“Enterprise Dependency” Used to Establish Nexus with Maryland

A Maryland court ruled that corporate income tax nexus was created through “enterprise dependency” between the taxpayers and affiliated entities. In addition, the court upheld the state’s use of an alternative apportionment formula to determine the taxpayers’ tax liability.

No Economic Substance as Separate Business Entities

The taxpayers were two corporations that did not have a physical presence in Maryland. They were affiliated with two other corporate subsidiaries that had nexus in Maryland through retail and catalog businesses.

The court determined that the taxpayers and affiliates did not have “real economic substance as separate business entities.” In fact “enterprise dependency” existed between the taxpayers and the affiliated subsidiaries. The taxpayers’ activities permeated the activities of each other and the affiliates. As separate entities, the taxpayers could not operate independently. Thus, the taxpayers were not separate business entities and, instead, were a part of a unitary business enterprise. Accordingly, the taxpayers had nexus with Maryland.


The state did not use the standard apportionment formula to calculate the taxpayers’ income attributable to Maryland. Use of the standard formula would have resulted in a zero apportionment factor and, therefore, zero income attributable to Maryland. Therefore, the state used an alternative apportionment formula instead.

The taxpayers claimed that the state ignored their substantial property, payroll, and sales by using the alternative formula. They claimed, the state used the affiliates’ apportionment factors to apportion franchise fee receipts and interest income to Maryland.

The state may use an alternative formula when the standard formula would yield an apportionment factor of zero. Nevertheless, the taxpayers argued the standard formula is more appropriate for corporations with economic substance. The court disagreed and found no reason in either statute or case law for an exception. Plus, the taxpayers would not qualify for such an exception, since they did not have economic substance. As a result, the state was authorized to use an alternative apportionment formula.

Staples, Inc. v. Comptroller of the Treasury, Circuit Court, 5th Judicial Court (Maryland), Nos. 09-IN-OO-0148 and 09-IN-OO-0149, August 9, 2018, ¶202-051

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All stories by: CCHTaxGroup