On July 30, 2026, the Massachusetts Appeals Court affirmed that Skechers USA, Inc. (Skechers) qualified as a manufacturing corporation for Massachusetts corporate excise tax purposes for tax years 2015 through 2017 (see Skechers USA, Inc. v. Commissioner of Revenue, 107 MassAppCt 157). The decision considered whether a company that designs, directs, and oversees footwear production through third-party overseas factories can be engaged in manufacturing in substantial part under Massachusetts law.
Case Overview
Prior to tax years beginning on and after Jan. 1, 2025, a “manufacturing corporation” was required to use a single-sales factor for apportioning income within and without the state. Massachusetts law defined a “manufacturing corporation” as one “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.” Skechers, which is based in California, originally filed using the general three-factor apportionment formula based on property, payroll, and sales under the theory that it was a design and marketing company, rather than a manufacturer. Notably, while Skechers had substantial sales into Massachusetts, it had very little in the way of property and payroll in the Commonwealth, so use of the three-factor instead of the single factor formula was advantageous to it.
Upon audit, the Commissioner determined Skechers should be treated as a manufacturing corporation and be required to use the single-sales-factor formula then applicable to manufacturers. The Appellate Tax Board ruled in favor of the Commissioner and concluded Skechers was engaged in manufacturing in substantial part.
The Appeals Court affirmed the Board’s ruling and agreed that Skechers’ activities extended beyond the creation of concepts and design. Skechers developed detailed product specifications for materials, dimensions, stitching, colors, construction, and technology. Its overseas offices coordinated with third-party factories and refined specifications during production. Skechers reviewed and approved materials, testing, prototypes, molds, fit results, samples, and quality standards. Skechers remained involved through preproduction, initial production, final inspection, packaging, and distribution. Although Sketchers itself didn’t actually manufacture a product, the court determined that Skechers’ continuous involvement in designing, directing, testing, approving, and overseeing footwear production was essential and integral to the manufacturing process, all of which are activities that are attributed to manufacturing under Massachusetts law and regulations. It found that Skechers’ primary business was to design, market, and oversee the production of footwear according to its quality standards and specifications and that Skechers engaged in manufacturing in substantial part.
Taxpayer Considerations
For the years at issue, Massachusetts required manufacturing corporations taxable both inside and outside the state to use single-sales-factor apportionment. That treatment could increase Massachusetts taxable income for companies with limited in-state property and payroll but more substantial sales into the state. Although Massachusetts eliminated the apportionment distinction between manufacturing and nonmanufacturing corporations beginning Jan. 1, 2025, the Skechers decision remains relevant for taxpayers with open Massachusetts years and for taxpayers that have not historically considered whether their activities may support manufacturing treatment under Massachusetts law.
Taxpayers should review whether the ruling affects their Massachusetts corporate excise positions, particularly if they outsource production while retaining significant responsibility for design, specifications, materials, prototypes, production standards, quality review, or approval rights. Similarly situated taxpayers should consider whether amended returns, refund claims, or protective refund claims may be appropriate for historical years.
Taxpayers that have not historically viewed themselves as manufacturers should also consider whether the court’s analysis warrants a broader review of other Massachusetts tax provisions. Any such analysis should be performed separately for each tax type and may include consideration of potential sales and use tax exemptions, investment tax credit eligibility, and local property tax treatment.
For help evaluating whether the Skechers decision affects your Massachusetts tax position, please contact a CBIZ SALT team member.
Frequently Asked Questions
The court found that Skechers played an integral role in the manufacturing process by developing product specifications, overseeing production, approving materials and prototypes, and maintaining quality standards throughout production, even though third-party factories manufactured the footwear.
The ruling may affect taxpayers with open Massachusetts tax years because manufacturing corporations were previously required to use single-sales-factor apportionment, which could increase taxable income for companies with significant Massachusetts sales but limited in-state property and payroll.
Potentially. The Skechers decision suggests that companies that retain significant control over design, specifications, testing, production standards, and quality review may be considered manufacturers under Massachusetts law.
Taxpayers should review whether their activities resemble those in the Skechers case and evaluate whether amended returns, refund claims, protective refund claims, or other Massachusetts tax considerations may be warranted for historical years.
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