Source: https://www.floridataxlawyer-blog.com/category/corporate-income-tax/
Timestamp: 2019-04-26 02:00:07+00:00

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In 2012, Scioto Insurance Company v. Oklahoma Tax Comm’n, 279 P. 3d 782 (Ok 2012), the Supreme Court of Oklahoma was the most recent high court to tackle the question of foreign intellectual property holding companies. Similar to the line of cases addressed above, Scioto is a Vermont holding company with nothing in Oklahoma. Specifically, Scioto receives fees for the use of its intellectual property used based on a percentage of gross sales made by Wendy’s in Oklahoma.
Digging further into the facts of the case, Scioto was established to insure risks of Wendy’s restaurants. In order to establish Scioto, Wendy’s transferred intellectual property to Scioto. Scioto only insures Wendy’s International and does not insure any restaurants in Oklahoma, rather Wendy’s franchises individual restaurants within Oklahoma’s borders. In exchange for use of the intellectual property, Wendy’s restaurants in Oklahoma pay 4% of their gross sales to Wendy’s International and those amounts are included as income for purposes of its state income tax return. Wendy’s International then pays and deducts 3% of this payment to Scioto for use of the intellectual property.
The court began its analysis by stating that whether or not Wendy’s International received any payments from restaurants in Oklahoma it still had an obligation to pay Scioto for use of the intellectual property. The court went on to distinguish the case from Geoffrey in that Scioto was not a shell corporation and actually had a bonafide business purpose. Perhaps most interesting in the short opinion is the fact that the court seem to decide the case on due process grounds. This highlights the importance to a state and local tax professional to argue due process in addition to commerce clause nexus in state and local tax cases.
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In 2011 a devastating taxpayer case in the SALT corporate income tax was decided. This slightly different spin on the case was introduced by a famous colonel and his chicken company. The company, known as Kentucky Fried Chicken, was incorporated in Delaware with a headquarters in Kentucky. KFC licensed its valuable name to franchisors nationwide, including into Iowa. Slightly different than the related trademark license in the Geoffrey cases, KFC licensed its trademark to franchisor’s who independently owned KFC’s. Certainly the use of the KFC trademark in Iowa could not force Kentucky based KFC to pay Iowa income tax could it?
The Supreme Court of Iowa ruled that it could in 2010. Lacking physical presence, the court said KFC was economically present in Iowa because its trademarks were firmly rooted in Iowa. Further, the court opined that such intangibles were functionally equivalent of physical presence. The court concluded “the intangibles in Iowa” provided sufficient nexus. How an intangible trademark could be firmly rooted anywhere or be present in Iowa is beyond me. In its liberal reading of Quill the court stated that physical presence was limited to sales and use tax cases because the burdens of filing income tax are far less than that of a sales and use tax. Following the logic in this case, there is no telling how far states can go to tax foreign trademark holding companies.
From the days of Geoffrey through 2011, the states were largely victorious in corporate income tax nexus cases involving “foreign” holding companies. For example, Geoffrey itself lost in Louisiana (2008) (Bridges v. Geoffrey, Inc., 984 So. 2d 115 (La. Ct. App. 2008)), Massachusetts (2009) (Geoffrey, Inc. v. Comm’r of Revenue, 899 N.E. 2d 87 (Mass. 2009)), and Oklahoma (2005) (Geoffrey, Inc. v. Oklahoma Tax Comm’n, 132 P.3d 632 (Okla. Ct. App. 2005)). Other companies such as Lanco Inc in New Jersey (Lanco, Inc. v. Director, 908 A. 2d 176 (N.J. 2006)), Abercrombie & Fitch in North Carolina (A&F Trademarks, Inc. v. Tolson, 605 SE 2d 187 (N.C. App. 2004)), and The Classics Chicago, Inc. in Maryland (The Classics Chicago, Inc. v. Comptroller, 985 A 2d 593 (Md. Ct. Speical App. 2010)) all marked taxpayer losses.
In 2006, the Geoffrey concept was extended by the Supreme Court of West Virginia in Tax Commissioner v. MBNA America Bank, 640 SE 2d 226 (W. Va. 2006).
In MBNA, a credit card company with its headquarters in Delaware had no real or tangible property in West Virginia. For the two years of corporate income tax at issue, MBNA had gross receipts totaling over $18 million. The court concluded that while physical presence was required for sales and use tax purposes, it was not for corporate income tax purposes.
Although in our cases subsequent to Bellas Hess and concerning other types of taxes we have not adopted a similar bright-line, physical-presence requirement, our reasoning in those cases does not compel that we now reject the rule that Bellas Hess established in the area of sales and use taxes.
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Trademark licensing companies have always been a difficult inquiry for courts to analyze from a constitutional perspective in the state and local tax arena. At its very basic level, the trademark licensing company cases involve a holding company (almost always a Delaware company) with no physical assets or employees in the taxing state. The holding company holds a valuable intangible asset, a trademark for example, and charges another company a fee to use that intangible asset to sell goods in a taxing state. The question then arises – does the taxing state have the power to tax the out-of-state holding company based on other company’s use of its trademarks within that state?
The only Supreme Court case that attempts to address this issue is Quill Corp. v. North Dakota, in 1992. In Quill, the Court held that in order for a state to have the power to tax a company within that state, the company must have some “physical presence” within that state. To add another wrinkle, Quill dealt with the ability for a state to force a company to collect its use tax. Does this “physical presence” apply to sales tax? What about corporate income tax?

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