State Tax Alert #2 (June 07)qxp

Document Sample
State Tax Alert #2 (June 07)qxp Powered By Docstoc
					                                                                                                                                 State Tax Alert                                                                                                                                                                                      June 2007 No. 2

     Supreme Court of the United States Declines to Decide Whether a State May Impose
           an Income Tax on an Entity That Lacks Physical Presence in the State
      By denying the certiorari petitions of                                        The fear that states may attempt                                               In short, the courts of both New
both Lanco (whose only contact with New                                        to extend Lanco’s mere “economic                                               Jersey and West Virginia rejected the
Jersey was the licensing of trademarks to                                      presence” theory (i.e., an entity may                                          “bright-line physical presence test”
an affiliate in New Jersey) and MBNA                                           be subject to a state’s income tax                                             and held that a mere “economic
(whose only contact with West Virginia                                         despite lacking any physical presence                                          presence” in the state was sufficient
was the solicitation, issuance, and servicing                                  in the state) comes closer to reality                                          to subject a corporation to its
—all done from outside of West Virginia—                                       in light of the fact that on the same                                          income tax.
of credit cards to West Virginia customers),                                   day the Supreme Court denied                                                        While, as mentioned in an earlier
the Supreme Court has likely emboldened                                        Lanco’s certiorari petition it also                                            Blank Rome State Tax Alert, the rea-
states to assert their taxing authority over                                   denied the certiorari petition of                                              soning of the New Jersey and West
companies that license any form of intel-                                      MBNA.2 MBNA challenged a West                                                  Virginia courts is subject to question,
lectual property to users in the state.                                        Virginia Supreme Court of Appeals                                              the Supreme Court’s denial of the
                                                                               decision that subjected MBNA to                                                Lanco and MBNA certiorari peti-
Lanco + MBNA = Intellectual                                                    West Virginia corporate income tax                                             tions effectively eliminates the
Property Licensors Beware!                                                     even though MBNA had no employ-                                                vulnerability of these decisions—
      In Lanco, Inc. v. Director,1 the New                                     ees or physical property in West                                               at least for the time being. Many
Jersey Supreme Court held that a cor-                                          Virginia. MBNA merely solicited                                                practitioners and observers believed
poration whose sole contact with New                                           West Virginia residents by mail and                                            that the Lanco/MBNA tandem—
Jersey was the licensing of trademarks to                                      telephone, issued credits cards to                                             which involve both affiliate and
affiliates who used them in the State                                          West Virginia customers and serviced                                           non-affiliate transactions—was likely
was subject to the New Jersey                                                  those cards. Even though MBNA                                                  to persuade the Supreme Court to
Corporation Business Tax (“CBT”).                                              conducted all of these activities outside of                                   resolve the physical versus economic
As we noted in an October 2006                                                 West Virginia, the West Virginia                                               presence issue. Now, the speculation
Blank Rome State Tax Alert, Lanco did                                          Supreme Court held that MBNA had                                               will turn to: (a) what sort of circum-
not limit its rationale to affiliate                                           sufficient nexus with West Virginia                                            stance may influence the Supreme
licensing arrangements; nor does any                                           for purposes of the Commerce                                                   Court to resolve one of the most
case similarly decided in Louisiana,                                           Clause to be subject to West                                                   important tax issues of the last two
New Mexico, North Carolina, and                                                                                                                               decades, and (b) when those
                                                                               Virginia’s corporate income tax.
South Carolina.
                                                                                                                                                              circumstances may be presented to
                                                                                                                                                              the Court. In the meantime, licen-
1. 908 A.2d 176 (N.J. 2006), cert. denied, No. 06-1236 (U.S. June 18, 2007).
                                                                                                                                                              sors of intellectual property should
2. FIA Card Services NA, fka MBNA America Bank NA, v. Tax Commissioner, 640 S.E.2d. 226 (2006), cert. denied,
   No. 06-1228 (U.S. June 18, 2007).
                                                                                                                                                              prepare for battle.

© 2007, BLANK ROME LLP Notice: The purpose of this newsletter is to review the latest developments which are of interest to clients of Blank Rome LLP. The information contained herein is abridged from legislation, court decisions,
and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
                                                                            One Logan Square • Philadelphia, Pennsylvania 19103-6998 • 215.569.5500
                                                                       STATE TAX       ALERT

Blank Rome Observations                                         statutes unless and until they                     if a state asserts nexus over
                                                                are required to retract them.                      a non-affiliate licensor, how can
   • States are continually trying
                                                              • For these reasons, licensors of
                                                                                                                   that licensor determine where
     to identify new and increase
                                                                intellectual property should                       its licensee is operating—and
     existing revenue sources. A
                                                                expect a potential barrage of                      to what extent? Putting aside
     revenue source that is neither
                                                                state attacks. While it is appro-                  the constitutional nexus issue,
     a tax increase nor a new tax
                                                                priate to hope for the best, it                    requiring a licensor to make
     becomes even more appealing
                                                                is also important to plan for                      these types of determinations
     when the ultimate taxpayer
                                                                the worst by anticipating the                      raises serious administrative
     is an out-of-state entity. For
                                                                state attacks, identifying their                   and privacy concerns.
     these reasons, it would not
     be surprising if more states                               vulnerabilities, and planning a                                           by Harris Ominsky
     jumped on the “economic                                    counterattack.                                 Harris Ominsky is a retired partner at
     nexus” bandwagon. The recent                             • It is important to remember               Blank Rome, where he co-chaired the firm’s
     proliferation, however, of “com-                           that being subject to a state’s           Real Estate Department for many years.
     bined reporting” statutes and                              tax does not end the analysis.            Mr. Ominsky writes the column,“Ominsky’s
     proposals reduces the number                               The next question—and yet                 Terrain,” in the Legal Intelligencer. He has
     of states that may be enticed                              another one of constitutional             also authored three books and more than
     by the “economic nexus” theory.                            dimension—is whether the                  1000 articles and is a frequent lecturer.
     Moreover, the characterization                             state has fairly apportioned
     of the theory as creating “new”                            such tax. Because it is increas-
     law without proper authoriza-                                                                                        Business Tax Group
                                                                ingly likely that states will
     tion may also deter some states                            assert that licensing intellectual                     Joseph T. Gulant, Practice Chair
     from making such an assertion.                             property to an unrelated entity                                 212.885.5304
   • Lanco—together with the other                              creates sufficient nexus to
     state court cases that have                                impose an income tax, licen-               Revital Ben-Zaken                   212.885.5130
     applied the “economic nexus”                               sors should consider how they                            
     theory—involved affiliate licensing                        might apportion their income               Daniel R. Blickman                  215.569.5373
     arrangements. Unlike Lanco,                                to states that may assert such a                          
     however, MBNA did not                                      position. This is particularly
                                                                                                           Robert M. Broder                    215.569.5717
     involve intercompany trans-                                important when one considers
     actions. Despite the lack of tax                           the variety of ways in which a
     avoidance taint, MBNA was                                  state may apportion the sale               Robert P. Harrill Jr.                 215.569.5743
                                                                of items other than tangible                                 
     found to have nexus with West
     Virginia. These observations                               personal property.                         Cory G. Jacobs                       215.569.5481
     lead us to conclude that states                          • Finally, many additional issues
     will likely feel emboldened to                             will flow from the Lanco and               David M. Kuchinos                   215.569.5729
     extend the reach of their taxing                           MBNA decisions. For instance,                             

                                                                                                           Harold N. Pappas                   212.885.5370
 Office Locations
                                                                                                           Jessica S. Powers                   215.569.5545
 Suite 417 • 1200 North Federal Highway • Boca Raton, FL 33432 • 561.417.8100
 Woodland Falls Corporate Park • Suite 200 • 210 Lake Drive East • Cherry Hill, NJ 08002 • 856.779.3600
                                                                                                           Michael J. Semes*                   215.569.5476
 1700 PNC Center • 201 East Fifth Street • Cincinnati, OH 45202 • 513.362.8700                                               
 The Chrysler Building • 405 Lexington Avenue • New York, NY 10174-0208 • 212.885.5000
                                                                                                           Barry E. Sweet                       215.569.5722
 One Logan Square • 130 North 18th Street • Philadelphia, PA 19103-6998 • 215.569.5500                                        
 200 West State Street • Trenton, NJ 08608 • 609.278.2320                                                  * Editor

 Watergate • 600 New Hampshire Avenue NW • Washington, DC 20037 • 202.772.5800
 Chase Manhattan Centre • Suite 800 • 1201 Market Street • Wilmington, DE 19801 • 302.425.6400             To be added to or removed from any or all Blank Rome
                                                                                                           notices, please call 215.569.5500 extension 4493 or email
 5605–07, The Center • 99 Queen’s Road Central • Hong Kong • 852.3528.8300                       

                                                                     BLANK ROME LLP        2

Shared By:
ps0001 ps0001