States enamored with deceptively attractive "Geoffrey nexus" position.

• Author: Lippman, Michael H.

Although some state tax officials expressed glee over the Supreme Court's decision denying certiorari in Geoffrey, Inc. v. South Carolina Tax Comm'n, 437 S.E.2d 13 (S. Car. Sup. Ct., 1993), state actions in the immediate aftermath of Geoffrey did not mirror the officials' excitement. While a few states quickly embraced the rationale underlying Geoffrey, most states took a "wait and see" approach to formally adopting economic presence nexus positions. (The absence of an intellectually honest nexus analysis in the Geoffrey decision may have impeded states from moving quickly to adopt their own nexus positions based on the decision.) However, the failures of other means to challenge similar corporate structures may have convinced many states that Geoffrey is their best weapon.

Precursors to Geoffrey

Economic presence nexus is not a new concept. Beginning in the late 1980s, a number of states began applying the economic presence theory of nexus to financial services businesses. Indiana, Minnesota, Tennessee and West Virginia all enacted statutes subjecting out-of-state financial services businesses to income tax based simply on an economic presence, including making loans, having credit card customers or depositors, or soliciting or rendering financial services to customers in the state. Reports now indicate that these states are targeting multistate credit card companies and lenders for audit.

More recently, Kentucky (networth franchise tax imposed on banks), Pennsylvania (bank shares tax) and Massachusetts have passed laws applying the economic presence theory of nexus to financial services businesses. Further, New Mexico regulations provide that franchisors are subject to gross receipts tax, despite the absence of a physical presence in the state. In fact, the South Carolina Supreme Court relied on two New Mexico gross receipts tax decisions involving franchisors to support its decision in Geoffrey. Hawaii has also asserted nexus on the basis of licensing intangible rights for use in Hawaii. Now that the dust has settled on Geoffrey, states are now moving to impose "Geoffrey nexus" on taxpayers outside of financial services. One common theme among these states is that, other than Iowa, they have not adopted Geoffrey by statute; rather, they apply it pursuant to (1) formal administrative rule or policy statement or (2) informal audit position. Although these rules or audit positions remain subject to challenge constitutionally, they may also be subject to procedural challenges, since these actions may exceed a state department of revenue's rule-making authority.

Administrative Geoffrey Developments

Arkansas, Florida, North Carolina and Wisconsin have formally promulgated Geoffrey rules or statements of policy. These rules limit their Geoffrey nexus positions to licensing of intellectual property (such as trademarks, tradenames, patents and copyrights) and sales or...