Geoffrey, Inc. v. South Carolina Tax Commission
1993 S.C. LEXIS 134, 313 S.C. 15, 437 S.E.2d 13 (1993)
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Rule of Law:
A state may impose an income tax on a foreign corporation that has no physical presence within the state, but licenses intangible property for use and derives income from that use within the state, without violating the Due Process or Commerce Clauses of the U.S. Constitution.
Facts:
- Geoffrey, Inc., a Delaware corporation and subsidiary of Toys R Us, Inc., held the trademarks and trade names for 'Toys R Us'.
- Geoffrey had no employees, offices, or tangible property in South Carolina.
- In 1984, Geoffrey executed a license agreement allowing Toys R Us to use its trademarks and trade names in many states.
- In exchange, Geoffrey received a royalty of one percent of the net sales made by Toys R Us under the licensed marks.
- Toys R Us began operating stores in South Carolina in 1985.
- Following this, Toys R Us made royalty payments to Geoffrey based on its sales generated within South Carolina.
- For the tax years 1986 and 1987, Toys R Us deducted these royalty payments from its South Carolina taxable income.
Procedural Posture:
- The South Carolina Tax Commission determined that Geoffrey, Inc. was required to pay state income tax on its royalty income and a corporate license fee.
- Geoffrey paid the assessed taxes under protest.
- Geoffrey filed an action in a South Carolina trial court seeking a refund of the taxes paid.
- The trial judge upheld the Tax Commission's assessment, ruling against Geoffrey.
- Geoffrey appealed the trial judge's decision to the Supreme Court of South Carolina.
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Issue:
Does a state's imposition of an income tax on royalty income earned by a foreign corporation from the in-state use of its trademarks and trade names violate the Due Process or Commerce Clauses of the U.S. Constitution when the corporation lacks any physical presence in that state?
Opinions:
Majority - Harwell, Chief Justice
No. The imposition of an income tax on royalty income from intangible property used within South Carolina does not violate the Due Process or Commerce Clauses, even if the corporation has no physical presence in the state. For Due Process, a sufficient 'minimum connection' or nexus exists when a corporation purposefully directs its economic activity toward a state. Geoffrey did this by licensing its valuable trademarks for use by Toys R Us in South Carolina, thereby contemplating and seeking the benefit of economic contact. Furthermore, Geoffrey's intangible property, including its trademarks, franchise rights, and the accounts receivable generated from South Carolina sales, had a taxable situs in the state. The tax is rationally related to the benefits South Carolina provides, such as an orderly society that makes it possible for Toys R Us to conduct business and for Geoffrey to earn income. For the Commerce Clause, the 'substantial nexus' requirement does not demand physical presence for income taxes, unlike sales and use taxes. The presence of intangible property and the regular exploitation of the state's market are sufficient to establish a substantial nexus.
Analysis:
This landmark case established the principle of 'economic nexus' for state corporate income tax, departing from the stricter physical presence standard required for sales and use taxes. The ruling allows states to tax out-of-state corporations that derive income from the in-state use of their intangible property, such as trademarks or patents. The 'Geoffrey nexus' standard significantly impacted state tax law, enabling states to counteract corporate tax avoidance strategies that used intangible holding companies in low-tax states. This decision has been widely adopted and has expanded states' authority to tax the income of multistate corporations based on their economic activities rather than their physical footprint.
