Trademark Holding Company Tax Strategy Fails in New York

According to a November 2, 2004 article in the New York Law Journal, a common corporate tax strategy involving the transfer of trademark rights to an out-of-state holding company has now been called into question by New York courts.

On October 28, 2004, the Appellate Division, 3rd Department, unanimously affirmed a Tax Appeals Tribunal holding that Sherwin-Williams is liable for a combined corporate franchise tax on income apportioned out of New York. Sherwin-Williams had set up subsidiaries in Delaware, where the corporate tax rate is high but there is no tax on "intangibles," a category that includes trademark-holding firms. Sherwin-Williams then assigned company trademarks to those subsidiaries while an operating unit in New York paid royalties to the Delaware entities in order to avoid New York taxes.

"The decision provides the department strong precedent with respect to evaluating and challenging corporations with similar tax avoidance structures," Tax Department spokesman Thomas Bergin reportedly said. "While many corporations have already voluntarily complied, the department expects that the Sherwin-Williams ruling will result in additional voluntary compliance."