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Published on: February 5, 2013

Courts Headed In The Right Direction In 2012 By Ruling In Trademark Licensing Taxpayers’ Favor PART 5: Scioto Shows Due Process Challenge Still A Viable Avenue to State Income Tax Cases

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.

Published on: January 31, 2013

Courts Headed In The Right Direction In 2012 By Ruling In Trademark Licensing Taxpayers’ Favor – Part 4: Conagra Finally Gives Taxpayers a Leg to Stand On

By Jerry Donnini, Esq.

In 2012, West Virginia (home of MBNA) went after ConAgra Foods, Inc. ConAgra is a trademark holding company and wholly owned by a Nebraska subsidiary of CA foods. ConAgra held valuable trademarks and trade names from affiliated and unrelated entities such as Armour, Butterball, Healthy Choice, Kid Cuisine, Morton, and Swift, and licensed them back for a fee. With the recently decided KFC and MBNA on the back burner, West Virginia seemed destined to rule in the state’s favor on a seemingly similar transaction. Surprisingly, the West Virginia Supreme Court went the other direction.

Published on: January 28, 2013

Courts Headed In The Right Direction In 2012 By Ruling In Trademark Licensing Taxpayers’ Favor – PART 2: States Win Cases on Geoffrey & Economic Presence Develops

By Jerry Donnini, Esq.

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.

With sparse logic and a few “authoritative law review” articles, the court opined that Quill was limited by the following language:

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.

Published on: January 24, 2013

Courts Headed In The Right Direction In 2012 By Ruling In Trademark Licensing Taxpayers’ Favor – Part 1 Background

By Jerry Donnini, Esq.

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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Published on: January 22, 2013

To Be an “S” or a “C,” That Is The Question – Companies Consider The Switch Following The Fiscal Cliff Tax Act

By Jerry Donnini, Esq.

Traditionally, if a corporation met the eligibility requirements of an S-Corporation, then it is almost always advisable to elect “S” status for small corporations. However, amidst the fiscal cliff tax act of 2012, some of our clients have explored the option of converting to a C-Corporation. While the results of an empirical analysis are important, other often overlooked ramifications should be considered.

By way of background, many businesses incorporate to shield its owners from personal liability as a result of acts of the business. Most small businesses organize as “pass-thru entities,” which are S-Corporations, Limited Liability Companies (LLC’s), or partnerships. Such entities are called “pass-thru entities” because the entity itself does not pay tax; rather the income is taxed when it “passes through” to the owners. In a simple example if ABC, Inc. earns $100 and it has 2 owners taxed at a 35% rate, it will not pay tax on $100. Rather the owners will report income of $50 and pay tax of $17.50.

In contrast, the traditional C-Corporation is not a “pass thru entity,” because a corporation is taxed twice. The C-Corporation is taxed on income it earns and then is taxed again when its earnings are distributed to its shareholders in the form of a dividend. In my simple example, if ABC, Inc. was a C-Corporation, it would be taxed at 35% on its $100 of income, resulting in $35 of tax at the corporate level. Upon distributing its remaining $65 to its lone shareholder, the income would get taxed again. Assuming the old 15% tax rate on dividends, the shareholder would then pay another $9.75 in tax. Therefore, purely because of its structure, $9.75 in additional tax would be due if the company were set up this way. Adding several 0’s to my simple example, one can easily see how this simple example can quickly become an issue.
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Published on: January 17, 2013

Sites That Pay Shopper Commissions – Is it Nexus Creating?

By Jerry Donnini, Esq.

Over the past few years many retailers and online companies have turned to shopper’s personal webpages for advertising. In our current online marketplace, individuals can post items, outfits, and recipes to their social media sites. Piggybacking on our growing use of social media in our daily lives, companies have taken advantage of this by paying individuals for tweets, posts, and other social media disseminations that drive customers to a company or online retailer. Using this tactic, social media sites such as Twitter, Facebook, and Pintrest are being transformed into paid promotion generators. An October 2012 article written in the New York Times that can be found here, discusses a Manhattan talent agent. In her free time the shopper posts various fashion items to her social media sites, such as lipsticks on her Pintrest account and her “night life collection” on Beso (which apparently is a shopping website.) If her posts drive customers to the lipstick site or Beso, the companies will reward her by paying her a fee. Some sites, such as Beso pay users around 14 cents for every click the individual sends to Beso. While other retailers, such as Pose, pay only when a product is purchased resulting from the click (usually around 5%). According to the article, the Manhattan talent agent makes about $50/month from promotion fees.

After reading this article, I am sure many readers had the same thought I did – can the fee paid from the retailer to the individual create nexus for sales tax purposes? Actually, I am sure the only people that even thought about this are state and local tax attorneys like me who spend many of their hours reading about sales tax laws. On a serious note, it does present an interesting sales tax law issue as to whether these activities can create nexus to an online retailer who has nothing in the state aside from a shopper who happens to post their products to social media.
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