Background
The Massachusetts Appeals Court held that Skechers USA was a manufacturing corporation for the 2015 through 2017 tax years even though independent factories in China and Vietnam physically assembled its shoes. The ruling affirms an Appellate Tax Board decision and the Commissioner of Revenue’s use of the then-applicable single-sales-factor formula, which increased the share of Skechers’s income apportioned to Massachusetts. The disputed assessment included $155,043 in tax and $36,476.98 in interest; the commissioner had already abated a $31,009 underpayment penalty.
Skechers characterized itself as a design and marketing business whose role in production was merely incidental. The record showed a much deeper involvement. Its designers prepared detailed specifications governing materials, dimensions, stitching, colors, technological features, lasts, molds, and construction methods. Overseas employees selected and worked with factories, reviewed materials and testing, and relayed revisions. Skechers personnel reviewed prototypes, required refinements, approved samples and operating procedures, inspected equipment and production runs, directed corrective action, rejected defective units, and conducted final inspections. The product-development cycle commonly lasted six to nine months.
Under the version of General Laws chapter 63, section 38 then in force, a manufacturing corporation was one engaged in substantial part in transforming physical materials through skill and knowledge into a new product with a new name, nature, and use. Manufacturing status mattered because qualifying multistate corporations used sales-only apportionment rather than the generally available property-payroll-sales formula. Massachusetts has since moved all business corporations to single-factor apportionment, effective January 1, 2025, but the statutory concept of a manufacturing corporation remains important for use-tax exemptions, investment tax credits, and local property-tax treatment.
The Court’s Holding
Justice Scott L. Massing, writing for a unanimous panel, concluded that substantial evidence supported the board’s classification. Massachusetts does not read “engaged in manufacturing” narrowly. A company need not operate the machinery or employ the workers who make the finished item if its own activities are an essential and integral part of transforming materials into that item. Skechers did more than supply an abstract creative concept: it directed nearly every stage from detailed specifications through prototypes, materials, testing, preproduction, quality control, and final inspection.
The court rejected the argument that third-party factories broke the link between Skechers and manufacturing. It compared Skechers’s continuing direction of production to precedents treating outsourced book production and other integral development work as manufacturing. The relevant question was the corporation’s contribution to the transformation, not who owned the factory. Skechers also could not recast its production work as insignificant. It conceded that its activities met at least one of section 38’s quantitative substantiality tests, and the court held that satisfying one of those statutory alternatives was dispositive. Any separate qualitative argument was both unpreserved before the tax board and unsuccessful on the record: overseeing footwear production to exact specifications was an important part of Skechers’s core business.
Key Takeaways
- Massachusetts manufacturing status can extend to a company that outsources physical production when its employees direct specifications, prototypes, materials, testing, operating procedures, and quality control throughout the process.
- For the former corporate-excise regime, satisfying any one of the statute’s quantitative substantiality tests was enough; a taxpayer could not add a separate subjective requirement that manufacturing also be qualitatively central.
- Taxpayers must preserve legal theories before the Appellate Tax Board. Skechers’s attempt to characterize its manufacturing as trivial or incidental was independently waived because it had argued below that it did not manufacture at all.
- Although the apportionment dispute concerns 2015 through 2017, the definition remains relevant to Massachusetts use-tax exemptions, investment tax credits, and local property-tax exemptions.
Why It Matters
The decision is important for consumer brands, technology companies, biotech businesses, and other enterprises that separate design and process control from physical production. Contract manufacturing does not necessarily make the commissioning company a nonmanufacturer under Massachusetts law. Detailed control, repeated technical feedback, testing, and authority to halt or correct production can establish direct participation in manufacturing even where another entity owns the plant and procures the raw materials.
For the Massachusetts tax bar, the opinion also supplies a practical record-building map. Contracts alone will not determine classification; the board and reviewing court will examine what employees actually do across the product-development and production cycle. Companies claiming or resisting manufacturing treatment should document who controls specifications, supplier choices, tooling, samples, quality standards, and approval to begin full production.