In an earlier posting, I noted that the Obama Administration's tax proposals go after the issue of foreign tax havens for intangible revenues. But this is not just an international taxation issue. As we pointed out in our report Intangible Asset Monetization: The Promise and the Reality, certain states have tax policies that make them advantageous as what some would consider to be domestic tax havens. The issue is whether states can collect taxes from companies doing business in their jurisdiction but not physically located there. The issue is more common with respect to income from online and catalog sales in other states. But it also applies to royalty income as well (especially common has been franchise income) through the use of Passive Investment Companies. Such a company holds the intangible asset, such as the trademark/brand/franchise agreement is a low or no corporate income tax state. Thus all royalties are earned in that state and are not subject corporate income tax in the state where the service supplied or product sold.
However, as we pointed out in the report, states have been taking actions to nullify this tax situation. Some recent court ruling may extend that trend, as pointed out in a recent the Business week story Chasing Tax Revenue Across State Lines. Earlier this year, the Massachusetts Supreme Judicial Court issued two rulings involving Capitol One Bank and Geoffrey, Inc (Toys-R-Us) requiring that they Massachusetts income-based excise tax based on sales to Massachusetts residents. In the Geoffrey case, the court specifically cited and upheld the Massachusetts requiring companies to pay tax on receipts coming from intangible assets - which "generally includes, but is not limited to, copyrights, patents, trademarks, trade names, trade secrets, service marks, and know-how." The New York Supreme Court also upheld a case earlier this year whereby Amazon.com was required to pay New York sales tax on purchases made by residents of that state.
The issue may be headed to the US Supreme Court - according to the Business Week story Capital One has filed an appeal. But it is unclear whether the Court will take up the case or not. If the Court takes it up, we may have closure on the issue. And even if it doesn't, letting the Massachusetts ruling stand will say volumes.
However, as we pointed out in the report, states have been taking actions to nullify this tax situation. Some recent court ruling may extend that trend, as pointed out in a recent the Business week story Chasing Tax Revenue Across State Lines. Earlier this year, the Massachusetts Supreme Judicial Court issued two rulings involving Capitol One Bank and Geoffrey, Inc (Toys-R-Us) requiring that they Massachusetts income-based excise tax based on sales to Massachusetts residents. In the Geoffrey case, the court specifically cited and upheld the Massachusetts requiring companies to pay tax on receipts coming from intangible assets - which "generally includes, but is not limited to, copyrights, patents, trademarks, trade names, trade secrets, service marks, and know-how." The New York Supreme Court also upheld a case earlier this year whereby Amazon.com was required to pay New York sales tax on purchases made by residents of that state.
The issue may be headed to the US Supreme Court - according to the Business Week story Capital One has filed an appeal. But it is unclear whether the Court will take up the case or not. If the Court takes it up, we may have closure on the issue. And even if it doesn't, letting the Massachusetts ruling stand will say volumes.
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