Supreme Court has also declared that the Commerce Clause "does not prevent the States from structuring their tax systems to encourage the growth and development of intrastate commerce and industry."  Id. at 336.  A tax incentive that is available to domestic and foreign corporations alike as a means of encouraging investment in the state is constitutionally justifiable because, with respect to nondiscriminatory tax benefits, the Commonwealth has legitimate state objectives (e.g., the promotion of certain industries), there is no facial discrimination against interstate trade, and the effect on interstate commerce is incidental.  See Bacchus Imports, 468 U.S. at 270 and Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978). 
At least one commentator has observed a distinction between state provisions that impermissibly implicate "the sale of goods and a continuing benefit to in-state economic activity" versus a credit, like the ITC, that bestows "a one time reduction in franchise taxes for purchases of new machinery and equipment installed in-state," positing that the latter passes Constitutional muster.  Mary F. Wyman, Note, The Dormant Commerce Clause: Economic Development in the Wake of Cuno, 39 Ind. L. Rev. 177, 185 (2005).  As observed by this commentator, the Dormant Commerce Clause is violated when a state law exerts regulatory pressure against out-of-state commerce; however, that occurs only if a state discriminatorily taxes products manufactured or business operations performed out of state.  Id.  
A review of past Supreme Court cases that have struck down state tax provisions on the grounds of the Dormant Commerce Clause corroborates the commentator's observation.  See Boston
Stock Exchange, supra; Maryland v. Louisiana, 451 U.S. 725, 760 (1981) (striking down a statute providing exemptions and credits for in-state consumption only); Westinghouse Elec. Corp. v. Tully, 466 U.S. 388, 407 (1984) (striking down a provision allowing a credit based on a taxpayer's portion of exports shipped within the state, with the credit decreasing the more the taxpayer shipped exports from other states); Bacchus Imports 468 U.S. at 273 (striking down exemption on alcohol tax only for products manufactured in, and indigenous to, that state); New Energy Co. of Indiana v. Limbach, 486 U.S. 269, 274 (1988) (striking down a motor-fuel tax credit that applied only if the ethanol was produced in home state or in a state that granted similar tax advantages to ethanol produced in home state); West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 199 (1994) (striking down a subsidy for in-state farmers funded principally from taxes on the sale of milk produced in other states).  
With respect to the ITC at issue, however, there is no "product correlation" as there was with the above statutes, because "[o]ut-of-state taxpayers are not required to pay a higher tax on the same item used by an in-state taxpayer . . . as a result of the investment tax credit."  39 Ind. L. Rev. at 194.  In other words, the crucial factor in a Dormant Commerce Clause analysis is whether the differential treatment is imposed, not simply on an out-of-state taxpayer, but on interstate commerce, which entails the movement of goods and services.  Here, the credit was denied to Random House because it failed to make a qualifying one-time investment in Massachusetts, not because it moved its goods or services across state lines.  Therefore, the Board found and ruled that commerce was not implicated in the denial of the ITC to Random House under the facts of this appeal.  Accordingly, the Board found and ruled that Random House failed to meet its burden of proving that the application of the corporate excise for manufacturers, together with the denial of the ITC, impermissibly interfered with its sale of books in Massachusetts in contravention of the Commerce Clause.


Conclusion
On the basis of the record evidence in this appeal, the Board found that Random House was a manufacturing corporation within the meaning of G.L. c. 63, § 38(l)(1) and that Random House was thus required to use the single-factor sales formula for apportionment purposes as provided by G.L. c. 63, § 38(l)(2)(v).  The Board further found that Random House failed to meet its burden of proving that the application of the corporate excise for manufacturers, together with the denial of the ITC for the tax years at issue, under the facts of this appeal, violated the Commerce Clause of the Constitution.       Accordingly, the Board issued a decision for the appellee. 
				
   APPELLATE TAX BOARD

					  By: _________________________________
						 Thomas W. Hammond, Jr., Chairman 
A true copy,
Attest: ________________________
	   Clerk of the Board

 Random House's publishing groups included, but were not limited to, the Crown Publishing Group, the Knopf Doubleday Publishing Group, the Random House Publishing Group, the Random House Audio Publishing Group, and Random House Children's Books. 
 Houghton Mifflin was decided under G.L. c. 63, § 38C, repealed in 2008, which provided the criteria for qualification as a domestic manufacturing or research and development corporation.  Unlike § 38(l)(1), § 38C did not provide its own definition of a manufacturing corporation.
 In DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006), the Supreme Court vacated an earlier 6th Circuit ruling that the ITC at issue there was unconstitutional, but did not reach the merits of the Commerce Clause argument.    
  DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006).

ATB 2012-973