North Carolina Appeals Court Imposes Franchise Tax on Trademark Holding Companies

North Carolina Appeals Court Imposes Franchise Tax on Trademark Holding Companies

The North Carolina Court of Appeals has held that corporate franchise and income tax could be assessed against subsidiaries created as trademark holding companies even though the subsidiaries did not have a physical presence in the state.

The North Carolina Court of Appeals has held that corporate franchise and income tax could be assessed against subsidiaries created as trademark holding companies even though the subsidiaries did not have a physical presence in the state (A&amp;F Trademark Inc., et al. v. Tolson, et al., Dec. 7, 2004). A&amp;F Trademark Inc. and several other wholly owned, nondomiciliary subsidiary corporations of the Limited Inc. (collectively, subsidiaries) had been created as trademark holding companies for the Limited's retail stores. Trademarks were assigned to the subsidiaries and then licensed back to the retail stores in return for royalty payments. The subsidiaries did not file state corporate franchise and income tax returns for the year 1994. The secretary of revenue issued a notice of proposed assessment. The subsidiaries protested and the Tax Review Board affirmed the final decision of the secretary. The Wake County Superior Court also affirmed the secretary's decision and the subsidiaries appealed to the North Carolina Court of Appeals. Two issues were presented on appeal. First, whether subsidiaries were "doing business" in the state and second, whether the assessment of corporate franchise and income tax violated the Commerce Clause of the U.S. Constitution. The appellate court held that the subsidiaries were "doing business" in the state and the state had not exceeded its authority by imposing franchise or income taxes. Although the subsidiaries argued that amendments to the income tax statutes in 2001 diluted the effect of the corporate income tax, the court held that the amendments were actually enacted to enhance compliance with the tax "on income generated from using trademarks in [manufacturing and retaining] activities." The court also held that the state had provided privileges and benefits to the subsidiaries, which "fostered and promoted the related retail companies." Finally, the court held that imposition of taxes on the subsidiaries did not violate the Commerce Clause. The court found substantial nexus although it was not based on the subsidiaries' activity in the state. The court wrote 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." The judgment of the superior court affirming the secretary's final determination was upheld.

The North Carolina Court of Appeals has held that corporate franchise and income tax could be assessed against subsidiaries created as trademark holding companies even though the subsidiaries did not have a physical presence in the state (A&F Trademark Inc., et al. v. Tolson, et al., Dec. 7, 2004). A&F Trademark Inc. and several other wholly owned, nondomiciliary subsidiary corporations of the Limited Inc. (collectively, subsidiaries) had been created as trademark holding companies for the Limited's retail stores. Trademarks were assigned to the subsidiaries and then licensed back to the retail stores in return for royalty payments. The subsidiaries did not file state corporate franchise and income tax returns for the year 1994. The secretary of revenue issued a notice of proposed assessment. The subsidiaries protested and the Tax Review Board affirmed the final decision of the secretary. The Wake County Superior Court also affirmed the secretary's decision and the subsidiaries appealed to the North Carolina Court of Appeals. Two issues were presented on appeal. First, whether subsidiaries were "doing business" in the state and second, whether the assessment of corporate franchise and income tax violated the Commerce Clause of the U.S. Constitution. The appellate court held that the subsidiaries were "doing business" in the state and the state had not exceeded its authority by imposing franchise or income taxes. Although the subsidiaries argued that amendments to the income tax statutes in 2001 diluted the effect of the corporate income tax, the court held that the amendments were actually enacted to enhance compliance with the tax "on income generated from using trademarks in [manufacturing and retaining] activities." The court also held that the state had provided privileges and benefits to the subsidiaries, which "fostered and promoted the related retail companies." Finally, the court held that imposition of taxes on the subsidiaries did not violate the Commerce Clause. The court found substantial nexus although it was not based on the subsidiaries' activity in the state. The court wrote 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." The judgment of the superior court affirming the secretary's final determination was upheld.