The Massachusetts Appeals Court recently ruled that Skechers USA, Inc. qualifies as a "manufacturing corporation" under state tax law. This decision affects the company's tax obligations and could have broader implications for how similar businesses are classified for tax purposes in the future.
The ruling came from a case filed under docket number AC 25-P-928, where Skechers appealed a decision by the Appellate Tax Board. The board had determined that Skechers was engaged in manufacturing in substantial part, which led to the denial of the company's application for a tax abatement.
Skechers, a Delaware corporation with its main office in California, argued that its primary business involved designing and marketing footwear, and that its role in the actual production process was merely incidental. The company contended that it should not be classified as a manufacturing corporation, which would subject it to a more burdensome tax formula.
The dispute reached the Massachusetts Appeals Court after Skechers filed for an abatement of corporate excise taxes, which had been assessed by the Commissioner of Revenue. Following an audit, the commissioner determined that Skechers should be taxed as a manufacturing corporation, leading to an assessed tax liability of $155,043, along with penalties and interest. Skechers appealed this decision after the Appellate Tax Board upheld the commissioner’s assessment.
In its ruling, the court affirmed the Appellate Tax Board's decision, stating, "The evidence showed a near-continuous back and forth between Skechers' US employees, its overseas employees, and the factories... Skechers employees played a vital role throughout the entirety of the shoe creation process." The judges involved in this ruling were Massing, Ditkoff, and Hand.
The court's decision hinged on the definition of a manufacturing corporation under Massachusetts law, which requires that a corporation be engaged in transforming materials into a new product in substantial part. The board found that Skechers was involved in various stages of the manufacturing process, including product development, design specifications, and quality control.
The ruling has significant implications for Skechers and potentially other companies in similar industries. By classifying Skechers as a manufacturing corporation, the court upheld the use of a single-factor apportionment formula for tax purposes, which is generally more favorable for manufacturers with limited property or payroll in Massachusetts. This decision could lead to increased tax liabilities for Skechers, as the single-factor formula tends to allocate a larger portion of income to Massachusetts.
Furthermore, the ruling may set a precedent for how other companies define their roles in manufacturing processes. Businesses that design and market products but do not physically produce them may need to reassess their tax classifications and liabilities. The court's interpretation of what constitutes substantial engagement in manufacturing could influence future tax assessments and corporate strategies.
Looking ahead, Skechers has the option to appeal the ruling to the Massachusetts Supreme Judicial Court. However, details regarding any potential appeal or related cases were not available in the court filing. The outcome of this case may prompt other companies to evaluate their manufacturing classifications and tax strategies in light of the court's interpretation.