Maryland Tax Court Holds Intangible Holding Company Had Corporate Income Tax Nexus

The Maryland Tax Court has held that an out-of-state intangible holding company had corporate income tax nexus with Maryland because it was considered to have no real economic substance as a business entity separate from its parent company.1 According to the Tax Court, the imposition of tax on the intangible holding company satisfied both the Due Process and Commerce Clauses of the U.S. Constitution. Because the holding company's income was produced from the parent company's business in Maryland, sufficient nexus was established to tax the holding company. The Tax Court also held that the Maryland Comptroller properly used a blended apportionment factor based on the income tax returns of the related entities that filed in Maryland.

Background

The parent company, ConAgra Foods, Inc. (ConAgra), a multi-national producer and marketer of processed foods and agricultural products, was based in Nebraska and had a physical presence in Maryland. In 1996, ConAgra incorporated ConAgra Brands, Inc. (Brands), a Nebraska corporation, to hold and enforce trademarks owned by ConAgra and several related subsidiaries, conduct central advertising for the corporate brands, and achieve other corporate efficiencies, including tax savings. Brands, which was entirely owned by ConAgra, licensed the trademarks back to ConAgra and the related subsidiaries, as well as to third-party corporations in a few cases. In exchange for the licensed trademarks, the licensees paid annual royalties to Brands, which was the primary source of Brands' income. All profits from Brands' operations were transferred back to ConAgra in annual payments and through other internal financial arrangements. Brands was physically housed on ConAgra's corporate campus in Nebraska and rented space and equipment from ConAgra. Also, Brands had its own officers, who were actually paid by Brands, but their payroll was serviced by ConAgra. Brands acquired employees from 1996 to 2003, the tax years in question, and had as many as 23 employees during this period. However, Brands did not have any employees, agents or property located in Maryland.

For the 1996 through 2003 tax years, Brands did not file income tax returns in Maryland. In 2007, the Maryland Comptroller assessed corporate income tax, interest and penalties against Brands for these tax years. Brands appealed from a notice of final determination that upheld the Comptroller's assessment. In the notice, the Comptroller alleged that Brands was operated, at least in part, as a conduit to shift income out of the reach of Maryland's taxing authorities. Brands contested the notice and argued that it was established for legitimate economic business purposes.

Out-of-State Intangible Holding Company Subject to Maryland Tax

The Tax Court applied the analysis developed by the Maryland Court of Appeals, the state's highest court, in Gore Enterprise...