West Virginia Supreme Court: Out-of-State Subsidiary Not Liable for Corporation Tax on Royalty Income

West Virginia Supreme Court: Out-of-State Subsidiary Not Liable for Corporation Tax on Royalty Income

The West Virginia Supreme Court of Appeals held that an out-of-state subsidiary was not liable for corporation net income and business franchise tax on royalty income received from third parties and affiliated companies because the subsidiary did not conduct business in the state during the audit period.

The West Virginia Supreme Court of Appeals held that an out-of-state subsidiary was not liable for corporation net income and business franchise tax on royalty income received from third parties and affiliated companies because the subsidiary did not conduct business in the state during the audit period. ConAgra Foods Inc. (CA Foods) is engaged in the food products industry. In 1997, CA Foods created ConAgra Brands Inc. (CBI), a Nebraska corporation, to manage and protect its trademark and trade name portfolio. CA Foods and its affiliates and several unrelated third parties entered into license agreements with CBI to use the trademarks and trade names in exchange for royalty payments. The Multistate Tax Commission conducted an audit of CBI and determined that the company failed to pay corporation net income tax on income received from sales in West Virginia. CBI filed petitions for reassessment with the Office of Tax Appeals, which were denied. The tax appeals office concluded that CBI had sufficient contacts with the state and that the royalty income attributed to West Virginia was rationally related to benefits provided by the state. The circuit court reversed the tax appeals office's ruling, finding that CBI was not doing business in the state during the audit period. The commission appealed to the West Virginia Supreme Court of Appeals. The court held that CBI was not liable for corporation net income and business franchise taxes on its royalty income. The court explained that CBI did not own or rent any offices or facilities in the state and did not maintain any inventory or sell or distribute merchandise in West Virginia. Moreover, it noted that CBI did not direct or dictate how the licensees distributed products bearing the trademarks and trade names to local businesses. The court also determined that the commission did not have personal jurisdiction over CBI because the company is not a shell corporation created solely for tax avoidance purposes. It found that there was sufficient evidence to show that CBI was legitimately created to centrally manage and provide for uniformity in brand image and presentation of the trademarks and trade names. The court noted that CBI acquired trademarks from other unrelated entities and earned royalty payments from the unrelated entities. Thus, the court affirmed the circuit court's decision that neither due process clause personal jurisdiction nor commerce clause significant economic presence was satisfied.

The West Virginia Supreme Court of Appeals held that an out-of-state subsidiary was not liable for corporation net income and business franchise tax on royalty income received from third parties and affiliated companies because the subsidiary did not conduct business in the state during the audit period. ConAgra Foods Inc. (CA Foods) is engaged in the food products industry. In 1997, CA Foods created ConAgra Brands Inc. (CBI), a Nebraska corporation, to manage and protect its trademark and trade name portfolio. CA Foods and its affiliates and several unrelated third parties entered into license agreements with CBI to use the trademarks and trade names in exchange for royalty payments. The Multistate Tax Commission conducted an audit of CBI and determined that the company failed to pay corporation net income tax on income received from sales in West Virginia. CBI filed petitions for reassessment with the Office of Tax Appeals, which were denied. The tax appeals office concluded that CBI had sufficient contacts with the state and that the royalty income attributed to West Virginia was rationally related to benefits provided by the state. The circuit court reversed the tax appeals office's ruling, finding that CBI was not doing business in the state during the audit period. The commission appealed to the West Virginia Supreme Court of Appeals. The court held that CBI was not liable for corporation net income and business franchise taxes on its royalty income. The court explained that CBI did not own or rent any offices or facilities in the state and did not maintain any inventory or sell or distribute merchandise in West Virginia. Moreover, it noted that CBI did not direct or dictate how the licensees distributed products bearing the trademarks and trade names to local businesses. The court also determined that the commission did not have personal jurisdiction over CBI because the company is not a shell corporation created solely for tax avoidance purposes. It found that there was sufficient evidence to show that CBI was legitimately created to centrally manage and provide for uniformity in brand image and presentation of the trademarks and trade names. The court noted that CBI acquired trademarks from other unrelated entities and earned royalty payments from the unrelated entities. Thus, the court affirmed the circuit court's decision that neither due process clause personal jurisdiction nor commerce clause significant economic presence was satisfied.