Section 2 Jurisdiction to Tax Foreign Corporations

• Library: Tax Law 2009

A foreign corporation is subject to the Missouri income tax if:

• it is doing business in Missouri, regardless of whether it is licensed to do so, § 143.441.1(1), RSMo 2000

• it maintains sufficient presence in Missouri to satisfy demands under the Commerce Clause and the Due Process Clause; and

• the sole basis for taxation is its sales of tangible personal property in Missouri and its business activities in Missouri exceed the minimum jurisdictional standard imposed by Public Law No. 86-272, 15 U.S.C. §§ 381–84

As a preliminary matter, for Missouri to subject a corporation to state income taxation, the corporation must have a “substantial nexus” with Missouri to satisfy the federal jurisdictional standards established by the Commerce Clause of the United States Constitution. The lesser federal due process standards of the Fourteenth Amendment to the Constitution must also be satisfied. What constitutes “substantial nexus” for jurisdictional purposes may differ among the various types of taxes that Missouri imposes. The United States Supreme Court has established that a taxpayer must have an actual physical presence within a state to satisfy the federal substantial nexus standard for sales and use tax purposes. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

Quill, however, specifically declined to address the issue of what constitutes “substantial nexus” for purposes of determining a state’s jurisdiction to impose other tax types, including taxes based on a taxpayer’s net income. Although the United States Supreme Court has had several opportunities to address this issue at the federal level, it has declined to do so. See Geoffrey, Inc. v. S.C. Tax Comm’n, 437 S.E.2d 13 (S.C. 1993), cert. denied, 510 U.S. 992 (1993). Since the decision in Geoffrey, many states have either changed their laws or judicially ruled that no actual physical presence is required to satisfy the federal substantial-nexus standard for income tax purposes. See:

• Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176 (N.J. 2006), cert. denied, 127 S. Ct. 2974 (2007)

• Tax Comm’r of State v. MBNA Am. Bank, N.A., 640 S.E.2d 226 (W. Va. 2006), cert. denied, 127 S. Ct. 2997 (2007)

• A & F Trademark, Inc. v. Tolson, 605 S.E.2d 187 (N.C. Ct. App. 2004), cert. denied, 546 U.S. 821 (2005)

That is, many states hold that the presence of any intangible assets in the particular state is a sufficient jurisdictional basis to justify the states’ imposing on the possessing taxpayer compliance with their income tax laws.

The Supreme Court of Missouri has declined to follow the rationale of these states. In Acme Royalty Co. v. Director of Revenue, 96 S.W.3d 72 (Mo. banc 2002), a case that was consolidated on appeal with Gore Enterprise Holdings, Inc. v. Director of Revenue, the Court reversed the AHC’s ruling that the presence of the taxpayers’ intellectual property in Missouri was sufficient to establish substantial nexus for Missouri income tax purposes. Acme Royalty Company licensed trademarks and trade names to a related corporation that conducted business in Missouri. Acme received royalties from the licensee equal to a percentage of the net sales of the licensed merchandise. Acme had no physical presence in Missouri and filed no Missouri income tax returns. The Missouri Director of Revenue (the Director) assessed Acme Missouri income tax, attributing the licensee’s Missouri sales to Acme. In...