GEOFFREY, INC., Appellant, v. SOUTH CAROLINA TAX COMMISSION,
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GEOFFREY, INC., Appellant, v. SOUTH CAROLINA TAXCOMMISSION, Respondent.Docket/Court:23886, Supreme Court of South CarolinaDate Issued:07/06/1993Tax Type(s):Corporate Income TaxCite:437 SE2d 13 , 313 SC 15Case Information:Heard April 7, 1993. Certiorari Denied Nov. 29, 1993. Cert den, U. S. Sup. Ct.(1993) 510 US 992, 114 SCt 550.OPINIONHARWELL, Chief Justice:Geoffrey, Inc. (Geoffrey), a foreign corporation, appeals from a ruling that requires it to pay SouthCarolina income tax and business license fees. We affirm.I.FACTSGeoffreyis 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 Carolinaand owns no tangible property here.In 1984,Geoffreybecame the owner of several valuable trademarks and trade names, including"Toys R Us." Later that year,Geoffreyexecuted a License Agreement (Agreement) that allowsToys R Us to use the "Toys R Us" trade name, as well as other trademarks and trade names, inall states except New York, Texas, Pennsylvania, Massachusetts, and New Jersey. TheAgreement further grants Toys R Us a right to useGeoffrey'smerchandising skills, techniques,and "know-how" in connection with marketing, promotion, advertising, and sale of productscovered by the Agreement.
As consideration for the licenses granted by the Agreement,Geoffreyreceives a royalty of onepercent "of the net sales by [Toys R Us], or any of its affiliated, associated, or subsidiarycompanies, of the Licensed Products sold or the Licensed Services rendered under the LicensedMark." Toys R Us reports the aggregate sales of all stores toGeoffreyin a single figure on amonthly basis. The royalty payment is made annually via wire transfer from a Toys R Us accountin Pennsylvania to aGeoffreyaccount in New York.1Toys R Us began doing business in South Carolina in 1985 and has since then made royaltypayments toGeoffreybased on South Carolina sales. In 1986 and 1987, Toys R Us deducted theroyalty payments made toGeoffreyfrom its South Carolina taxable income. The South CarolinaTax Commission (Commission) initially disallowed the deduction, but later took the position thatToys R Us was entitled to the deduction and thatGeoffreywas required to pay South Carolinaincome tax on the royalty income. The Commission also held thatGeoffreywas required to paythe South Carolina corporate license fee.Geoffreypaid the taxes under protest and filed this action for a refund, claiming, among otherthings, 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'sassessment of taxes againstGeoffrey.Geoffreyappealed.II.DISCUSSIONS.C.Code Ann. § 12-7-230 (Supp.1992), pursuant to which both foreign and domesticcorporations 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 ornot 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 taxequivalent to five percent of a proportion of its entire net income, to be determinedas provided in this chapter. The term "transacting", "conducting", or "doingbusiness", 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 incomewithin the jurisdiction of this State," which "includes," but isnot limited to, "the engaging in or the transacting of any activity in this State for the purpose offinancial profit or gain." We construe this language as extending to the limits of the constitutionSouth Carolina's authority to tax foreign corporations. Here,Geoffreycontends that the DueProcess 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 astate and the person, property or transaction it seeks to tax," and that the "income attributed tothe 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).Geoffreyargues that the Commission has failed to satisfy bothof these requirements. We disagree.The nexus requirement of the Due Process Clause can be satisfied even where the corporationhas 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 , 119L.Ed.2d at 104.Geoffreyasserts that it has not purposefully directed its activities toward SouthCarolina. To support its position,Geoffreypoints 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 betweenGeoffreyand South Carolina required by due process.In our view,Geoffreyhas not been unwillingly brought into contact with South Carolina throughthe unilateral activity of an independent party.Geoffrey'sbusiness is the ownership, licensing,and management of trademarks, trade names, and franchises. By electing to license itstrademarks and trade names for use by Toys R Us in many states,Geoffreycontemplated andpurposefully sought the benefit of economic contact with those states.Geoffreyhas been awareof, consented to, and benefitted from Toys R Us's use ofGeoffrey'sintangibles in South Carolina.Moreover,Geoffreyhad the ability to control its contact with South Carolina by prohibiting the useof its intangibles here as it did with other states. We rejectGeoffrey'sclaim that it has not