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In Lanco, Inc. v. Director, Division of Taxation (Appellate Division), the court, following the trend of some other states, determined that New Jersey can tax the income of an out-of-state business that did not have any physical presence in this state.
Lanco, Inc. is a Delaware corporation that owns and licenses trademarks, trade names and service marks to its affiliate, Lane Bryant, which uses this intangible property to conduct its retail clothing business in New Jersey. Lanco receives a royalty from Lane Bryant but has no offices, employees or real or tangible personal property in this state. In short, Lanco has no physical presence in New Jersey.
This decision - which reversed the lower court decision in favor of Lanco - demonstrates the desire of the New Jersey Division of Taxation to tax out-of-state businesses in light of: (1) the growth of e-commerce (which allows businesses not physically within the state to nevertheless engage in business transactions with state residents); and (2) the proliferation of certain tax strategies under which an out-of-state business creates a separate related entity which does have an actual presence in the state. The Division previously indicated its position that transactions between an out-of-state taxpayer and in-state affiliates (other than licensing arrangements) would subject the taxpayer to New Jersey corporate tax (CBT), and this latest Lanco decision now includes licensing arrangements among those transactions. The Division has also indicated that there may be an issue as to whether an out-of-state business selling digitized goods through the internet is enjoying a property right in New Jersey by virtue of licensing, thereby allowing New Jersey to tax the business.
Lanco may attempt to appeal this decision to the New Jersey Supreme Court. In addition, a similar case from North Carolina has been appealed to the United States Supreme Court, which may decide to hear the case in its upcoming session. We will closely monitor these cases, as they could have far-reaching and expensive consequences for out-of-state businesses with New Jersey affiliates or out-of state businesses conducting e-commerce in New Jersey.
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