In both New Mexico and Oklahoma, recent court decisions have upheld the states’ efforts to impose income tax on companies that are licensing intangibles to affiliates doing business in those states. While this issue is still being litigated in many states, and the United States Supreme Court has yet to address it, many companies may be interested in taking advantage of opportunities that may be available in New Mexico and Oklahoma to resolve potential liabilities and avoid lengthy audits and assessments.
In Kmart Corp.v.Taxation & Revenue Dep’t of New Mexico, 131 P.3d 22 (N.M. 2005), the New Mexico Supreme Court quashed the review it had previously granted, thereby upholding the Court of Appeals’ determination allowing the Department to assert nexus over an out-of-state trademark licensing company despite the lack of physical presence. However, the Supreme Court also held that gross receipts tax could not be imposed on the licensing company under the New Mexico statute.
In the wake of Kmart, the New Mexico tax authorities are interested in settling income and franchise tax liabilities, both for companies that have already been assessed (whose cases were on hold pending the determination in Kmart), and for those companies who have not been audited on this issue. For assessed companies or those already under audit, the State’s offer is to accept a reduced payment of tax, along with statutory interest, and to waive all penalties. Gross receipts tax will be eliminated in accordance with the court’s decision in Kmart. Details are still being worked out on such issues as the apportionment percentage that must be applied and the type of return that must be filed. For those companies that have not yet been identified by New Mexico, and that wish to come forward and identify themselves under New Mexico’s "Managed Audit Program," in addition to the reduction of tax, and the waiver of penalties, interest would also be waived, and the "look back" period would be limited to seven years. The window of opportunity for these settlements is expected to close by August 1, both for companies with pending cases and those which have not yet been approached by New Mexico’s auditors but who wish to come forward.
In Oklahoma, the Oklahoma Court of Civil Appeals reached a decision similar to that in Kmart, and upheld the imposition of Oklahoma corporate income tax against a trademark licensing company, finding that it had "substantial nexus" with the State, and that the physical presence nexus requirement under Quill was limited to sales and use taxes. Geoffrey, Inc.v.Oklahoma Tax Comm’n, 132 P.3d 632 (Okla. Civ. App. 2005), cert. denied, No. 99,938(Okla. Mar. 20, 2006).
Oklahoma may be willing to allow companies that have been licensing intangible property to affiliates doing business in Oklahoma and have not been audited yet to come forward and enter into Voluntary Disclosure Agreements. The terms of these agreements are still being addressed by the Oklahoma Tax Commission, but are expected to include waiver of all penalties.
The Departments in both Oklahoma and New Mexico have stated that they are in the process of compiling lists of companies to pursue for audit, so companies with potential exposure may want to consider coming forward if they have not yet been approached. We have been advised that, as is usually the case, the voluntary disclosure offers may no longer be available once a company has been identified and selected for audit.