Income/Franchise Tax:

California – Taxpayer’s LLC interest does not constitute “doing business” in California

On January 12, 2017, the California Court of Appeal, Fifth District, held that Swart Enterprises, Inc. (“Swart”) was not “doing business” in California by virtue of owning a 0.2% non-managing interest in a Limited Liability Company (“LLC”) that was doing business in California. The Court of Appeal ruled that Swart’s LLC interest was a passive interest, similar to a limited partner, as such, Swart was not able to control or manage the LLC.¹

Colorado – An intellectual property (“IP”) company has economic nexus and the state’s alternative apportionment methodology is unreasonable and must include the IP company’s property and payroll.

The Colorado District Court in the case of Target Brands Inc. v. Colorado Department of Revenue found that Target Brands, Inc. (“Brands”) was “doing business” in Colorado and subject to corporate income tax. Brands is an IP holding company formed as an 80/20 company with no physical presence in Colorado. Brands licenses its IP for use by its corporate parent in Colorado. Under the license agreement between Brands and its parents, Brands received significant income related to the use of its IP in Colorado. The Colorado District Court found that the imposition of tax on Brands did not violate the Commerce Clause of the US Constitution and physical presence is not required to establish substantial nexus.

The Colorado District Court also found that the Colorado Department of Revenue had met its burden of proof to impose an alternative apportionment formula on Brands. However the Colorado District Court determined the formula used, which excluded all of Brand’s factors and was based on the parent company’s sales factor only, was unreasonable. The Colorado District Court concluded the Colorado Department of Revenue must include Brand’s payroll and property factors with the parent’s sales factor in the apportionment formula. ²

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¹ Swart Enterprises, Inc. v. California Franchise Tax Board, No. F070922 (Cal. Ct. App., 5th Dist., 1/1217).
² Target Brands Inc. v. Colorado Dept. of Rev., No. 2015CV33831 (Colo Dist. Ct., City and Cnty. of Denver, 1/27/17).


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