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Rather than a physical presence standard, a significant economic presence test is a better indicator of whether a substantial nexus exists for Commerce Clause purposes. A substantial economic presence standard incorporates due process purposeful direction towards a state while examining the degree to which a company has exploited a local market. Further, a substantial economic presence analysis involves an examination of both the quality and quantity of the company's economic presence. Finally, under this test, purposeful direction towards a state is analyzed as it is for Due Process Clause purposes, and the Commerce Clause analysis requires the additional examination of the frequency, quantity, and systematic nature of a taxpayer's economic contacts with a state.
The Office of Tax Appeals rejected the challenge of ConAgra Brands, Inc. ("ConAgra Brands") to assessments for unpaid corporation net income tax and business franchise tax. The assessments were imposed on apportioned royalties ConAgra Brands received from the licensing of its intangible trademarks and trade names for use throughout the United States, including West Virginia. In setting aside the decision of the Office of Tax Appeals, the circuit court held that ConAgra Brands' licensing transactions did not constitute doing business in West Virginia and that the assessments failed to meet the requirements of the Due Process and Commerce Clauses of the Constitution of the United States. The West Virginia State Tax Commissioner appealed from the final order of the Circuit Court of Berkeley County which set aside the decision of the West Virginia Office of Tax Appeals. The Tax Commissioner seeks reinstatement of the assessments for corporation net income tax and business franchise tax.
Did the circuit court err in invalidating the assessments and concluding that ConAgra Brands had not done business in West Virginia during the audit period for purposes of the corporation net income tax or the business franchise tax?
The West Virginia supreme court found, inter alia, that ConAgra Brands had no physical presence in West Virginia, did not sell or distribute food-related products or provide services in West Virginia, all products bearing ConAgra Brands’ trademarks and trade names were manufactured solely by unrelated or affiliated licensees outside of West Virginia, ConAgra Brands did not direct or dictate how its licensees distributed the products, and the licensees, operating no retail stores in West Virginia, sold the products only to wholesalers and retailers in West Virginia. Accordingly, even if the assessments satisfied the Due Process Clause, U.S. Const. amend. XIV, § 1, they failed under the substantial nexus component of the Commerce Clause, U.S. Const. art. 1, § 8, cl. 3.