## Facts

- Geoffrey, Inc., a Delaware corporation and subsidiary of Toys “R” Us, owned trademarks and trade names, including “Toys R Us.”
- Geoffrey had no employees, offices, or tangible property in South Carolina.
- Geoffrey licensed its marks and related merchandising know-how to Toys “R” Us for use in many states, including South Carolina, in exchange for a 1% royalty based on net sales of licensed products and services.
- Toys “R” Us began operating retail stores in South Carolina in 1985 and paid Geoffrey royalties calculated from South Carolina sales.
- For tax years 1986 and 1987, Toys “R” Us deducted the royalty payments from its South Carolina taxable income.
- South Carolina assessed corporate income tax and corporate license fees against Geoffrey on the royalty income attributable to South Carolina sales.
- Geoffrey paid under protest and sued for a refund, arguing lack of nexus because it was not “doing business” in South Carolina and had no physical presence.

## Issues

1. Whether imposing South Carolina corporate income tax and corporate license fees on Geoffrey’s royalty income violated the Due Process Clause because Geoffrey lacked sufficient connection to the state.
2. Whether the tax violated the Commerce Clause for lack of “substantial nexus” where Geoffrey had no physical presence in South Carolina.

## Decision

- The South Carolina Supreme Court affirmed the judgment upholding the assessments against Geoffrey.
- The court held due process was satisfied because South Carolina taxed income tied to in-state economic activity and Geoffrey purposefully sought economic benefit from the state through licensing.
- The court held the Commerce Clause’s substantial-nexus requirement was met because the in-state exploitation of Geoffrey’s intangible property and the resulting royalty stream created economic nexus even without physical presence.
- The court declined to extend Quill’s physical-presence rule (from a sales and use tax context) to income tax and corporate license fees.

## Legal Principles

- Due process permits state taxation when there is a “definite link” and “minimum connection” between the state and the person, property, or transaction taxed, and when the income taxed is fairly attributable to in-state activity.
- A nondomiciliary corporation can establish due process nexus through continuous in-state use of its intangible property and the receipt of royalties measured by in-state sales.
- For corporate income taxes and related business license fees, substantial nexus under the Commerce Clause can be shown through purposeful direction of economic activity toward the taxing state and in-state exploitation of intangibles, without physical presence.
- Under South Carolina’s broad statutory definition, deriving continuous, profit-motivated royalty income from in-state use of intellectual property constitutes “doing business” in the state.

## Conclusion

South Carolina could impose corporate income tax and corporate license fees on an out-of-state trademark holding company’s royalty income because the trademarks were continuously used in South Carolina to generate sales-based royalties, creating constitutionally sufficient due process connection and Commerce Clause substantial nexus despite the licensor’s lack of physical presence.


Geoffrey, Inc. v. S.C. Tax Comm'n, 313 S.C. 15, 437 S.E.2d 13 (1993)