Massachusetts Appellate Tax Board Invalidates Finnigan Rule for P.L. 86-272 Protected Members

On July 22, 2026, the Massachusetts Appellate Tax Board (“Board”) ruled¹ that Massachusetts could not apply its Finnigan rule to include a proportionate share of the Massachusetts sales of a P.L. 86-272-protected combined-group member in the sales-factor numerators of taxable members. The Board concluded that this application of the rule indirectly imposed tax on income that federal law otherwise protects from direct taxation. In reaching its decision, the Board declined to follow contrary decisions from other states.

Finnigan Rule Invalidated

Smithfield Packaged Meats Corp., along with its unitary subsidiaries, filed a Massachusetts combined corporate excise return for 2017. Fresh Meats Sales, one of the included affiliates, was not taxable in Massachusetts because its in-state activities were limited to the solicitation of orders protected by P.L. 86-272. Under 830 CMR 63.32B.2(7)(b), approximately $85.7 million of Fresh Meats Sales’s Massachusetts receipts were included in the group’s sales-factor numerators. The Board held that this allocation was an improper violation of the Supremacy Clause of the U.S. Constitution. In the Board’s view, P.L. 86-272 does not just limit a state’s ability to tax an out-of-state entity—the income earned by the protected entity is exempt without qualification.

The Commissioner of Revenue (“Commissioner”) relied on decisions from Arizona, New York, and California that treated the use of a protected affiliate’s receipts as an apportionment mechanism rather than a tax on the affiliate. The Board found those authorities unpersuasive, asserting that these decisions have the effect of subsuming the activities of a protected entity within the activities of a combined group by “placing combined and consolidated reporting, and concepts of apportionment, ahead of the constitutional principles embedded in the Supremacy Clause.” It reasoned that allocating Fresh Meats Sales’s Massachusetts receipts to taxable members produced essentially the same result as if Fresh Meats Sales itself had been taxable. Massachusetts therefore accomplished indirectly what P.L. 86-272 prohibited it from doing directly. The Board granted Smithfield a $239,719 abatement for 2017 and eliminated the related underpayment penalty.

Combination Provision Upheld

The Board upheld the Commissioner’s application of 830 CMR 63.32B.2(7)(g)2.a., which provides that when a combined group member sells, to an unrelated third party, a product that it previously purchased from another member of the group that produced the product, the activities of both members must be considered jointly for purposes of determining the appropriate apportionment formula of the member making the sale. Applying this regulation allowed the Commissioner to characterize certain members of the group as manufacturers, even though they functionally operated as sales companies. This was important because during the tax years at issue, manufacturers were required to use a single sales factor formula.² The Board observed that the Legislature’s broad grant of regulatory authority gave the Commissioner the discretion to address the appropriate apportionment methodology after an intercompany transaction between unitary group members (one a manufacturer and the other a sales entity) has been eliminated.

Ryan’s Take and Action Steps

The decision regarding the Finnigan rule has the potential to create significant opportunities for combined filers in Massachusetts. The Board rejected arguments that were successful in other states: namely that the proportional allocation of otherwise non-taxable sales is merely an apportionment mechanism—which P.L. 86-272 does not address. The decision is subject to appeal, and it’s likely the Commissioner will file one. However, all Massachusetts combined filers whose groups include non-taxable members should weigh the implications of the decision and the impact it would have on the group’s sales factor numerators.

¹ Smithfield Packaged Meats Corp. and Combined Affiliates v. Commissioner of Revenue, ATB No. C344811 (July 22, 2026).

² As of January 1, 2025, single sales factor now generally applies to all business corporations in the state.

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