Kohl’s Department Stores, Inc. v. Virginia Department of Taxation

Kohl’s Department Stores, Inc. entered into a license agreement with Kohl’s Illinois, Inc., an affiliate of Kohl’s that operates retail stores in select states, but not Virginia, for the use of intellectual property managed and licensed by Kohl’s Illinois. Kohl’s paid royalties to Kohl’s Illinois, and when calculating its federal taxable income, Kohl’s deducted these royalty payments from its income as an ordinary and necessary business expense. Kohl’s Illinois, however, did not pay state income taxes on a substantial portion of the royalties. Kohl’s claimed that the royalty payments fell within the “subject-to-tax” exception to the add back statute. The Virginia Department of Taxation auditor required that the untaxed portion be added back to Kohl’s taxable income and issued a notices of assessment to Kohl’s for certain taxable years. The circuit court affirmed, concluding that only the portion of the royalties that was actually taxed by another state fell within the subject-to-tax exception. The Supreme Court reversed, holding that the circuit court erred by failing to hold that Kohl’s Illinois need not be the entity that pays the tax for the subject-to-tax exception to apply. Remanded for a determination of what portion of the royalty payments was actually taxed by another state and therefore excepted from the add back statute. View "Kohl's Department Stores, Inc. v. Virginia Department of Taxation" on Justia Law