MARYLAND HIGH COURT ATTRIBUTES NEXUS TO OUT-OF-STATE AFFILIATES DUE TO LACK OF ‘ECONOMIC SUBSTANCE’, NOT BASED ON UNITARY NEXUS

On March 24, 2014, Maryland’s highest court, the Court of Appeals, upheld a finding of nexus against two Delaware affiliates of W.L. Gore & Associates, Ltd. (Gore), on the premise that the affiliates lacked any economic substance [Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury, Md. Ct. App., No 36 (March 24, 2014)] In so doing, the court also rejected the lower court’s determination that the affiliates had Maryland nexus on the basis that they were part of a unitary business with Gore.

Maryland's highest court stated that the unitary principle “does not confer nexus to allow a state to directly tax a subsidiary based on the fact that the parent company is taxable and that the parent and subsidiary are unitary.

Beginning with the lower court’s unitary nexus determination, the Court of Appeals stated that the unitary principle “does not confer nexus to allow a state to directly tax a subsidiary based on the fact that the parent company is taxable and that the parent and subsidiary are unitary.” (emphasis in original) Relying on the court’s precedent in Comptroller of the Treasury v. SYL, Inc., the court upheld the lower court’s determination that the affiliates lacked economic substance, pointing to the fact that the affiliates had no independent Directors, relied solely on Gore for income, served solely the interests of Gore in their limited function, and did not engage in any independent activities (i.e., the invention of new products or processes).

Lastly, relying on Maryland’s apportionment rules that allow the Comptroller to use alternative apportionment methods to the extent the entity’s own factors do not fairly represent the entity’s Maryland activity, the court allowed the use of Gore’s apportionment factor’s for purposes of determining the affiliates’ Maryland apportionment. As such, the ruling supports the use of unitary apportionment factors measured by Gore’s activities to calculate the Maryland tax liability of the affiliates.

However, the ruling supports the use of unitary apportionment factors measured by Gore’s activities to calculate the Maryland tax liability of the affiliates.

While the court’s rejection of the Comptroller’s asserted use of the unitary principle to find nexus for an otherwise out-of-state business, taxpayers should take notice that Maryland continues to assert nexus on out-of-state affiliates due to a “lack of economic substance”. Furthermore, the Maryland court’s will use unitary apportionment principles to apportion the activity of the affiliate based on the Maryland taxpayer’s factors if this more “fairly represents” the affiliate’s tax liability to Maryland.