KFC Corporation Vs. Iowa Department Of Revenue
2010 Iowa Sup. LEXIS 149
Iowa2010Background
- KFC is a Delaware corporation licensing its fast‑food trademark system; Iowa franchises pay 4% royalty to KFC.
- KFC owns no Iowa restaurants, has no Iowa employees, but licenses intangibles used by Iowa franchisees.
- IDOR assessed $284,658.08 for 1997–1999 corporate income taxes, penalties, and interest.
- ALJ ruled for IDOR, finding KFC had nexus via intangible property used in Iowa.
- Director of IDOR adopted ALJ’s findings; district court upheld against KFC on Commerce Clause and state law.
- Iowa Supreme Court affirmed, holding physical presence not required for Iowa income tax on royalties from intangibles used in Iowa.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Dormant Commerce Clause nexus for income tax on intangibles | KFC contends no physical presence; income tax invalid | IDOR argues substantial nexus via use of intangibles in Iowa | Dormant Commerce Clause not violated; tax sustained |
| Quill physical presence test applied to intangibles income | Quill prohibits tax without physical presence | Quill does not control income tax nexus for intangibles | Quill not extended; intangibles in Iowa provide nexus under historical precedent |
| Iowa Code 422.33(1) interpretation | Tax requires situs in Iowa; no physical presence | Intangible property located in Iowa qualifies as income source | Statute supports taxation of income from intangibles with a situs in Iowa |
| Penalties and policy letter issues not preserved | Agency policy letter deviations and penalties should be reviewed | Issues were not preserved for review | Not preserved; district court judgment affirmed on other grounds |
Key Cases Cited
- Nw. States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959) (nexus for income tax may exist without physical presence)
- Int’l Harvester Co. v. Wis. Dep’t of Taxation, 322 U.S. 435 (1944) (taxable portion of nonresident income may derive from in-state events/transactions)
- Whitney v. Graves, 299 U.S. 366 (1937) (intangible property may have business situs in a state)
- Bellas Hess, Inc. v. Dept. of Revenue, 386 U.S. 753 (1967) (physical presence required for use tax collection in sales taxes; bright-line rule)
- Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (physical presence not required for due process; questions remain for Commerce Clause in non-sales taxes)
- Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) (multifactor nexus test: substantial nexus, fair apportionment, no discrimination, related to services)