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Maryland Asserts Nexus Based on Economic Dependence in Staples

Tax Development Aug 21, 2018

The Maryland Court of Special Appeals upheld the Tax Court’s determination of nexus for intangible holding companies operating in Maryland due to the subsidiaries’ economic dependence on their out-of-state parent. In Staples, Inc. v. Comptroller of the Treasury (Doc 2018-33299), the Tax Court’s ruling was upheld, finding that two intangible holding company subsidiaries had total financial dependence on the parent and, therefore, lacked economic substance as separate entities.

Although the two subsidiaries, Staples, Inc. (“Staples”) and Staples the Office Superstore, Inc. (“Superstore”) had no employees or property in Maryland, the Court asserted that their complete financial dependence on the Massachusetts-based parent provided the necessary connection to the state to establish nexus. Based on this connection, the Tax Court followed the earlier findings in Gore Enterprise Holdings, Inc. v. Comptroller of Treasury to assert nexus and disregard the legal entity status of the subsidiaries, finding a lack of economic substance.

The income that Maryland was seeking to tax was franchise fee receipts received from two affiliated entities, Staples the Office Superstore East, Inc. (“Staples East”) and Staples Contract and Commercial, Inc. (“Staples C&C”). The Court concluded that because the standard three-factor apportionment method would result in zero apportionment, an alternative apportionment was required. To derive the alternative apportionment, the Comptroller’s auditors started with the total franchise fee receipts received from the two entities. They determined the receipts factor percentage reported by Staples East on its Maryland income tax return and added it to the receipts factor percentage reported by Staples C&C to arrive at a blended apportionment rate. This rate was applied to the total franchise fee receipts received by Superstore to determine the taxable income to be reported by Superstore. The appellants contested this apportionment method as being distortive, as this method ignored any expenses attributable to the income received. The Comptroller successfully argued that the state used the “best information in the possession of the tax collector,” as Superstore declined to provide further details of expenses.

Based on this decision, it would appear that the Maryland Department of Revenue has usurped the Maryland Legislature and will impose an income tax on a unitary basis, irrespective of the state’s separate reporting regime. This leaves taxpayers to wonder what factors will be sufficient to successfully establish a separate business entity as an intangible holding company and how to avoid alternative apportionment to impute revenue to Maryland.  


Mark Nachbar

Mary Bernard