Taxpayers have asked the U.S. Supreme Court
to review if Maryland can base corporate income tax nexus on “enterprise dependency.”
Taxpayers’ Business
The taxpayers (Staples, Inc. and Staples
the Office Superstore, Inc.) have no physical presence in Maryland. However,
their subsidiaries have nexus in Maryland through retail and catalog
businesses.
Staples received royalty and interest
income from the affiliates, which the affiliates counted as expenses. In 2008,
Maryland assessed Staples corporate income taxes for 1999 through 2004.
Court Decisions
Staples challenged the assessment, and both
the Maryland Tax Court and Court of Special Appeals upheld the assessment.
Enterprise Dependency
The courts held that the Staples
corporations did not have economic substance as separate entities from their
affiliates. The courts found that Staples and their affiliates had enterprise
dependency.
Enterprise dependency is present when a
“substantial mutual interdependence” exists between a parent company and its
subsidiaries. This interdependence can be determined through several variables,
including:
- a subsidiary’s dependence on the parent company for income;
- the circular flow of money between the companies;
- a subsidiary’s reliance on the parent for core functions and services; and
- the absence of substantive activity from a subsidiary that is in any meaningful way separate from the parent corporation.
Specifically, the
courts determined that a circular flow of money existed between the companies. Also,
the affiliates relied on Staples for income, and for core functions and
services. As a result, a substantial mutual
interdependence existed at all levels between the entities. Thus, the courts
found enough economic nexus for Maryland to tax Staples without violating the
Due Process and Commerce Clauses.
Petitioners’ Arguments
In their
petition for certiorari, the Staples corporations contended that their
businesses have no meaningful operations within Maryland. Staples argued that
Maryland may not constitutionally tax out-of-state entities based on the mere
receipt of royalties from businesses within the state.
Additionally,
they noted that in other jurisdictions, courts have ruled that states may not
tax royalty income received by out-of-state entities, including:
Staples
also highlighted a recent petition for certiorari in a dispute between two
states. There, Arizona challenged the constitutionality of California’s “doing
business” tax on out-of-state entities with investments in California-based
businesses.
They concluded by arguing that state conflicts about nexus standards lead to uncertain business positions. Staples requested that the Court issue a clear ruling on the matter.
By Amber Harker, J.D.
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