United States

Maryland Tax Court applies enterprise dependence nexus test


On May 28, 2015, the Maryland Tax Court issued its opinion in Staples, Inc. v. Comptroller of the Treasury of Maryland, finding that Staples, Inc. (Staples) and Staples the Office Superstore, Inc. (Superstore) were not separate and discrete businesses, and had sufficient contacts with Maryland to require it to file returns and pay income taxes.

The Court found that Staples reorganized in 1998 to minimize its state tax liabilities in separate return states like Maryland. After the reorganization, Staples wholly owned Superstore and Staples C&C. Superstore wholly owned Staples East. Staples East and Staples C&C operated the "Staples" retail stores, and their nexus was not at issue in this case. Neither Staples, nor Superstore, had physical presence nexus in Maryland.

Staples provided the three subsidiaries with corporate and administrative support services such as treasury, accounts payable, legal, finance, accounting and strategic planning. Superstore provided operations services to Staples East and Staples C&C including purchasing, inventory control, advertising and marketing, and licensing of trademarks and other intellectual property. In return, Staples East and Staples C&C paid royalties and interest for the services provided by Staples and Superstore.

The Maryland comptroller determined that Staples and Superstore had no economic substance as separate entities. Staples contended that this ignored over $100 million of wages paid by and over $150 million of real property and assets owned by Superstore, and over $50 million of wages paid by and over $100 million of real property and assets owned by Staples. Further, Staples argued that all fees provided were charged at arm's-length rates.

The Court held that "[p]hysical presence is not required to satisfy due process, so long as the business engages in some purposeful direction to the state." The Court continued,

Maryland courts have consistently concluded that the basis of a nexus sufficient to justify taxation is the economic reality of the fact that the parent's business in Maryland was what produced the income of the subsidiary. Thus, the Court's initial inquiry is to examine the facts and determine whether the Petitioner had real economic substance as separate business entities.

In analyzing the facts at issue, the Court found that the activities of Staples and Superstore permeated each other and of the retail entities. Because they could not operate independently, Staples and Superstore were not separate business entities, supporting the comptroller's position of "enterprise dependency." As part of a unitary business enterprise, the Court concluded that Staples and Superstore had nexus with the state of Maryland.

In disposing of whether the apportionment determined by the comptroller was fair, the Court held that applying the apportionment factor of the licensee/in-state retailer to the affiliated entities that received the royalty and interest payments was constitutional and fair under recent decisions by the Maryland Court of Appeals.


The Court's narrow view of "discrete business enterprises" shows that doing business with affiliates on an arm's-length basis, and having economic substance evidenced by people and property may be sufficient to create a filing obligation. Taxpayers with unitary affiliates that file separately in Maryland should review their operations for such enterprise dependence, and consider whether to file in Maryland.


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