Spring Licensing Group Inc. Subject to Corporate Business Tax

In a recent decision, the New Jersey Tax Court asserted that Spring Licensing Group Inc., an out-of-state intangible holding company, was subject to the state corporate business tax for royalty income it earned from an in-state affiliate. According to a Bloomberg BNA report, the decision held that the company was subject to New Jersey’s related-party expense disallowance statute, and thus not exempt from filing a CBT return because it earned revenue within state borders.

Spring Licensing Group Inc. v. Director, Division of Taxation

In the case, Spring Licensing Group argued that since it is incorporated in South Carolina and licenses the trademarks it owns to companies in various states, that it was not subject to the CBT. Its argument in this case was that it should not be subject to filing an additional CBT return for the royalty payments it received from its affiliate. The primary point of contention was that the taxes had already been paid on the royalty payments by the affiliate for the intangible property licensed. Therefore, Spring Licensing Group felt that the Division of Taxation imposed double taxation through the requirement of a CBT return.

However, the New Jersey Division of Taxation argued that any collection of royalty income from intangible property within New Jersey borders creates a nexus, thus the company was subject to the CBT. The Division of Taxation felt that due to this nexus created, it was irrelevant whether or not Spring Licensing Group had added back the intangible expenses to the affiliate company. Further, the Division of Taxation argued that since Spring Licensing Group failed to take advantage of available tax exemptions for out-of-state intangible holding companies, it had not properly filed a CBT return.

The court ruled in favor of the Division of Taxation

The court ruled that Spring Licensing Company was required to file a CBT return because it was subject to taxation for the income it generated from licensing intangible property. In turn, the court also held that since tax relief provisions are available in the state of New Jersey, Spring Licensing Group can still apply for these exemptions. The affiliate company is also allowed to apply for a refund to avoid the double taxation of that money for the added back expenses.

The issue of contention for the court was that Spring Licensing Group filed a “zero” in its CBT return for 2002, and requested a refund for estimated expenses in that year. Further, Spring Licensing Group explained that the affiliate company would report income from royalty payments on its New Jersey state tax returns. However, while the affiliate company added back the royalty payments to Spring Licensing Group, it did not seek exemption from one of the statutory regulations on add-back rules. Therefore, the court ruled that as part of the New Jersey state business tax reforms in 2002, the related-party expense disallowance statute required Spring Licensing Group to file a CBT return and add back its expenses for royalty payments it received.

The significance of the decision

The decision, in this case, was a big win for the state of New Jersey Division of Taxation because even though an out-of-state intangible holding company did not create a corporate income tax nexus in New Jersey, it was subject to the corporate business tax return. This was due to the fact that since 2002, New Jersey has required all income from related-party intangible expenses to be taxable, in addition to federal income taxes. It also clarified that the add back did not excuse Spring Licensing Group from filing a CBT return.

The court also cited that income shifting from out-of-state parent and in-state subsidiary companies was a concern for state departments of revenue. Therefore, the decision was made to ensure that state entities file and pay accurate taxes for disallowable expenses paid to related members.