Current corporate income tax developments: this two-part article discusses a myriad of recent state tax activity in the corporate income tax area.

• Author: Boucher, Karen J.
• Position: Part 1

During 2004, numerous state statutes were added, deleted or modified; court cases were decided; regulations were proposed, issued and modified; and bulletins and rulings were issued, released and withdrawn. This two-part article focuses on some of the more interesting of these in the corporate income tax area. Part I, below, covers nexus; Internal Revenue Code (IRC) Sec. 338(h)(10) transactions; tax base; and business/nonbusiness income. Part II, in the April 2005 issue, will explore apportionment formulas; filing methods/unitary groups and administration; and several other significant state tax developments.

Nexus

* Alabama

A circuit court reversed (1) an administrative law judge (ALJ) decision holding that the state lacked statutory authority to tax the income of a Georgia limited partner of an investment partnership. According to the court, Alabama had jurisdiction to tax the nonresident partner based on his "purposeful connection" with his family's Alabama-domiciled investment partnership.

* Indiana

The Department of Revenue (DOR) originally held (2) that a nonresident minority shareholder in four limited-partnership real estate investment trusts (REITs) domiciled outside Indiana, which each held interests in four respective Indiana shopping malls, had nexus as an owner of real property. However, on rehearing, (3) it was established that the taxpayer was a partner, but not actually a member, of the REIT; partnership income from the Indiana rental property was, thus, taxable in Indiana.

* Kansas

SB 29, Laws 2004, defined the term "doing business" for foreign entities. Among other provisions, "doing business" does not include conducting an isolated transaction completed within 30 days; creating or acquiring debt, mortgages or security interests in property; foreclosing mortgages or other security interests in property; and holding, protecting and maintaining property so acquired.

* Louisiana

The state Supreme Court reversed (4) a lower court decision to hold that a Delaware trademark holding company had Louisiana commercial domicile and, thus, was subject to income/franchise tax. The court explained that (1) the taxpayer functioned and was substantially managed in Louisiana through its parent company and (2) numerous board of director actions occurred in the state.

In a similar decision, the Court of Appeal held that trademarks licensed by Gap Apparel acquired an in-state business situs, as they were sufficiently used in the state to become an integral part of the licensee's in-state retail businesses. (5) Thus, under economic nexus principles, Gap Apparel was deemed subject to corporate income and franchise taxes, despite no physical presence.

In another decision, the Court of Appeal held that the mere ownership of stock in a corporate REIT that receives substantial rental income from Louisiana did not subject a Nevada corporation to tax. (6) The Louisiana Supreme Court has granted certiorari in this case. (7)

* Michigan

The Court of Appeals reversed (8) a trial court to hold that a four-person instate sales force established the necessary physical presence to impose the Single Business Tax.

* New Jersey

The state Tax Court held (9) that P.L. 86-272 did not protect a vendor against the corporate minimum flat tax, because that tax is not based on net income.

* New Mexico

A hearing officer ruled (10) that, when taken as a whole, the New Mexico trademark and franchise activities of a product's manufacturer and marketer exceeded the scope of P.L. 86-272, as a result of a relationship with an in-state distributorship.

* New York

Amended regulations provide a 14-day bright-line nexus text for foreign corporations participating in in-state trade shows, as long as the activity is limited to displaying goods or promoting services, no sales are made and any orders received are completed outside the state. (11)

The Department of Taxation and Finance (Department) advised (12) that accepting payments for orders at three one-day trade shows is not a protected activity, nor is it de minimis, under either P.L. 86-272 or New York's 14-day trade-show-participation rule.

In another ruling, the Department advised that a manufacturer did not have income/franchise tax nexus merely through a shareholder's phone book listing or warranty services provided by an authorized independent service center. (13)

* North Carolina

The Secretary of Revenue held (14) that two out-of-state intangible licensing companies had state corporate income/franchise tax nexus, because they purposefully availed themselves of the state's economic market, through regular and systematic use of their marks, tradenames and goodwill by their respective affiliated companies and third-party franchisees in over 250 in-state restaurant locations.

In a similar decision, (15) the Court of Appeal affirmed a superior court decision that the taxpayer had the requisite nexus for the state to impose income tax on its trademark companies. In reaching this decision, the court found that physical presence is not required under the Commerce Clause for income and franchise tax purposes.

* Pennsylvania

The state Supreme Court affirmed (16) a ruling that a subsidiary soliciting sales on behalf of its parent receives P.L. 86-272 protection, even if it does not hold title to the goods for sale.

The DOR described (17) the state's application of P.L. 86-272 and related de minimis standards. Among the de minimis standards provided are: installation, franchise tax solicitation, purchasing activities, trade shows and incidental personal property and incidental travel.

* Tennessee

A Chancery Court held (18) that an out-of-state credit card subsidiary had sufficient nexus for franchise/excise tax purposes, due to the frequency and nature of its contacts with the state. The company, a bank subsidiary of Dillard Department Stores, had a continuous and targeted program directed at in-state residents...