Iowa SC orders KFC to pay up

Jessica M. Karmasek Jan. 20, 2011, 1:42pm


DES MOINES, Iowa (Legal Newsline) - The Iowa Supreme Court has ruled that popular fried chicken chain KFC must render nearly $285,000 in unpaid corporate income taxes.

The Court, in its 40-page opinion filed Dec. 30, affirmed the judgment of the Iowa District Court for Polk County.

The state's high court had to determine whether the state Department of Revenue could impose an income tax on revenue received by a foreign corporation that has "no tangible physical presence" in Iowa, but receives revenues from the use of the corporation's intangible property within the state.

Tom Miller, Iowa's attorney general, represented the State in the case.

KFC Corporation is a Delaware corporation with its principal place of business in Louisville, Ky.

Its primary business is the ownership and licensing of the KFC trademark and related system. KFC licenses its system to independent franchisees who own approximately 3,400 restaurants throughout the United States.

While KFC also licenses its system to related entities -- including KFC National Management Company -- all KFC restaurants in Iowa are owned by independent franchisees. KFC owns no restaurant properties in Iowa and has no employees in Iowa.

On Oct. 19, 2001, the Iowa Department of Revenue issued KFC an income tax assessment in the amount of $284,658.08 for unpaid corporate income taxes, penalties and interest for the years 1997, 1998 and 1999.

The out-of-state corporation, after receiving the assessment, filed a protest with the agency on constitutional and statutory grounds.

The revenue department rejected the protest. On review of the agency's action, the district court affirmed. KFC appealed the ruling.

Justice Brent R. Appel, who authored the Court's opinion, wrote, "Based upon our analysis of the above authorities and our understanding of the underlying constitutional purposes of the dormant Commerce Clause, we conclude that the district court, in light of the available Supreme Court precedents, adopted a sound approach when it held that the dormant Commerce Clause is not offended by the imposition of Iowa income tax on KFC's royalties earned from the use of its intangibles within the State of Iowa."

The Court points to application of a "physical presence" test in using intangible property for revenue within a state for an out-of-state entity.

"In this case, KFC has licensed its valuable intellectual property for use within the geographic boundaries of the State of Iowa to produce income," Appel wrote for the Court.

"This case thus does not involve the arguably 'slightest presence' of intangible property within Iowa, but a far greater involvement with the forum state."

The presence of transactions within the state that give rise to KFC's revenue also "provide a sufficient nexus" under established Supreme Court precedent, the Court wrote.

"We hold that, by licensing franchises within Iowa, KFC has received the benefit of an orderly society within the state and, as a result, is subject to the payment of income taxes that otherwise meet the requirements of the dormant Commerce Clause," Appel wrote for the Court.

From Legal Newsline: Reach Jessica Karmasek by e-mail at

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