An earnings-stripping arrangement reduced taxes in Missouri.

Earnings-stripping arrangement reduced taxes in Missouri | Norton Rose Fulbright

February 01, 2003 | By Keith Martin in Washington, DC

A company that made bricks reorganized and put all its trademarks in an out-of-state affiliate and started paying royalties to the affiliate for the use of the trademarks.  It deducted the royalty payments in Missouri.  More than $34 million had been paid in royalties by the time the state tax collector complained that the out-of-state affiliate should pay tax on them on grounds that they are income from Missouri sources.

The state supreme court disagreed.  It said no tax can be collected because the affiliate has too little activity in Missouri to justify a tax.  The court said the brick company and its affiliate are separate legal entities.  The tax collector would have to prove that the affiliate has its own property, payroll or sales in Missouri to justify a tax.  It could not.  The affiliate has no property in the state, no employees or agents, and no sales.  The licensing arrangement was negotiated entirely outside the state.  The case is Acme Royalty Company v. Director of Revenue.  The court released its decision in late November.

Keith Martin