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Oct20
Delaware Intellectual Property Holding Company
Linda Chan October 20, 2006
Know More: Taxes 2.0, Taxes
The following is for information and not meant to be legal advice.

On October 12, 2006, the New Jersey Supreme Court affirmed a tax case against Lane Bryant, rejecting the company's trademark holding company state tax technique.

In the technique, a company with transfers its trademarks to a Delaware subsidiary trademark holding company. The parent pays royalties for the use of the trademarks to the Delaware holding company, and deducts the royalty payments from its state income tax return. Since Delaware does not impose its tax on intellectual property royalties, there is no corresponding taxable income, resulting in an overall tax savings.

Several states, including Massachusetts, have attacked this structure, taking the position that the Delaware intellectual property holding company is subject to its tax, even though it has no presence in that state, other than the presence of its intellectual property licensed in that state.
Companies might be careful in entering into the technique since the success rate of the technique has been attacked.

Previously, the New Jersey the Superior Court, Appellate Division also interpreted the U.S. Supreme Court decision of Quill v. North Dakota to require a physical presence for a state to impose a sales tax collection obligation only to apply to sales tax, and not, as in the Lane Bryant case, to income tax. Quill set the precedent for the reason that ecommerce suppliers are not required to collect sales tax on interstate sales to customers in states where they have no physical presence.


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