Louisiana Can Tax Out-of-State IPHC, Says La. First Circuit

In recent years, many large retailers have set up intellectual-property holding companies (IPHCs). Typically, the IPHC will own the retailer's trademarks, trade names, and service marks. The IPHC will then license this intellectual property to the retailer, who pays a fee for the license and uses the license to sell merchandise nationwide.

A hot issue lately is whether the IPHC's income can be taxed by a state where the merchanise is sold, even when the IPHC itself does no business in the taxing state. In a decision handed down yesterday, the Louisiana First Circuit said that it can. Secretary v. Gap (Apparel), Inc., No. 2004-CW-0263, slip op. (La. App. 1 Cir. June 25, 2004).

This case involved The Gap, Inc., which owns and operates The Gap, Old Navy, and Banana Republic stores in Louisiana and nationwide. Gap created an IPHC, Gap (Apparel), Inc., whose state of incorporation and place of business is California. Gap transferred various trademarks, trade names, and service marks to Apparel, who in turn licensed that intangible property back to Gap.

The Louisiana Department of Revenue contended that Apparel had received $11.9 million in license fees attributable to sales in Louisiana, and assessed corporation income and franchise taxes against Apparel. When Apparel refused to pay, the Department sued. Apparel objected that the Louisiana court had no personal jurisdiction over it. The trial court held that Apparel was subject to personal jurisdiction in Louisiana. Apparel then applied to the First Circuit for supervisory writs, which that court denied. In its per curiam opinion, the court said, "While Apparel may not have a physical presence in Louisiana, its intangible property clearly has a connection with Louisiana." Slip op. at 4. The court concluded that because Apparel's "intangibles have acquired a business situs in Louisiana," those intangibles "are subject to taxation in this state." Id. at 5.

Posted by RPW at June 26, 2004 01:09 PM