Geoffrey, Inc. appeals from a ruling that requires it to pay South Carolina income tax and business license fees. The case involves the taxation of royalty income by South Carolina and the Due Process Clause and the Commerce Clause. The court found that Geoffrey had a sufficient nexus with South Carolina for its royalty income to be taxable here. The court also found that the presence of Geoffrey's intangible property in South Carolina was sufficient to sustain a tax.
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GEOFFREY, INC., Appellant, v. SOUTH CAROLINA TAX COMMISSION, Respondent.Docket/Court: 23886, Supreme Court of South Carolina Date Issued: 07/06/1993 Tax Type(s): Corporate Income Tax Cite: 437 SE2d 13 , 313 SC 15 Case Information: Heard April 7, 1993. Certiorari Denied Nov. 29, 1993. Cert den, U. S. Sup. Ct.(1993) 510 US 992, 114 SCt 550. OPINION HARWELL, Chief Justice: Geoffrey, Inc. (Geoffrey), a foreign corporation, appeals from a ruling that requires it to pay South Carolina income tax and business license fees. We affirm. I. FACTSGeoffrey is a wholly-owned, second-tier subsidiary of Toys R Us, Inc. (Toys R Us) incorporated inDelaware with its principal offices in that state. It has no employees or offices in South Carolina and owns no tangible property here. In 1984, Geoffrey became the owner of several valuable trademarks and trade names, including "Toys R Us." Later that year, Geoffrey executed a License Agreement (Agreement) that allows Toys R Us to use the "Toys R Us" trade name, as well as other trademarks and trade names, in all states except New York, Texas, Pennsylvania, Massachusetts, and New Jersey. The Agreement further grants Toys R Us a right to use Geoffrey's merchandising skills, techniques, and "know-how" in connection with marketing, promotion, advertising, and sale of products covered by the Agreement.
As consideration for the licenses granted by the Agreement, Geoffrey receives a royalty of one percent "of the net sales by [Toys R Us], or any of its affiliated, associated, or subsidiary companies, of the Licensed Products sold or the Licensed Services rendered under the Licensed Mark." Toys R Us reports the aggregate sales of all stores to Geoffrey in a single figure on a monthly basis. The royalty payment is made annually via wire transfer from a Toys R Us account in Pennsylvania to a Geoffrey account in New York.1Toys R Us began doing business in South Carolina in 1985 and has since then made royalty payments to Geoffrey based on South Carolina sales. In 1986 and 1987, Toys R Us deducted theroyalty payments made to Geoffrey from its South Carolina taxable income. The South Carolina Tax Commission (Commission) initially disallowed the deduction, but later took the position that Toys R Us was entitled to the deduction and that Geoffrey was required to pay South Carolina income tax on the royalty income. The Commission also held that Geoffrey was required to pay the South Carolina corporate license fee. Geoffrey paid the taxes under protest and filed this action for a refund, claiming, among other things, that it did not do business in South Carolina and that it did not have a sufficient nexus withSouth Carolina for its royalty income to be taxable here. The trial judge upheld the Commission's assessment of taxes against Geoffrey. Geoffrey appealed. II. DISCUSSIONS.C.Code Ann. § 12-7-230 (Supp.1992), pursuant to which both foreign and domestic corporations are taxed, provides: [E]xcept as otherwise provided, every foreign corporation transacting, conducting, doing business, or having an income within the jurisdiction of this State, whether or not the corporation is engaged in or the income derived from intrastate, interstate, or foreign commerce, shall make a return and shall pay annually an income tax equivalent to five percent of a proportion of its entire net income, to be determined as provided in this chapter. The term "transacting", "conducting", or "doing business", as used in this section, includes the engaging in or the transacting of anyactivity in this State for the purpose of financial profit or gain.
Section 12-7-230 levies a tax on the income of foreign corporations "transacting, conducting, doing business, or having an income within the jurisdiction of this State," which "includes," but is not limited to, "the engaging in or the transacting of any activity in this State for the purpose of financial profit or gain." We construe this language as extending to the limits of the constitution South Carolina's authority to tax foreign corporations. Here, Geoffrey contends that the Due Process Clause, U.S. Const. amend. XIV, § 1, and the Commerce Clause, U.S. Const. art. I, § 8, cl. 3, prohibit the taxation of its royalty income by South Carolina. We disagree. A. Due ProcessThe Due Process Clause requires "some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax," and that the "income attributed to the state for tax purposes must be rationally related to values connected with the taxing State." Quill Corp. v. North Dakota, _______ U.S. _______ , _______ - _______ , 112 S.Ct. 1904, 1909-10, 119 L.Ed.2d 91, 102 (1992) . Geoffrey argues that the Commission has failed to satisfy both of these requirements. We disagree. The nexus requirement of the Due Process Clause can be satisfied even where the corporation has no physical presence in the taxing state if the corporation has purposefully directed its activityat the state's economic forum. Quill, _______ U.S. at _______ , 112 S.Ct. at 1909-10 , 119 L.Ed.2d at 104. Geoffrey asserts that it has not purposefully directed its activities toward South Carolina. To support its position, Geoffrey points out that Toys R Us had no South Carolina storeswhen it entered into the Agreement and urges, therefore, that Toys R Us's subsequent expansioninto South Carolina was unilateral activity that cannot create the minimum connection between Geoffrey and South Carolina required by due process. In our view, Geoffrey has not been unwillingly brought into contact with South Carolina through the unilateral activity of an independent party. Geoffrey's business is the ownership, licensing, and management of trademarks, trade names, and franchises. By electing to license its trademarks and trade names for use by Toys R Us in many states, Geoffrey contemplated and purposefully sought the benefit of economic contact with those states. Geoffrey has been aware of, consented to, and benefitted from Toys R Us's use of Geoffrey's intangibles in South Carolina.Moreover, Geoffrey had the ability to control its contact with South Carolina by prohibiting the useof its intangibles here as it did with other states. We reject Geoffrey's claim that it has not
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