United States

Maryland: Tax Court Upholds Assertion of Nexus Based on Corporate Parent’s Maryland Activities

Mar 09, 2015
From KPMG TaxWatch

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The Maryland Tax Court recently addressed whether an out-of-state taxpayer had sufficient contacts with Maryland to require it to file returns and pay income taxes for the 1996 to 2003 tax years. The taxpayer at issue was formed to centralize the ownership of intellectual property related to a number of food brands. The taxpayer managed, controlled, promoted, and marketed its brand names and trademarks, and earned royalties from licensing its intellectual property to unrelated and related parties. It was not disputed that the taxpayer had no physical presence in Maryland and all of its activities related managing its intellectual property were performed out-of-state. The Comptroller’s basis for the assessment was that the taxpayer was formed, in part, to shift income out of the reach of the Maryland taxing authorities. The taxpayer, not surprisingly, challenged the assessment arguing that it had “real and substantial economic substance” outside Maryland.

Maryland courts have held that nexus can be established when a parent company’s business in Maryland is what produces the income of a subsidiary. The court noted that the existence of a unitary business being conducted in Maryland is not sufficient to confer nexus on an out-of-state unitary group member. However, when analyzing whether a taxpayer has economic substance separate from its parent, the courts analyze a number of factors—including those that indicate the existence of a unitary business. The court noted that from its formation the taxpayer had been, and continued to be, dependent on the parent for funding, support, officers and directors, etc. The taxpayer, in the court’s view, could not function without the parent’s corporate personnel, support services, and office space. Almost all of the taxpayer’s income was derived from licensing intangibles to its affiliates and that income was returned to the parent through various intercompany payments. Due to the functional integration and control through stock ownership and common employees, directors and officers, the court concluded that the taxpayer’s income was produced from the parent’s Maryland business activity and therefore the taxpayer had Maryland nexus. Because the taxpayer had no Maryland property, payroll or sales, the court upheld the Comptroller’s use of a blended apportionment formula that was derived from the five corporate affiliates that filed Maryland income tax returns. However, the court did agree to waive penalties and interest for reasonable cause, as the taxpayer had a reasonable basis for challenging the law and acted in good faith. Please contact Mike Riscili at 717-260-4719 with questions on ConAgra Brands, Inc. v. Comptroller of the Treasury.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.