Taxpayers Seek High Court Review in Maryland “Enterprise Dependency” Nexus Case

Taxpayers have asked the U.S. Supreme Court to review if Maryland can base corporate income tax nexus on “enterprise dependency.”

Taxpayers’ Business

The taxpayers (Staples, Inc. and Staples the Office Superstore, Inc.) have no physical presence in Maryland. However, their subsidiaries have nexus in Maryland through retail and catalog businesses.

Staples received royalty and interest income from the affiliates, which the affiliates counted as expenses. In 2008, Maryland assessed Staples corporate income taxes for 1999 through 2004.

Court Decisions

Staples challenged the assessment, and both the Maryland Tax Court and Court of Special Appeals upheld the assessment.

Enterprise Dependency

The courts held that the Staples corporations did not have economic substance as separate entities from their affiliates. The courts found that Staples and their affiliates had enterprise dependency.

Enterprise dependency is present when a “substantial mutual interdependence” exists between a parent company and its subsidiaries. This interdependence can be determined through several variables, including:

  • a subsidiary’s dependence on the parent company for income;
  • the circular flow of money between the companies;
  • a subsidiary’s reliance on the parent for core functions and services; and
  • the absence of substantive activity from a subsidiary that is in any meaningful way separate from the parent corporation.

Specifically, the courts determined that a circular flow of money existed between the companies. Also, the affiliates relied on Staples for income, and for core functions and services. As a result, a substantial mutual interdependence existed at all levels between the entities. Thus, the courts found enough economic nexus for Maryland to tax Staples without violating the Due Process and Commerce Clauses.

Petitioners’ Arguments

In their petition for certiorari, the Staples corporations contended that their businesses have no meaningful operations within Maryland. Staples argued that Maryland may not constitutionally tax out-of-state entities based on the mere receipt of royalties from businesses within the state.

Additionally, they noted that in other jurisdictions, courts have ruled that states may not tax royalty income received by out-of-state entities, including:

Staples also highlighted a recent petition for certiorari in a dispute between two states. There, Arizona challenged the constitutionality of California’s “doing business” tax on out-of-state entities with investments in California-based businesses.

They concluded by arguing that state conflicts about nexus standards lead to uncertain business positions. Staples requested that the Court issue a clear ruling on the matter.

By Amber Harker, J.D.

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CCHTaxGroup

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