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Lanco, Inc. v. Director

August 24, 2005


On appeal from a final judgment of the Tax Court of New Jersey, Docket No. 5329-1997, whose opinion is reported at 21 N.J. Tax 200.

The opinion of the court was delivered by: Stern, P.J.A.D.



Argued March 3, 2005

Before Judges Stern, Wecker and Graves.

This case presents the important question, as the Tax Court stated it, of "whether New Jersey may constitutionally subject a foreign corporation to the Corporation Business Tax (N.J.S.A. 54:10A-1 et seq., 'the CBT'), where the corporation has no physical presence in the state and derives income from a New Jersey source only pursuant to a license agreement with another corporation that conducts a retail business here." Lanco, Inc. v. Director, Div. of Taxation, 21 N.J. Tax 200, 203 (Tax 2003).

Defendant, Director of the Division of Taxation, appeals from an order of January 9, 2004, entering judgment for plaintiff taxpayer "since it does not have a taxable nexus in the State which would subject it to New Jersey's Corporate Business Tax." Plaintiff, which licenses intellectual property (trademarks, trade names and service marks) to Lane Bryant, a clothing retailer, has no real or personal property or personnel in the State, and the Tax Court, in a published opinion, held that because plaintiff was not physically present in New Jersey, subjecting it to the tax would violate the Commerce Clause of the federal constitution. Lanco, supra, 21 N.J. at 214. On this appeal the Director argues that Lanco derived receipts from sources in the State, thereby making it subject to the tax, and that "there are no constitutional impediments to application of the corporation business tax to plaintiff given its substantial nexus to New Jersey" because there was no violation of the due process clause (which is not contested before us)*fn1 or the Commerce Clause (which is the critical issue contested on the appeal). Thus, the critical issue is whether the taxpayer must have a physical presence in the state in order to constitute the required "substantial nexus" necessary to satisfy the Commerce Clause under Quill Corp. v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904, 119 L.Ed. 2d 91 (1992), which applied that test and held physical presence was necessary in the context of a sales and use tax.

The Tax Court succinctly stated the relevant facts as follows:

Plaintiff Lanco, Inc., ("Lanco") is a Delaware corporation that owns certain intangible property (trademarks, trade names and service marks). The parties have stipulated that Lanco has no offices, employees, or real or tangible property in New Jersey. Lanco licenses Lane Bryant, Inc., ("Lane Bryant") to utilize the intangible property in the conduct of Lane Bryant's retail operations, including those in New Jersey, and in return receives royalty payments from Lane Bryant. Lanco and Lane Bryant are affiliated corporations, but the common ownership is not material to the constitutional issue concerning the determination by the defendant, Director of the Division of Taxation ("Director"), that activity under the license agreement makes Lanco subject to taxation in New Jersey. It is the determination that Lanco is obliged to file under the CBT, rather than the calculation of tax claimed to be due, that is contested.

[Lanco, supra, 21 N.J. Tax at 203 (footnote omitted).]

In Quill Corp. v. North Dakota, 504 U.S. 298, 301, 112 S. Ct. 1904, 1907, 119 L.Ed. 2d 91, 99 (1992), the State of North Dakota sought to impose a duty to collect a use tax on "an out-of-state mail-order house that ha[d] neither outlets nor sales representatives in the State." Quill sold office furniture by mail order catalogue and advertising, and delivered it by mail or common carrier. The Court held that, while the Due Process Clause "minimum contacts" jurisprudence did not bar the state from requiring Quill, as the seller, to collect a use tax, there was an insufficient nexus under the Commerce Clause to permit such a tax. Quill, supra, 504 U.S. at 313, 112 S.Ct. at 1913-14, 119 L.Ed. 2d at 101. According to Justice Stevens, "[t]he two standards are animated by different constitutional concerns and policies":

Due process centrally concerns the fundamental fairness of governmental activity. Thus, at the most general level, the due process nexus analysis requires that we ask whether an individual's connections with a State are substantial enough to legitimate the State's exercise of power over him. We have, therefore, often identified "notice" or "fair warning" as the analytic touchstone of due process nexus analysis. In contrast, the Commerce Clause and its nexus requirement are informed not so much by concerns about fairness for the individual defendant as by structural concerns about the effects of state regulation on the national economy.

[Quill, supra, 504 U.S. at 312, 112 S.Ct. at 1913, 119 L.Ed. 2d at 106.]

The Court discussed the four factors it first enunciated in Complete Auto Transit, Inc. v. Bradley, 430 U.S. 274, 279, 97 S. Ct. 1076, 1079, 51 L.Ed. 2d 326, 331 (1977), to determine whether a state tax will withstand a commerce clause challenge:

Under Complete Auto's four-part test, we will sustain a tax against a Commerce Clause challenge so long as the "tax [1] is applied to an activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate ...

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