West Virginia Supreme Court Holds Out-Of-State Intangible Holding Company Does Not Have Income Or Franchise Tax Nexus

Author:Mr Duane Dobson, Jamie Yesnowitz, Giles Sutton, Chuck Jones, Hannah Yoo and Gary Rosen
Profession:Grant Thornton LLP

The West Virginia Supreme Court of Appeals has held that an out of state company licensing intellectual property to out of state licensees did not have corporation net income tax or business franchise tax nexus.1 The Court based its determination on the following facts of the case: (i) the licensor lacked a physical presence in the state and did not sell products or services within the state; (ii) the licensees manufactured the products bearing the trademarks and trade names outside the state; (iii) the licensor did not direct or dictate how the licensees distributed the products; and (iv) the licensees did not operate any stores in the state and only sold the products to wholesalers and retailers in the state.


ConAgra Brands, a Nebraska corporation, was established by ConAgra Foods to centralize the management and protection of intellectual property. ConAgra Foods, which wholly owned ConAgra Brands, transferred the intellectual property, consisting of trademarks and trade names that appeared on food products distributed throughout the United States, including West Virginia, to ConAgra Brands. ConAgra Brands also acquired intellectual property from other unrelated entities.

Pursuant to its licensing agreements, ConAgra Brands collected royalties based on the licensees' sales of the food products bearing the intellectual property. However, ConAgra Brands operated its business of licensing and protecting the intellectual property entirely outside West Virginia. Moreover, its licensees manufactured the products outside the state as well, and merely sold or distributed the products to in state wholesalers and retailers. ConAgra Brands did not direct or dictate how the licensees distributed the products, although ConAgra Brands paid all expenses in defending its intellectual property against infringement and in overseeing national marketing efforts.

In July 2006, after conducting a field audit, the Director of the Auditing Division of the West Virginia State Tax Division issued two notices of assessment against ConAgra Brands for the period June 1, 2000 to May 31, 2003 for failure to pay corporation net income tax and business franchise tax as apportioned to West Virginia.

The West Virginia Office of Tax Appeals upheld the assessments, concluding that the assessments were consistent with the requirements under the Due Process and Commerce Clauses of the U.S. Constitution. On appeal, a circuit court ruled in favor of ConAgra Brands...

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