Taxpayers Seek High Court Review in Maryland “Enterprise Dependency” Nexus Case
By Amber Harker, J.D. Enterprise Dependency The taxpayers (Staples, Inc. and Staplesthe Office Superstore, Inc.) have no physical presence in Maryland. However,their subsidiaries have nexus in Maryland through retail and catalogbusinesses. Staples received royalty and interestincome from the affiliates, which the affiliates counted as expenses. In 2008,Maryland assessed Staples corporate income taxes for 1999 through 2004. Petitioners’ Arguments Staples challenged the assessment, and boththe Maryland Tax Court and Court of Special Appeals upheld the assessment. 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; andthe absence of substantive activity from a subsidiary that is in any meaningful way separate from the parent corporation. The courts held that the Staplescorporations did not have economic substance as separate entities from theiraffiliates. The courts found that Staples and their affiliates had enterprisedependency. 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. Additionally,they noted that in other jurisdictions, courts have ruled that states may nottax royalty income received by out-of-state entities, including: Court Decisions In theirpetition for certiorari, the Staples corporations contended that theirbusinesses have no meaningful operations within Maryland. Staples argued thatMaryland may not constitutionally tax out-of-state entities based on the merereceipt of royalties from businesses within the state. Specifically, thecourts determined that a circular flow of money existed between the companies. Also,the affiliates relied on Staples for income, and for core functions andservices. As a result, a substantial mutualinterdependence existed at all levels between the entities. Thus, the courtsfound enough economic nexus for Maryland to tax Staples without violating theDue Process and Commerce Clauses. Taxpayers’ Business West Virginia (Griffith v. ConAgra Brands, Inc.); andOklahoma (In re: Tax Protest of Scioto Insurance Co.) Login to read more on CCHAnswerConnect. Staplesalso highlighted a recent petition for certiorari in a dispute between twostates. There, Arizona challenged the constitutionality of California’s “doingbusiness” tax on out-of-state entities with investments in California-basedbusinesses. Enterprise dependency is present when a“substantial mutual interdependence” exists between a parent company and itssubsidiaries. This interdependence can be determined through several variables,including: Taxpayers have asked the U.S. Supreme Courtto review if Maryland can base corporate income tax nexus on “enterprise dependency.” Not a subscriber? Sign up for a free trial or contact us for a representative.