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Top court: Out-of-state subsidiaries can be taxed here

In what is at least a $26 million victory for the state, Maryland’s top court ruled Monday that the comptroller can tax the income of out-of-state subsidiaries of a company doing business in Maryland if the subsidiary’s operations are economically dependent on the parent.

In its 7-0 decision, the Court of Appeals rejected the argument of manufacturer W.L. Gore & Associates Inc’s subsidiaries that Maryland’s tax violated their federal constitutional right to due process because they operated solely outside the state. The subsidiaries — Gore Enterprise Holdings Inc. and Future Value Inc. — also argued that Maryland’s tax was unconstitutional.

The court, however, said the tax on the subsidiaries’ income was constitutional because their operations were “intertwined” with Gore’s business in Maryland and they were not truly “separate business entities” that could claim no link to the state.

GEH and FVI “lacked substance apart from Gore and consequently satisfied the constitutional requirements for taxation in Maryland,” Judge Sally D. Adkins wrote for the high court.

Robert F. Reklaitis, the subsidiaries’ attorney, said he and the companies are considering a petition to the U.S. Supreme Court. Maryland’s taxation violates the Constitution’s Commerce Clause by discouraging businesses with subsidiaries from operating across state lines, the companies argue.

“There is no nexus between Gore Enterprise Holdings [and FVI] and the state of Maryland,” said Reklaitis, of LeClairRyan in Washington, D.C.

The state high court’s decision marked a victory for what Maryland Comptroller Peter Franchot has called his fight against companies trying to avoid paying taxes by establishing holding companies.

In November 2010, Franchot’s office said it had recovered at least $110 million in taxes from such companies, including the Gore subsidiaries.

Franchot did not return telephone messages Monday seeking comment on the court’s decision. However, a spokesman said the decision “validates” the comptroller’s position.

“It puts to rest legal arguments that have been made to challenge those assessments as well as the apportionment formula we use to assess their tax liability,” said the spokesman, Andrew Friedson.

Gore, which makes Gore-Tex and other fabrics, medical devices and electronics, spun off GEH to handle its patent applications and formed FVI to manage its capital. All three companies are incorporated in Delaware, but only W.L Gore does business in Maryland.

The case arose in July 2006, when the Maryland comptroller assessed $23.9 million in taxes and interest against GEH for the years 1983 to 2003 and $2.3 million against FVI for the years 1996 to 2003.

The comptroller also assessed $193,000 against Gore, the parent, for 2001 to 2003. Gore was not a party to the litigation.

GEH and FVI challenged the assessment’s constitutionality in Maryland Tax Court, an administrative agency, which ruled for the state in 2009.

Court decisions then went back and forth, with Cecil County Circuit Court Judge Lawrence R. Daniels finding for the subsidiaries in September 2011 but the intermediate Court of Special Appeals holding for the state in a reported Jan. 24, 2013, opinion.

The subsidiaries then sought review by the Court of Appeals.

The high court, in its decision Monday, cited its 2003 holding in Comptroller v. SYL Inc.

In that case, the court upheld the state’s taxation of the Syms Inc. subsidiary, which was paid royalties earned in Maryland by the parent company but which had no property, employees or accounts in the state. The high court ruled that Syms and SYL were not a parent and subsidiary but a “unitary business” subject to Maryland taxes.

GEH and FVI, like SYL, had no Maryland operations, performed no business independent of the parent and derived their income through payments by the parent, the high court said.

“Indeed, Gore permeates the substantive activities of both GEH and FVI,” Adkins wrote.

The subsidiaries’ “employees and operations are so intertwined with Gore as to be almost inseparable, as the ‘Legal Services Consulting Agreement’ and reliance on Gore — for everything from professional services to things like office space — so indicate,” she added.

WHAT THE COURT HELD

Case:

Gore Enterprise Holdings Inc. and Future Value Inc. v. Comptroller, CA No. 36, September Term 2013. Opinion by Adkins, J. Argued Dec. 6, 2013. Filed March 24, 2014.

Issue:

Did the tax court err in upholding Maryland’s taxation of out-of-state subsidiaries that were economically dependent on a parent who did business in Maryland?

Holding:

No; the subsidiaries “lacked substance” independent of the parent and therefore “satisfied the constitutional requirements for taxation in Maryland.”

Counsel:

Robert F. Reklaitis for petitioners; Michael J. Salem for respondent.

RecordFax # 14-0324-21 (44 pages).