The West Virginia Supreme Court of Appeals held that an out-of-state licensor of intangible property did not have nexus in West Virginia despite products bearing its intangible property being sold in the state. Griffith v. ConAgra Brands, Inc., Dkt. No. 10-AA-02 (W. Va. May 24, 2012). The decision is an important taxpayer victory, particularly for licensors of intangible property.

ConAgra Foods, Inc., a food products company, established and transferred to a wholly owned subsidiary, ConAgra Brands (CA Brands), numerous trademarks and trade names. CA Brands also acquired intangibles from unrelated third parties. CA Brands licensed the intangibles to related and unrelated parties in return for royalty payments. The licensed food products were manufactured by the licensees outside of West Virginia and were sold or distributed to wholesalers and retailers in several states, including West Virginia. CA Brands had no physical presence in West Virginia, and it did not control how the licensees distributed the products bearing the CA Brands’ intangibles.

The court held that CA Brands did not have nexus with West Virginia because it lacked both “purposeful direction” under the Due Process Clause and “substantial nexus” under the Commerce Clause. The court distinguished its prior decision in Tax Comm’r v. MBNA America Bank, 640 S.E.2d 226 (W. Va. 2006), cert. denied, 551 U.S. 1141 (2007), in which it held that an out-of-state bank that issued credit cards to West Virginia customers had income tax nexus based on its “significant economic presence” in the state. While the court reiterated that physical presence is not required for Commerce Clause purposes, it nonetheless distinguished MBNA. Unlike MBNA, CA Brands did not “continuously and systematically” engage in direct mail and telephone solicitation and promotion in West Virginia. The court also noted that CA Brands did not dictate how the licensees distributed the licensed food products.

It is interesting to compare the holding in ConAgra to the holding in Jack Daniels Props, Inc. v. Iowa Dep’t of Revenue, Dkt. No. 09DORFC002 (Iowa Dept. Inspects. and Appeals July 28, 2011), where a taxpayer without physical presence was found to have nexus because it received royalties based on the sales of licensed products in the state.