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Keywords

trademarkcompliancedue process
willtrademarkdue process

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Geoffrey, Inc. v. South Carolina Tax Com’n, 313 S.C. 15, 437 S.E.2d 13

Facts

Geoffrey, Inc. is a wholly-owned subsidiary of Toys R Us, Inc., incorporated in Delaware. It owns several trademarks, including 'Toys R Us,' and executed a License Agreement allowing Toys R Us to use these trademarks in various states, excluding a few. Geoffrey receives a royalty based on Toys R Us's sales, which includes sales made in South Carolina. After Toys R Us began operations in South Carolina, the South Carolina Tax Commission required Geoffrey to pay income tax on the royalty income, leading Geoffrey to file for a refund under protest.

Geoffrey is a wholly-owned, second-tier subsidiary of Toys R Us, Inc. (Toys R Us) incorporated in Delaware with its principal offices in that state. It has no employees or offices in South Carolina and owns no tangible property here.

Issue

Whether South Carolina's taxation of Geoffrey's royalty income violates the Due Process Clause and the Commerce Clause of the U.S. Constitution.

Whether South Carolina's taxation of Geoffrey's royalty income violates the Due Process Clause and the Commerce Clause of the U.S. Constitution.

Rule

The Due Process Clause requires a definite link between the state and the person or property it seeks to tax, while the Commerce Clause allows taxation if there is a substantial nexus with the state, the tax is fairly apportioned, does not discriminate against interstate commerce, and is related to services provided by the state.

The 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.'

Analysis

The court found that Geoffrey had purposefully directed its activities toward South Carolina by licensing its trademarks for use in the state, thus establishing the required minimum connection for taxation under the Due Process Clause. Additionally, the presence of Geoffrey's intangible property in South Carolina, through the sales made by Toys R Us, further satisfied the nexus requirement. The court also determined that the tax was rationally related to the benefits Geoffrey received from operating in South Carolina.

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.

Conclusion

The court affirmed the lower court's ruling, holding that South Carolina's taxation of Geoffrey's royalty income did not violate the Due Process Clause or the Commerce Clause.

Accordingly, we find that Geoffrey's purposeful direction of activity toward South Carolina as well as its possessing intangible property here provide a definite link between South Carolina and the income derived by Geoffrey from the use of its trademarks and trade names in this State.

Who won?

South Carolina Tax Commission prevailed because the court upheld the taxation of Geoffrey's royalty income, finding sufficient nexus and compliance with constitutional requirements.

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.

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