Louisiana Nexus Developments

Several recent developments in Louisiana addressed nexus. Two decisions, issued at the beginning of 2004, discussed the context of out-of-state holding companies. Further, a district court recently ruled that several lawsuits challenging intangible holding company licensing transactions could proceed.

 

Kevin Associates, L.L.C.

In Kevin Associates, L.L.C. v. Crawford, 865 So2d 34 (La. 2004), the Louisiana Supreme Court held that a Delaware-based company was subject to Louisiana corporate income and franchise taxes. The decision reversed an appellate court decision (Kevin Associates, L.L.C. v. Crawford, 834 So2d 465 (La. Ct. App. 1st Cir. 2002)). The company was part of a closely held group of corporations; all of its directors, except one (the companys Delaware-based nexus provider) were Louisiana residents. The company earned dividends from subsidiaries located in Louisiana and other states and received interest from an intercompany loan to an affiliated Louisiana corporation.

The Louisiana Supreme Court held that the company was commercially domiciled in Louisiana, because it was managed from there and its Delaware presence was merely a paper domicile. For Commerce Clause purposes, the company had a physical presence in Louisiana, because its principal place of business was in the state and it was managed from there. Thus, rather than imposing an economic nexus approach to subject an absent company to jurisdiction based on the presence of intangible assets in the state, the court deemed a physical presence to exist based on an argument more analogous to a sham-type rationale.

The Louisiana Court of Appeals had held that the company did not have nexus. It had employed a substance-over-form approach, noting that the company followed all the required formalities for establishing and maintaining a Delaware holding company. The court also noted that taxpayers are free to engage in planning to establish a tax-efficient structure. Although the Louisiana Supreme Court echoed this principle, it found that this was overruled by the fact that the companys principal place of business was in Louisiana. The court of appeals had also ruled that the company did not avail itself of Louisiana benefits and protections, a conclusion that the Louisiana Supreme Court found to be completely erroneous.
 

Autozone Properties, Inc.

In Bridges v. Autozone Properties, Inc., No. 2003 CA 0492, La. Ct. App., 1st Cir., 1/5/04, which was handed down before Kevin Associates, a Louisiana appellate court held that the Department of Revenue (DOR) could not assert jurisdiction over an out-of-state holding company, because the corporations contacts with the state were insufficient to satisfy Due Process Clause nexus requirements. The DOR attempted to tax dividends received by a Nevada corporation from a real estate investment trust (REIT) that earned rental income from subsidiary retail stores, some of which were located in Louisiana. The REIT was subject to Louisiana tax but paid no tax as a result of the dividends-paid deduction, even though the stores took a deduction for rental expense.

The courts decision relied, in part, on the seminal economic-presence decision, Geoffrey, Inc. v. South Carolina Tax Commn, 437 SE2d 13 (SC 1993), cert. den. However, it examined Geoffrey only from a due process perspective, concluding that, unlike the economic presence created by the trademarks (which gave rise to the due process nexus in Geoffrey), the holding companys dividends had no economic presence in Louisiana, nor could a Louisiana business situs be claimed for themthey had no connection with the state other than being paid by a REIT that earned part of its income from in-state properties.

Although the Commerce Clause was not at issue in Autozone, the court did state in a footnote that physical presence is needed to establish Commerce Clause nexus, pursuant to the Supreme Courts decision in Quill Corp. v. North Dakota, 504 US 298 (1992). This position appears to be consistent with the Louisiana Supreme Courts approach in Kevin Associates. The court rejected alter ego attributional nexus as inappropriate, based on the lack of such a relationship between the holding company and the REIT, although it is unclear whether the DOR raised the issue. Finally, the court acknowledged that the arrangement at issue constituted legal tax planning, which is the legislatures responsibility to correct, a position also consistent with Kevin Associates.

 

Other Cases

In a related development, a Louisiana district court denied motions filed by two out-of-state trademark-licensing companies to dismiss DOR suits filed to recover income taxes. In both LA DOR v. Geoffrey, Inc., LA 19th Jud. Dist. Ct., No. 502769, 12/8/03, and LA DOR v. Gap (Apparel), LA 19th Jud. Dist. Ct., No. 501651, 12/8/03, the suits could proceed, despite the defendants claims that they had no physical presence in the state. Several other cases currently pending in Louisiana also involve this issue. These controversies reflect the DORs position, as announced in Rev. Rul. 02-001, that economic nexus may be asserted against companies that engage in certain intangible licensing activities in the state. The district courts rulings preceded both the Kevin Associates and Autozone decisions, neither of which involved the type of intellectual property licensing activities at issue in the district court rulings. However, these cases are likely to affect the outcome of future proceedings.

From Sharlene Amitay, J.D., CPA, Washington, DC