The distinction between a manufacturer and a service provider has several important tax implications for businesses, especially in Massachusetts. Manufacturers often receive sales tax exemptions, personal property tax exemptions, and more favorable apportionment treatment for income tax purposes.
Akamai Technologies Inc. (“Akamai”) requested abatement of Massachusetts corporate income taxes paid in tax years 2010 through 2012, based on changing its classification to a manufacturer of standardized, remotely accessed computer software. The refund of $7.5 million dollars was based on the use of single sales factor apportionment, prescribed for manufacturers, in computing the company’s corporate income tax liability. The company had sought abatements on several occasions and was first told it would be classified as a manufacturer, but the classification was subsequently revoked. Upon review at the Appellate Tax Board (“Board”), Akamai was told that it should always have been considered a manufacturer and was entitled to refunds based on that classification status.
In its finding, the Board noted that it is irrelevant if the technology industry refers to software-as-a-service products as services. “The substance of what Akamai sold to its customers is the relevant question,” according to the Board.
As property tax exemptions are also impacted by business classification, the City of Cambridge intervened in this case, objecting to the classification of Akamai as a manufacturer. Such a classification would result in an exemption from Cambridge personal property tax for Akamai. A separate appeal continues with the city in the matter of the personal property tax.
This decision is important because the distinction between a service provider and a manufacturer may provide guidance for technology companies faced with this situation. Ryan professionals can assist you in reviewing your company’s classification in Massachusetts and how this may also apply to other states.
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