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Home Depot U.S.A. Inc. v. Arizona Department of Revenue

Court of Appeals of Arizona, First Division

December 5, 2013

HOME DEPOT U.S.A., INC. AND AFFILIATES, Plaintiff/Appellant,
v.
ARIZONA DEPARTMENT OF REVENUE, an executive administrative agency of the State of Arizona, Defendant/Appellee.

Appeal from the Arizona Tax Court No. TX2006-000240 The Honorable Dean M. Fink, Judge

Frazer Ryan Goldberg & Arnold, LLP, Phoenix By Michael G. Galloway, Kacie N. Dillon Co-Counsel for Plaintiff/Appellant

Morrison and Foerster, LLP, Sacramento, CA, By Eric J. Coffill, Carley A. Roberts, Pro Hac Vice Co-Counsel for Plaintiff/Appellant

Arizona Attorney General's Office, Phoenix By Kimberly J. Cygan Counsel for Defendant/Appellee

Bade Baskin Richards, PLC, Tempe By William A Richards Co-Counsel for Amicus Curiae Multistate Tax Commission

Multistate Tax Commission, Washington, D.C., By Shirley K. Sicilian, Bruce J. Fort, Pro Hac Vice Co-Counsel for Amicus Curiae Multistate Tax Commission

Chief Judge Diane M. Johnsen delivered the opinion of the Court, in which Presiding Judge Lawrence F. Winthrop and Judge Margaret H. Downie joined.

OPINION

JOHNSEN, Chief Judge:

¶1 Home Depot U.S.A., Inc. challenges the tax court's ruling that it must file a combined return incorporating income its subsidiary, Homer TLC, Inc., generated from licensing Home Depot trademarks. Because the activities of the two corporations are substantially interdependent, we affirm the judgment.

FACTS AND PROCEDURAL BACKGROUND

¶2 Home Depot is a Delaware corporation headquartered in Atlanta. It operates retail stores selling home improvement products throughout the United States. In 1991, Home Depot created Homer as a wholly owned subsidiary and assigned to it all of Home Depot's trademarks, trade names and service marks, including "The Home Depot, " "Do-It-Yourself Warehouse" and "Where Low Prices Are Just the Beginning."

¶3 At the time of the assignment, an independent appraisal concluded the market value of the assigned marks was $354 million. Homer entered a 10-year licensing agreement with Home Depot under which, consistent with the appraisal, Home Depot paid a royalty of 1.5 percent of gross sales for use of the marks. Two years before that license agreement was to expire, Homer and Home Depot entered a second 10-year licensing agreement that specified a royalty of four percent of gross sales, based on an appraisal dated October 28, 1999. Pursuant to the license, Home Depot placed the marks on its advertising, website, store facades, shopping carts, tags, signs and employee aprons and on some but not all of the products it sold.

¶4 Following an audit of Home Depot's Arizona income, the Arizona Department of Revenue (the "Department") required Home Depot to include Homer in its Arizona return as part of its unitary business for the tax years ending January 30, 2000, January 28, 2001 and February 3, 2002. [1] After timely protesting and exhausting its administrative remedies, Home Depot appealed the Department's assessments to the tax court pursuant to Arizona Revised Statutes ("A.R.S.") section 42-1254(C) (2013). [2]

¶5 The tax court ruled in the Department's favor on cross- motions for summary judgment. We have jurisdiction of Home Depot's timely appeal pursuant to Article 6, Section 9 of the Arizona Constitution and A.R.S. § 12-2101(A) (2013).

DISCUSSION

A. Legal Principles.


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