New Laws Take On Delaware Subsidiaries

One of the advantages that companies gain by incorporating in Delaware was recently stripped away by New York tax courts. The case involved paint maker Sherwin-Williams (SHW Quote), which, as of 1991, maintained two subsidiaries in Delaware to manage its trademarks.

Because the state does not require corporations to pay taxes on revenue derived from intellectual property (trademarks, patents, and copyrights), such subsidiaries -- known as passive investment companies, or PICs -- are common.

In the past few years, however, 15 states have passed so-called Add-Back legislation that challenged Delaware PICs. These laws assert that if a company uses intellectual property on a state's turf, the state has every right to tax the resulting revenue. ...