By Nick Kump and Timothy Gustafson

The Wisconsin Tax Appeals Commission overturned a $2.4 million assessment against an intellectual property (IP) holding company, ruling that the company’s income-producing activities for Wisconsin sales factor purposes – IP licensing and related activities – occurred entirely outside of the state. The taxpayer, a wholly owned subsidiary of the California-based shoe company Skechers USA, Inc. (Skechers), owned all of Skechers’ domestic IP and licensed that IP to Skechers and to unaffiliated third parties across the United States in exchange for a royalty. The taxpayer also engaged in the design, development and marketing of “Skechers” brand footwear from outside of Wisconsin. Despite the taxpayer’s lack of employees, representatives, and real or tangible personal property in the state, the Department of Revenue issued an assessment against the taxpayer based on its parent company’s wholesale sales of shoes bearing and incorporating the “Skechers” IP in the state. The Commission did not address whether the taxpayer had taxable nexus in Wisconsin and rejected the Department’s market-based approach for sourcing the taxpayer’s royalty income, finding that the sale of shoes was Skechers’ income-producing activity, not the taxpayer’s. Given that the taxpayer’s licensing activities occurred entirely outside of the state, the Commission concluded that its Wisconsin sales factor was zero. As a consequence of the ruling, several other cases held in abeyance will now move forward to determine whether the Department properly denied Skechers’ deductions for the royalty payments made to its subsidiary. Skechers USA, Inc. II v. Wisconsin Department of Revenue, No. 10-I-173 WI (July 31, 2015).