298
W. VA. CODE §§ 11-10E-5, 11-10E-8, 11-10E-9 (2006).
299
W. VA. CODE §§ 11-10-18(f)(2), 11-10E-5(b) (2006).
300
W. VA. CODE § 11-10E-6 (2006).
301
W. VA. CODE §§ 11-10-18(f)(1), 11-10E-7 (2006).
302
Louisiana has employed a nexus analysis when challenging intercompany transactions. In Bridges v. AutoZone Properties, Inc.,303 an out-of-state owner of a real estate investment trust (REIT) that received dividends from the REIT was subject to Louisiana corporate income tax on the dividends because the owner of the REIT had sufficient nexus with the state to satisfy the requirements of the Due Process Clause.304
The Louisiana Appellate Court held the owners’ shares of the REIT did not acquire business situs in Louisiana because they were not acquired by the owner in the course of any business conducted in Louisiana nor was there any indication of share ownership or dividend receipt in the state.305 The appellate court extracted from case law the doctrines that related to the taxation of intangible property in Louisiana.306 The doctrines indicated that intangible property is taxed at the legal domicile of its owner unless it has obtained business situs in a foreign state.307 The owner of the REIT was not qualified to do business in Louisiana, had no property, office or employees in the state.308 Therefore in the opinion of the appellate court the REIT owner did not have sufficient nexus with Louisiana to meet the Due Process standards.
The Louisiana Supreme Court, citing International Harvester Co. v. Wisconsin Department of Taxation,309 reversed the holding of the appellate court.310 In reaching its conclusion, the Supreme Court first addressed the issue of whether the REIT would be characterized as a trust for Louisiana purposes.311 The court dismissed the Department’s 303 900 So. 2d 784 (La. 2005). 304Id . at 786-87. 305 Id. at 789. 306 Id. at 789. 307 Id. 308Id . at 789-90. 309 322 U.S. 435 (1944). 310 900 So. 2d 784, 809 (La. 2005). 311 Id. at 796.
argument indicating that the “status as a corporation remains intact and is not converted to a trust simply by its business operations in Louisiana.”312
The court then turned to the jurisdictional issue, namely, whether Louisiana has jurisdiction to tax the dividend income of AutoZone Properties (“Properties”) based solely on its investment in the REIT that received benefits and protection from doing business in Louisiana.313 The court acknowledged that the nexus requirements of the federal Due Process Clause control in this matter.314 The court stated, “the Due Process Clause requires some definitive link, some minimum connection between a state and the person, property or transaction it seeks to tax.”315 In addition, the court remarked, the income sought to be taxed “must be rationally related to the values” provided by the taxing jurisdiction.316 The court found the REIT had received benefits and protection from Louisiana.317 Therefore, because “Louisiana…helped create the income,” it is not prevented from taxing its share of the income.318
Louisiana raised a similar nexus challenge with respect to an intangible holding company. Secretary, Dep’t of Revenue, Louisiana v. Gap (Apparel) Inc.319 In this case, the Louisiana appellate court affirmed the trial court’s holding that it had personal jurisdiction over Gap Apparel Inc. (“Apparel”).320 The Gap, Inc. (Gap) is a Delaware corporation that owns and operates retail stores in the United States with 41 of those
312 Id. at 800. 313Id . at 800. 314
Id. at 801. Because the Commerce Clause was not raised as an issue, the court did not address it. Id.
315 Id. at 800-01. 316 Id. at 801. 317Id . at 809. 318 Id. 319
Secretary, Dep’t of Revenue, Louisiana v. Gap (Apparel) Inc.,886 So. 2d 459 (La. Ct. App. 2004).
320
stores in Louisiana.321 Gap developed a number of trade names, trademarks and service marks as part of its business.322 The marks were transferred to a subsidiary, GPS (Delaware), Inc., and subsequently to Apparel.323 After the transfer,, Apparel and Gap entered into a licensing agreement whereby Apparel licensed to Gap and its affiliates the use of the intellectual property and the licensees paid a royalty to Apparel for such use.324 Apparel is a California corporation with its principal place of business in that state.325
The Department filed suit for the non-payment of corporate income and franchise tax.326 Apparel responded by arguing the court lacked personal jurisdiction over the company, as it had no contact with the state.327 The appellate court acknowledged that Apparel may not have physical presence in Louisiana, however, its intangible property had a connection with the state.328 Citing United Gas Corp. v. Fontenot,329 the court concluded the marks licensed by Apparel “have been used in Louisiana in such a way as to become an integral part of the licensees’ businesses” in Louisiana.330 The court continued to indicate that as such, “the intangibles have acquired business situs in Louisiana and are subject to taxation.”331
North Carolina also has asserted taxing jurisdiction over an intangible holding company. A&F Trademark, Inc. v. Tolson.332 Although the intangible holding companies had no physical presence in North Carolina it licensed trademarks valued 321 Id. at 461. 322Id. 323 Id. 324 Id. 325 Id. at 462. 326Id . at 461. 327 Id. at 462. 328 Id. 329 241 La. 488 (1961). 330
886 So. 2d 459, 462 (La. Ct. App. 2004).
331
Id.
332
605 S.E.2d 187 (N.C. 2004), appeal denied, 359 N.C. 320 (2005), andcert. denied, 126 S. Ct. 353 (2005).
approximately $1.2 billion333 to separate retail operating subsidiaries in North Carolina. The North Carolina Supreme Court held the holding company was doing business in the state and subject to franchise tax. The court noted that the company was doing business in the state because North Carolina provided privileges and benefits that fostered and promoted the related retail companies and made it possible for the taxpayers to earn income pursuant to the licensing agreements.334 In so doing, the court rejected the taxpayers’ claim that physical presence in the state is required for the state to have jurisdiction to tax under the Commerce Clause for purposes of income and franchise taxes.335 The court concluded that, “where a wholly-owned subsidiary licenses trademarks to a related retail company operating stores located within North Carolina, there exists a substantial nexus with the State sufficient to satisfy the Commerce Clause.”336
In Lanco Inc. v. Director, Division of Taxation,337 the New Jersey Superior Court, Appellate Division reversed the Tax Court and also held that physical presence is not required for the imposition of the Corporate Business Tax.338 Lanco, Inc. (“Lanco”) is a Delaware corporation that owned intellectual property such as trade names and trademarks.339 The intellectual property was licensed to Lane Bryant, Inc., a retailer with
333 Id. at 189. 334 Id. at 192. 335 Id. at 193. 336Id . at 195. 337
879 A.2d 1234 (N.J. Super. Ct. App. Div. 2005), cert. granted, 892 A.2d 1291 (N.J. 2006).
338
Id. at 1242.
339
New Jersey locations.340 Lanco had no office, employees or property in New Jersey.341 Lane Bryant paid a royalty to Lanco for the use of the intellectual property.342
The court, in reaching its conclusion, rejected the Tax Court’s conclusion that the holding of Quill Corp. v. North Dakota343 applied to corporate income taxes.344 Rather, the court adopted the rationale of Geoffrey Inc. v. South Carolina Tax Commission345 that physical presence was not required to satisfy the Commerce Clause’s substantial nexus requirement.346
In Geoffrey, Inc. v. The Oklahoma Tax Commission,347 the Oklahoma Appellate Court affirmed the holding of the Oklahoma Tax Commission that the imposition of Oklahoma income tax attributable to royalty income earned by Geoffrey, Inc. (Geoffrey) under a licensing agreement which was based on sales within Oklahoma did not offend the Due Process Clause nor burden interstate commerce in violation of the Commerce Clause of the United States Constitution.348
Geoffrey, a Delaware corporation, appealed an Order of the Oklahoma Tax Commission imposing income tax on the royalties received from licensing its intangibles.349 As part of a corporate restructuring in the mid-1980s, Toys ‘R’ Us, Inc. formed Geoffrey, and assigned certain intellectual property, such as trademarks, to
340Id . 341 Id. 342 Id. 343 504 U.S. 298 (1992).
344Lanco Inc. v. Dir., Div. of Taxation
, 879 A.2d 1234, 1238 (N.J. Super. Ct. App. Div. 2005), cert. granted, 892 A.2d 1291 (N.J. 2006).
345
437 S.E.2d 13 (1993).
346
Lanco Inc. v. Dir., Div. of Taxation, 879 A.2d 1234, 1238 (N.J. Super. Ct. App. Div. 2005), cert. granted, 892 A.2d 1291 (N.J. 2006).
347
132 P.3d 632 (Okla. Civ. App. 2005).
348
Id. at 641.
349
Geoffrey in exchange for Geoffrey stock.350 Geoffrey entered into licensing agreements with Toys ‘R’ Us, Inc. for the use of the intellectual property.351 The royalties for the use of the marks were equal to either two percent or three percent of sales depending on the mark.352 The licensing of the intangible property was the only business activity of the company.353 Geoffrey did not maintain an office or have employees in Oklahoma.354
The Oklahoma Appellate Court rejected Geoffrey’s argument that the Commerce Clause requires substantial nexus through physical presence and that the Due Process requires minimum contacts.355 In so doing, the court rejected the argument that the
Quill356 decision extended the bright-line physical presence test to all taxes.357 Agreeing with and applying the benefits test of a decision in South Carolina involving Geoffrey and similar issues,358 the Oklahoma court concluded that the real source of income was not the license agreement, but rather the Oklahoma customers and by Oklahoma “providing an orderly society” in which to conduct business made it possible to earn the income.359 The tax is rationally related to the benefits and protections provided by Oklahoma and the Due Process minimum contacts requirement was met because Geoffrey purposefully directed its activities towards Oklahoma.360
350 Id. at 634. 351 Id. 352 Id. 353Id . 354 Id. 355 Id. at 635. 356
Quill Corp. v. North Carolina, 504 U.S. 298 (1992).
357Id
.
358
Geoffrey, Inc. v. South Carolina Tax Comm’n, 437 S.E.2d 13 (S.C 1993).
359
Geoffrey, Inc. v. Oklahoma Tax Comm’n, 132 P.3d 632, 638-39 (Okla. Civ. App. 2005).
360
In Acme Royalty Co. v. Dir. of Revenue,361 the Missouri Supreme Court reached the opposite conclusion holding that intangible holding companies were not subject to Missouri corporate income tax because they had no contacts, and specifically no sales, within Missouri.362 To be subject to Missouri tax, the companies had to have some activity, such as payroll, property, or sales, in Missouri.363 The companies did not do business, maintain employees or agents, conduct sales, or distribute property in Missouri.364 The court noted that despite the fact that related companies did business and paid tax in Missouri, the intellectual property holding companies were separate legal entities and should be treated as such.365 Because the companies did not derive income from sources in the state, the court concluded that the income sought to be taxed by the Director was outside the scope of Missouri taxation.366 Therefore, the decisions of the Missouri Administrative Hearing Commission were reversed.367