Massachusetts has now joined the growing list of states asserting taxable nexus (i.e. jurisdiction) over Intangible Holding Companies ("IHCs"). See, Geoffrey, Inc. v. Commissioner of Revenue, Mass. App. Tax Board, C271816 (July 24, 2007). Like South Carolina, North Carolina, New Jersey, Louisiana, New Mexico and others, the Massachusetts Appellate Tax Board has decided that the presence of the use of trade names and trademarks in Massachusetts (e.g., Toys 'R' Us) creates "economic presence" with Massachusetts sufficient to subject an IHC to Massachusetts Corporate Excise Tax.
For decades, IHCs have been used by many corporations to manage and shelter their various intangibles, such as trade names, trademarks, patents, customer lists, etc. Usually, the IHCs are subsidiaries created solely for the purpose of holding and managing these intangibles. These IHCs then charge their affiliates a royalty or other license fee for the right to use such intangibles. While this generally has little state income tax impact in states that require unitary combination of affiliate corporations, in those states that treat each corporation as a separate taxable entity, the use of an IHC could significantly reduce a corporation's state income taxes.
To counter IHCs, a number of separate-entity states have taken such actions as (1) disallowing royalty or interest deduction for payment to an IHC (e.g., New York); (2) challenging IHCs as shams (e.g., Maryland); (3) asserting tax nexus over the IHC in order to tax its revenues directly (e.g., South Carolina); or (4) converting to a unitary combination state (e.g., Vermont). (Note: Some states still view IHCs as valid, depending upon the facts, but others have yet to formally address the issue.)
Corporate groups with valid business reasons for IHCs are scrambling to cope with this ever-changing state tax environment. Consequently, every corporation group with an IHC should look closely at its IHCs and the states in which the corporate group has tax nexus to see if changing its corporate structure or operations is not only prudent but necessary.