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ECONOMIC NEXUS – HAS THE PENDULUM FINALLY SWUNG IN THE TAXPAYER’S FAVOR? THE CHICAGO TAX CLUB FALL SEMINAR October 22, 2012 David J. Kupiec Darren Lebiecki Natalie M. Martin Kupiec & Martin, LLC Kraft Foods Group Kupiec & Martin, LLC Moderator.

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October 22, 2012

David J. Kupiec Darren Lebiecki Natalie M. Martin

Kupiec & Martin, LLC Kraft Foods Group Kupiec & Martin, LLC


economic nexus background
Economic Nexus - Background
  • Sales Tax Nexus – physical presence (Quill)
  • Income Tax Nexus – physical presence, bright line nexus or economic nexus
  • Franchise Tax Nexus – physical presence
nexus physical presence
Nexus – Physical Presence
  • Quill – Physical Presence Test Is Nexus Standard
  • Sales and Use Tax Application
  • Tennessee and Texas Application of Quill to Income Taxes
bright line nexus
Bright Line Nexus
  • Establish nexus by certain amount of activity in a state
  • For example: Factors are over a threshold amount Factors over a threshold percentage
  • California, Colorado, Connecticut, Michigan and Ohio are examples
  • California Throwback – 2012 Chief Counsel Ruling
economic nexus states concerns
Economic Nexus – States’ Concerns
  • Generally States attempt to tax companies that have activity in the State that has a purposeful direction at a market with sales or benefits derived by these activities
  • Look to companies with intangible assets or customers in the State
  • Originated from perceived intangible holding company abuse
economic nexus litigation
Economic Nexus – Litigation
  • Various states have litigated the issue
  • Geoffrey 1993 – The Beginning
economic nexus litigation1
Economic Nexus – Litigation
  • A&F Trademark v. Tolson, 605 S.E.2d 187 (N.C. Ct. App. 2004)
    • The taxpayer had income tax nexus by virtue of having intangible property in the state along with receiving income from use of property in state
  • K Mart Corp. v. Taxation and Revenue Dept., N.M. Sup. Ct. Docket No. 27,260 (Dec. 29, 2005)
    • The New Mexico Supreme Court discussed gross receipts tax and income tax nexus resulting from the use of trademarks in New Mexico and the impact of the relationship between the taxpayer and the in-state operating company
economic nexus litigation2
Economic Nexus – Litigation
  • West Virginia v. MBNA, 640 S.E.2d 226 (W.Va. 2006)
    • The Court ruled that nexus is created under a significant economic presence test which includes purposeful direction toward a state while measuring the degree of the contacts
    • The degree is measured by “the frequency, quantity, and systematic nature of a taxpayer’s economic contacts with a state”
  • Lanco, Inc. v. Dir, Div. of Taxation, 908 A.2d 176 (N.J. 2006)
    • Appellate Court found that physical presence necessary for sales and use tax nexus is not applicable to income tax
    • Licensing fees attributable to New Jersey created income tax nexus
    • Ruling upheld by the New Jersey Supreme Court
economic nexus litigation3
Economic Nexus – Litigation
  • Praxair Technology v. Director, Division of Taxation, 404 N.J. Super. 287 (2008)
    • The Court relied on Lanco and reasoned that a taxpayer does not need physical presence for income tax nexus
    • Presence of intangible property creates income tax nexus
  • Geoffrey, Inc. v. Comm. Of Revenue (453 Mass. 17, 899 N.E. 2d 87) (2009)(cert. denied to U.S. Supreme Court, Dkt. 08-1207, June 22, 2009)
    • Taxpayer had substantial nexus because they carried on business in Mass. through the licensing of intangibles (pursuant to Capital One)
economic nexus litigation4
Economic Nexus – Litigation
  • AccuZIP, Inc. v. Director, Div. of Taxation, 25 N.J. Tax 158 (Tax 2009):
    • Division of Taxation Director requests that court adopt the significant economic presence test to determine whether a substantial nexus exists
  • Capital One Bank v. Comm. Of Revenue (453 Mass. 1, 899 N.E. 2d 76) (2009)(cert. denied U.S Supreme Court, Dkt. 08-1169, June 22, 2009)
    • Taxpayer had substantial nexus under Complete Auto because it deliberately solicited and conducted significant credit card business in Mass and they used Mass banking and credit facilities
economic nexus litigation5
Economic Nexus – Litigation
  • W.V. Admin. Decision No. 06-544 N (January 6, 2010)
    • Royalty income from licensing trademarks and trade names to corporations selling products in West Virginia resulted in out-of-state corporation being subject to West Virginia corporate net income and business franchise taxes
  • Lamtec Corporation v. Department of Revenue of State of Washington, 170 Wash. 2d 838 (January 20, 2011)
    • Taxpayer argued it did not maintain a physical presence in Washington
    • Court held that even though Taxpayer’s employees did not solicit sales in Washington, the employee visits and activities constituted substantial nexus and therefore the imposition of the B&O tax did not violate the Commerce Clause
    • The United States Supreme Court denied cert. on October 3, 2011
economic nexus recent cases to consider trending to taxpayers
Economic Nexus – Recent Cases To Consider: Trending to Taxpayers?

KFC – Iowa

Telebright – New Jersey

Scioto – Oklahoma

Conagra – West Virginia

kfc corp v iowa dor
KFC Corp. v. Iowa DOR
  • Iowa Supreme Court found that the taxpayer’s receipt of royalties from its Iowa franchisees using the taxpayer’s intangible property constituted nexus.
  • DOR argued that no physical presence required when a franchisor licenses intellectual property that generated income from within the state based on operation of its franchisees.
  • Decided December 30, 2010.

Recent Iowa Administrative Hearing Appeal– Matter of Jack Daniels Properties (July 28, 2011)

telebright corp v director nj
Telebright Corp. v Director, NJ
  • Appellate Division of Superior Court found that an out-of-state corporation that regularly and consistently permitted an employee to telecommute from her New Jersey residence was doing business in New Jersey.
  • Employee worked full time in New Jersey and was entitled to the legal protections afforded to New Jersey residents and caused corporation also to have protections.
  • Decided March 2, 2012.
scioto insurance v ok tax comm may 1 2012
Scioto Insurance v. OK Tax Comm. - May 1, 2012
  • Oklahoma Supreme Court found that “due process is offended by Oklahoma’s attempt to tax an out of state corporation that has no contact with Oklahoma other than receiving payments from an Oklahoma taxpayer (Wendy’s International) who has a bona fide obligation to do so under a contract not made in Oklahoma.”
  • Court found Oklahoma simply has no connection to or power to regulate the licensing agreement and cannot summarily disregard it simply because it produces a deduction that the Commission does not like.
griffith v conagra brands may 24 2012
Griffith v. ConAgra Brands – May 24, 2012
  • Supreme Court of Appeals of West Virginia found that “Assessments against a foreign licensor for West Virginia corporation net income and business franchise tax, on royalties earned from the nation-wide licensing of food industry trademarks and trade names, satisfied neither ‘purposeful direction’ under the Due Process Clause nor ‘significant economic presence’ under the the Commerce Clause, where the foreign licensor, with no physical presence in this State, did not sell or distribute food-related products or services in West Virginia….”
griffith v conagra brands cont d
Griffith v. ConAgra Brands (Cont’d)

Court weighed the following factors in their decision:

  • ConAgra did not have any property in WV
  • ConAgra had no employees in WV
  • ConAgra did not direct or dictate how the licensees distributed the products
  • ConAgra Brands was not a shell corporation

Court found that ConAgra did not engage in the solicitation as in MBNA

Court also distinguished Geoffrey and KFC

business activity tax simplification act h r 1083
Business Activity Tax Simplification Act (H.R. 1083)
  • Addresses issue of sufficient contacts (nexus) to allow a state to tax
  • Proposes a physical presence standard - greater than 14 days during a taxable year
  • Applies to direct taxes that are imposed on business engaged in interstate commerce (corporate income taxes, gross receipts taxes, franchise taxes, single business taxes, etc. – not sales and use taxes)
  • Updates 86-272 to include all sales and transactions – not just tangible personal property
  • Streamline Sales Tax – Impact
additional federal legislation proposed
Additional Federal Legislation Proposed
  • Main Street Fairness Act – H.R. 2701
    • Introduced July 29, 2011
  • Marketplace Equity Act – H.R. 3179
    • Introduced October 13, 2011
  • Marketplace Fairness Act – S.B. 1832
    • Introduced November 9, 2011
economic nexus what s next
Economic Nexus - What’s Next
  • Audits
  • Legislation
  • Regulations
  • Policy Statements
  • Letter Rulings
  • Litigation Pending (Maryland, …)
  • Other ….
economic nexus what to do
Economic Nexus – What To Do?
  • It Depends:
    • What Are Your Facts?
    • What State is at Issue?
    • What Year is at Issue

David J. Kupiec Natalie M. Martin

Kupiec & Martin, LLC Kupiec & Martin, LLC

(312) 632-1022 (312) 632-1023

[email protected]


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