The New Jersey Supreme Court ruled that companies operating in the state may not use out-of-state subsidiaries to hold their intellectual property and subsequently shield profits from the state’s corporate income tax.The judgment, which applies only to New Jersey, means that companies will no longer be able to use a shelter strategy to transfer property such as trademarks or patents to subsidiaries in low- or no-tax states. Companies have generally paid the subsidiary for the use of brands or other proprietary property and then deducted those payments from their state income taxes. The income collected by the subsidiary is than taxed at a lower rate, or not at all.
The New Jersey case involved apparel retailer Lane Bryant, which had transferred trademarks to a Delaware corporation it also owned. Lane Bryant then paid Lanco for the use of those trademarks.
Because a portion of the income paid to Lanco was derived from Lane Bryant stores in New Jersey, the state’s tax authorities had argued that Lanco owed New Jersey state taxes. In 2003, New Jersey's tax court ruled that because Lanco had no physical presence in the state, it shouldn't be subject to the corporate business tax. An appellate court sided with the state Division of Taxation’s appeal of the decision -- which was the ruling that the Supreme Court upheld.
According to state officials, had they lost the appeal, New Jersey would have lost about $190 million in revenue for the current year and in refunds to companies that have paid the corporate business tax since the regulation was first adopted in 1996.
The ruling follows similar decisions by state courts around the country, and could potentially clash with a pending bill in Congress that says companies must have a substantial physical presence in a state before being subject to state taxes.
