Geoffrey, Inc. v. Commissioner of Revenue (July 24, 2007)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


GEOFFREY, INC.           	v.     COMMISIONER OF REVENUE

Docket No. C271816		 	  	  Promulgated:
							  July 24, 2007


	This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the appellee Commissioner of Revenue ("appellee" or "Commissioner") to grant an abatement of corporate excises assessed against appellant Geoffrey, Inc. ("Geoffrey") under G.L. c. 63, § 39 for the taxable years ending January 31, 1997 through January 31, 2001.
	Commissioner Gorton heard this appeal. With Commissioner Gorton materially participating in the deliberations of this appeal, Commissioners Scharaffa, Egan, Rose and Mulhern joined in the decision for the appellee, adopting the recommendations of the hearing officer. Chairman Hammond took no part in the consideration or decision of this appeal. 
	These findings of fact and report are made on the Appellate Tax Board's own motion under G.L. c. 58A, § 13 and 831 CMR 1.32 and are promulgated simultaneously with its decision. 

	Paul H. Frankel, Esq., Irwin M. Slomka, Esq., and Maxwell D. Solet, Esq. for the appellants.

	Thomas W. Hammond, Esq., Anne P. Hristov, Esq., and Patricia M. Good, Esq. for the appellee. 


FINDINGS OF FACT AND REPORT

	Geoffrey challenged the validity of a corporate excise deficiency assessment made by the appellee for the taxable years ending January 31, 1997 through January 31, 2001 inclusive ("years at issue"). Geoffrey's claim rested principally on the Commerce Clause of the United States Constitution (U.S. Const. art. I, § 8, cl. 3 (the "Commerce Clause"). On the basis of the parties' Agreed Statements of Facts and the testimony and exhibits presented at trial, the Board made the following findings of fact, relying on and adopting the recommendations of the hearing officer as to issues of witness credibility.
During the appellee's audit of Geoffrey's affiliated entity, Toys "R" Us-Mass, Inc. ("TRUMI"), the Commissioner discovered that Geoffrey received royalty income from TRUMI for the licensure of Geoffrey's trademarks, trade names, and service marks for TRUMI's use in its retail business activities in Massachusetts. Taxation of this royalty income, and separate royalty income paid to Geoffrey by Baby Superstore, Inc., which was also licensed to use Geoffrey's intellectual property in Massachusetts, supplied the basis for the assessments at issue.
	On October 2, 2002, the Commissioner issued a Notice of Failure to File Return to Geoffrey for the taxable years spanning February 1, 1996 through January 31, 2001. On or about October 15, 2002, Geoffrey supplied to the Audit Division of the Department of Revenue ("DOR") unsigned, pro-forma Massachusetts Foreign Business or Manufacturing Corporation Excise Returns ("Returns") for the years at issue. A Notice of Intention to Assess was issued on December 14, 2002; a revised notice followed on December 23, 2002.
	On January 28, 2003, the Commissioner issued a Notice of Assessment to Geoffrey for the years at issue, in the amount of $1,692,568 in corporate excise plus statutory additions. Appellee apportioned Geoffrey's royalty income to Massachusetts based on a sales factor alone, because its property and payroll factors were each less than 3.33% of its taxable net income. The sales factor was computed on the basis of the ratio of Geoffrey's royalty income from Massachusetts retail operations, to its royalty and interest income from all sources. 
Geoffrey filed an Application for Abatement on February 25, 2003. The Commissioner's Notice of Abatement Determination, denying the requested abatement, was issued on September 19, 2003. Geoffrey filed a Petition Under Formal Procedure with the Appellate Tax Board ("Board"), commencing the instant appeal, on November 18, 2003. The foregoing facts establish the Board's jurisdiction over this appeal. 
	Geoffrey presented three witnesses at trial: Mr. Peter Weiss, the Senior Vice President for Taxes of Toys "R" Us, Inc., and an officer and director of Geoffrey; Professor Richard D. Pomp of the University of Connecticut Law School; and attorney Paul Fields of the New York law firm of Darby and Darby. Mr. Weiss testified about the business structure of the Toys "R" Us family of corporations. Professor Pomp offered an opinion--based on economic policy considerations--regarding the interpretation of the "substantial nexus" requirement which governs state taxation of businesses engaged in interstate commerce. Mr. Fields, an expert in the field of intellectual property who had served as outside counsel to Geoffrey and other Toys "R" Us entities on trademark and trade name issues, described efforts to protect Geoffrey's interests in its trademarks, trade names, and service marks. The factual testimony, which was credible and uncontradicted, served to supplement the stipulated facts, and was relied on by the hearing officer and the Board to flesh out the relevant circumstances in a number of details. 
	The operative facts are undisputed. The corporate parent of both Geoffrey and TRUMI was Toys "R" Us, Inc., which was a publicly held company during the years at issue. It held shares in the various Toys "R" Us operating subsidiaries and provided management and support services to the stores and companies. TRUMI, a first-tier subsidiary of Toys "R" Us, Inc., operated retail toy and children's clothing stores in Massachusetts. During the years at issue, TRUMI operated a total of 26 Toys "R" Us and Kids "R" Us retail stores at locations throughout the Commonwealth. TRUMI filed Massachusetts corporate excise tax returns on a single-entity basis. 
	TRU, Inc., a holding company, was a subsidiary of Toys "R" Us, Inc. and the parent of Geoffrey. Geoffrey was incorporated in Delaware on January 28, 1984. Effective August 1, 1984, Toys "R" Us, Inc. transferred trademarks, trade names, and service marks (the "Trademarks") to Geoffrey, including the "Toys 'R' Us" and "Kids 'R' Us" trademarks in exchange for stock. The Trademarks acquired by Geoffrey also included the "Geoffrey" giraffe character that is the logo for Toys "R" Us.
	Arthur Andersen and Company's Valuation Services Group was engaged in 1991 to ascertain a fair market value royalty rate for the Trademarks owned by Geoffrey. In Arthur Andersen's opinion, the fair market value of the intellectual property owned by Geoffrey was $1.5 billion. Arthur Andersen deemed 3 per cent of net sales revenue to be the fair market value royalty rate for the use of the Toys "R" Us Trademarks, and 2 per cent of net sales revenue to be the fair market value royalty rate for the use of the Kids "R" Us Trademarks. A subsequent transfer pricing study, including a valuation of a royalty rate for licensure of the Trademarks, was performed by Ernst and Young. The Ernst and Young study supported the Arthur Andersen valuation findings. 
Geoffrey's business activities entailed entering into licensing agreements which allowed the various Toys 'R' Us, Inc. operating companies to use the Trademarks in support of their retail operations. These agreements were renegotiated following Arthur Andersen's valuation study. Geoffrey's licensing agreement with TRUMI, entered into on May 3, 1992, permitted the use of the subject Trademarks solely in Massachusetts. Geoffrey had the right to review guides used in the creation of advertisements featuring the Trademarks, customer complaint statistics, and private label product testing reports. Geoffrey also had the right to see product samples.
Pursuant to the licensing agreement, Geoffrey received a royalty of 2 per cent of TRUMI's net sales income at Kids "R" Us stores in Massachusetts for the use of the Kids "R" Us Trademarks, and a royalty of 3 per cent of TRUMI's net sales at Toys "R" Us stores located in Massachusetts for the use of the Toys "R" Us Trademarks. Signing for Geoffrey was Howard Simon, President of Geoffrey, whose offices were situated in Wilmington, Delaware. Jonathon Friedman, an officer of TRUMI, signed for the licensee. His offices were in New Jersey. The agreement was made subject to the laws of Delaware. Geoffrey had no Massachusetts employees or offices and owned no tangible property, real or personal, in Massachusetts during the years at issue.
	Geoffrey also licensed Trademarks for the use of "Babies 'R' Us", a division of Baby Superstore, Inc. Babies "R" Us operated stores in three Massachusetts locations during the years at issue. The licensing agreement involving Babies "R" Us, signed in February of 1997, set a royalty rate of 1 per cent of net sales revenue for the fiscal year 1996, 1.5 per cent of net sales for the fiscal year 1997, and 2 per cent of net sales for all years remaining in the duration of the agreement.
	In an example of their use in Massachusetts, physical manifestations of the Trademarks would be held out to the public on signage, store displays, and product packaging at the Massachusetts stores operated by TRUMI. The Trademarks were intended to represent to consumers that goods and services sold by licensees were of a certain level of quality. Geoffrey's rights to its Trademarks were strengthened by their use, including their use by Toys "R" Us, Kids "R" Us, and Babies "R" Us stores in Massachusetts. Geoffrey had access to the Massachusetts courts, and federal courts located in Massachusetts, to protect its interests in its Trademarks and its entitlement to royalty payments under the licensing agreements.
The licensing agreements gave Geoffrey considerable control over how the Trademarks were put to use in Massachusetts, in the interest of preserving their reputation for quality and value. At § 6.3 of the 1992 TRUMI license agreement, Geoffrey retained the right to review product samples and specifications, signs, labels, tags, packaging material, advertising and sales promotion materials, bills, catalogs, pamphlets or the like, which displayed any Trademark information. At § 7.2, TRUMI agreed to comply with Geoffrey's instructions so as to obviate the possibility that the Trademarks might become generic terms, which might adversely affect Geoffrey's interests in its Trademarks. 
Pursuant to a Quality Control, Legal And Treasury Service Agreement dated February 6, 1996, Toys "R" Us, Inc. provided services to Geoffrey to assist with quality control issues related to the Trademarks. Toys "R" Us, Inc. dedicated the services of an intellectual property specialist, Ms. Ellen Storch, to the task of protecting Geoffrey's assets. Toys "R" Us, Inc. also employed the regional and district managers with responsibilities for Massachusetts stores, who could monitor use of the Trademarks in Massachusetts and would bring any problems in stores, e.g. issues related to cleanliness, to the attention of the appropriate officials. Toys "R" Us, Inc. produced reports explaining the results of its quality control activities, and copies were also supplied to Geoffrey. For its services Toys "R" Us, Inc. was paid $300,000 a year. 
On January 1, 2000, Geoffrey changed its principal place of business from Wilmington, Delaware to Paramus, New Jersey. Moreover, Toys "R" Us, Inc. entered into a Management Service Agreement with Geoffrey, and certain Toys "R" Us, Inc. employees became employees of Geoffrey, also on January 1, 2000. Toys "R" Us, Inc. continued to make Ms. Storch's services available under the Management Service Agreement to protect Geoffrey's interest in its Trademarks.
Geoffrey entered into an Accounting and Management Services Agreement with Simon, Master, and Sidlow, a Delaware accounting firm, on January 8, 1993. Geoffrey also obtained additional services from several outside firms, including Mr. Fields' law firm, which provided legal services to Geoffrey to protect its ownership interests and the value of the Trademarks. The Trademarks were registered with the United States Patent and Trademark Office. The Darby law firm, acting on information from Geoffrey and third parties, kept vigilance against any infringements on the Trademarks owned by Geoffrey. Legal services included preparation of "cease and desist" letters to potential infringers. Trademark infringement claims might have led to settlement agreements or litigation by Geoffrey.
The testimony established that Geoffrey acted to protect its Trademarks against claimed infringement by a Massachusetts-based business, "GunsAreUs.com." The claim led to an infringement action in the Federal District Court for the Southern District of New York. The claimed infringer eventually changed its name.
Geoffrey received the following amounts of royalty income with respect to retail stores located in Massachusetts:
Taxable Year
Ending:
	Royalty Income
Received	
2/1/97	$5,928,567	
1/31/98	$6,554,625	
1/30/99	$6,628,656	
1/29/00	$7,117,981	
2/3/01	$7,423,420	

	 	On the basis of the foregoing, the Board found and ruled that Geoffrey's business activities gave it "substantial nexus" with Massachusetts. In reaching this conclusion, the Board agreed that Geoffrey neither owned nor leased real property in Massachusetts. Moreover, the Board found that no employee of Geoffrey was situated in Massachusetts during the years at issue. Nevertheless, Geoffrey purposefully sought to reap economic benefits from the Massachusetts retail marketplace by licensing its assets for use in Massachusetts by TRUMI and Baby Superstore, Inc. The Trademarks were used extensively by Toys "R" Us, Kids "R" Us, and Babies "R" Us stores in Massachusetts. The receipt of substantial royalty income over the course of the years at issue represented the realization of the desired economic benefits from Massachusetts. 
Moreover, Geoffrey reserved the ability to regulate the use of its Trademarks in Massachusetts, having rights of approval over promotional activities, product standards, and store conditions which might damage the value of the Trademarks. Finally, Massachusetts afforded rights and protections to Geoffrey in connection with the use of the Trademarks here, including recourse to the courts of the Commonwealth to address issues of trademark infringement and compliance with the terms of the licensing agreements. These facts supported a finding of "substantial nexus," so as to validate the disputed tax assessment.
	Accordingly, for all of the foregoing reasons, the Board issued a decision for the appellee in this appeal.

OPINION
	The principal issue on this appeal was whether the Commerce Clause requires that a foreign corporation have a "physical presence" in a state in order to support the imposition of that state's income-based corporate excise. Geoffrey also challenged the application of the statutory apportionment formula of G.L. c. 63, § 38 on the ground that it resulted in taxation of extraterritorial values. 
The Board first addressed the relevant statutory scheme and Geoffrey's statutory arguments. The assessment arose by operation of G.L. c. 63, § 39, which provides that "every foreign corporation, exercising its charter, or qualified to do business or actually doing business in the commonwealth, or owning or using any part or all its capital, plant or any other property in commonwealth, shall
pay, on account of each taxable year, the excise provided in subsection (a) or (b) of this section…." The legislative intent of this section is amplified at G.L. c. 63, § 39(3), where it is stated that
It is the purpose of this section to require the payment of this excise to the commonwealth by foreign corporations for the enjoyment under the protection of the laws of the commonwealth, of the powers, rights, privileges, and immunities derived by reason of the corporate form of existence and operation.
	
	The Appeals Court explained the statutory apportionment methodology in its opinion in Dana Lease Finance Corp. v. Commissioner of Revenue, 53 Mass. App. Ct. 840, 841 n.1 (2002):
For corporations having income from business which is taxable both here and another States, income is apportioned to Massachusetts by multiplying taxable net income by a fraction called the "income apportionment percentage", see G.L. c. 63, §§ 30(9), 38(c). This uses the sum of three factors, "property," "payroll," and "sales" in the numerator; if a factor is "insignificant," G.L. c. 63 § 38(g), it is eliminated and the denominator of the fraction is reduced….


Accordingly, given that Geoffrey had no property and payroll in the commonwealth, these two apportionment factors were inapplicable in the relevant calculation, and Geoffrey's net income was apportioned on the basis of a sales factor-derived percentage. See G.L. c. 63 § 38(g). 
Geoffrey contested the tax with the argument that it made no sales in Massachusetts, and, given its lack of physical presence, its income-producing activities occurred out-of-state. The statute provides that 
Sales other than sales of tangible personal property, are in this commonwealth, if 1. the income-producing activity is performed in this commonwealth; or 2. the income-producing activity is performed both in and outside this commonwealth and a greater proportion of this income-producing activity is performed in this commonwealth than in any other state, based on costs of performance.
G.L. c. 63, § 38(f). 

830 CMR 63.38.1(9(d)(3)(c) addresses the sourcing of gross receipts from the licensing of intangible property, like Geoffrey's Trademarks:
Gross receipts from the licensing … of intangible property are attributable to Massachusetts if the property is used by the … licensee soley in Massachusetts. If the … licensee uses the intangible property in more than one state, the gross receipts from licensing … are attributable to Massachusetts if the use of property by the … licensee in Massachusetts exceeds its use of the property in any other one state.

The statute, interpreted in light of this regulation, would place the income-producing activity giving rise to the royalty income at issue in Massachusetts on the instant record. TRUMI, the licensee, used Geoffrey's trademarks exclusively in Massachusetts. TRUMI incurred an obligation to pay Geoffrey royalties in agreed percentages based on sales occurring in TRUMI's Massachusetts retail stores. Because Geoffrey's income arose in connection with Massachusetts sales made on the strength of its Trademarks, the relevant income-producing activity was treated as taking place in the commonwealth.
	Nevertheless, Geoffrey challenged the rule of 830 CMR 63.38.1(9(d)(3)(c) as being inconsistent with statute, arguing that the statute looked only to Geoffrey's activities, none of which formally transpired in Massachusetts. However, "[r]egulations issued by an agency are presumptively valid so long as they are authorized by the enabling statute and do not violate any other statute or the Federal or State constitution." Cohen v. Bd. of Water Commissioners, Fire Dist. No. 1, South Hadley, 411 Mass. 744, 749 (1992). As the Supreme Judicial Court has held, "review of the validity of a regulation promulgated by a State agency is guided by the established principle that '[r]egulations are not to be declared void unless their provisions cannot by any reasonable construction be interpreted in harmony with the legislative mandate.'" Smith v. Commissioner of Transitional Assistance, 431 Mass. 638, 646 (2000)(Citations omitted.) 
	Geoffrey failed to establish inconsistency between regulation and statute. Cf. Duarte v. Commissioner of Revenue, ATB Findings of Fact and Report 2006-490, 515-16. Nothing in G.L. c. 63, § 38(f) requires so blinkered a view of the relevant income-producing activity as to disregard the important uses to which Geoffrey's Trademarks were put in Massachusetts. In Allied Building Credits, Inc. v. State Tax Commission, 344 Mass. 503, 507 (1962), the Supreme Judicial Court held that G.L. c. 63 "did not in terms restrict the meaning of assets 'employed in any business within the commonwealth' to assets physically or legally situated here." (Citation omitted.) The taxpayer in Allied Building bought installment notes made to sellers of lumber, carpets, furniture, and heating and plumbing supplies by the buyers of these products. Though the taxpayer argued that its intangible assets should be sourced to its state of domicile, California, the Court held that the intangibles were appropriately considered in arriving at the amount of corporate excise payable to the Commonwealth. Id. The Court explained that "[l]egal situs of intangibles is, to a degree at least, determinable in light of the purpose of the determination." Id. at 508. The Court concluded that "[a] State, in imposing excises, may look to property beyond its borders to get the true value of things within it." Id.
   With a profit-seeking intent, Geoffrey licensed its intangibles for use in this state, and earned a share of the proceeds as sales were made at TRUMI's and Baby Superstore's Massachusetts retail locations. The licensing agreements recognized that the value of Geoffrey's Trademarks contributed to retail sale transactions at Toys "R" Us, Kids "R" Us, and Babies "R" Us stores in Massachusetts. "The findings show that in such a business as [Geoffrey's] the out-of-State intangibles may have very important uses within the Commonwealth." Cf. id. Given the intended use of its property to facilitate retail sales in Massachusetts, Geoffrey's assertion that its income-producing activity occurred entirely out-of-state is strained and formalistic. 
	Furthermore, the Supreme Judicial Court upheld the application of 830 CMR 63.38.1(9(d)(3)(c) in Boston Professional Hockey Ass'n, Inc. v. Commissioner of Revenue, 443 Mass. 276, 282-283, 296-98 (2005). Geoffrey failed to persuade that physical presence or the formal situs of intangible assets in Massachusetts was a prerequisite to finding income-producing activity within the meaning of the corporate excise statute.
	Finally, Geoffrey failed to establish it was entitled to use an alternative method of apportionment, e.g. by including a property factor in the apportionment formula used to arrive at the percentage of net income which was attributable to Massachusetts. Geoffrey cited G.L. c. 63, § 42 in arguing that apportionment pursuant to G.L. c. 63, § 38 was "not reasonably adapted to approximate the net income derived from business carried on within this commonwealth…." Yet, beyond bare assertions that its income-producing activities occurred out-of-state, Geoffrey failed to satisfy its burden of showing "by 'clear and cogent evidence' that the income attributed to the Commonwealth is in fact 'out of all appropriate proportion to the business transacted' here or has 'led to a grossly distorted result.'" Gillette Co. v. Commissioner of Revenue, 425 Mass. 670, 679 (1997) (Citations omitted.) "[B]lanket assertions" of the sort Geoffrey relied on are not sufficient to warrant application of G.L. c. 63, § 42. See id.
	Geoffrey's constitutional claim relied on a broad reading of the decision of the United States Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298, 305 (1992), to argue that the Commerce Clause precluded application of the corporate excise given its lack of physical presence in Massachusetts. Quill reaffirmed the prior decision of the Court in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), which held that a taxpayer's physical presence in a state was necessary to square that state's imposition of a sales or use tax with the Commerce Clause. While this constitutional question may have been open at the time of trial, it has since been resolved by the Board. In Capitol One Bank and Capitol One F.S.B. v. Commissioner of Revenue, ATB Findings of Fact and Report 2007-544, 565, the Board held that "neither … Supreme Court nor Massachusetts precedent supports the proposition that physical presence is required to impose an income-based tax …." Indeed, as Capitol One emphasizes, "Massachusetts has recognized the Supreme Court's careful limitation of Quill to the sales and use tax context." Id. at 2007-565.
	Capitol One settled that the authority governing Geoffrey's Commerce Clause claim is Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977), which authorized state taxation of "a company engaged in purely interstate commerce provided that the tax: '[1] is applied to an activity with a substantial nexus with the taxing state, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, [4] and is fairly related to the services provided by the State.'" ATB Findings of Fact and Report 2007-560. Focusing on the first prong of the Complete Auto Transit test, which is the crux of Geoffrey's claim, the Board observed that "'[s]ubstantial nexus' comprises contacts of varied character and not merely those of a physical nature." Id. at 566. The Board agreed with the Supreme Court of Appeals of West Virginia, which held that "[r]ather than a physical presence standard, this Court believes that a significant economic presence test is a better indicator of whether substantial nexus exists for Commerce Clause purposes." Tax Commissioner of West Virginia v. MBNA America Bank, N.A., 640 S.E.2d 226, 234 (2006). "[T]he [West Virginia] court, despite finding that the taxpayer had no real or tangible personal property or real estate located in the state, had 'no trouble concluding that MBNA's systematic and continuous business activity in this State produced significant gross receipts attributable to its West Virginia customers which indicate a significant economic presence sufficient to meet the substantial nexus prong of Complete Auto.'" ATB Findings of Fact and Report at 2007-567, quoting 640 S.E.2d at 236.
	Capitol One also relied on other cases in which a company was deemed subject to an income-based tax based "solely on the presence of [intangible] trademark assets within the taxing jurisdiction." ATB Findings of Fact and Report 2007-569, citing, e.g., Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C. 1993). In a case involving a similar claim by the same taxpayer, the South Carolina Supreme Court held that "by licensing intangibles for use in this state and deriving income from their use here, Geoffrey ha[d] a 'substantial nexus' with South Carolina." Geoffrey, 437 S.E.2d at 18. In Lanco, Inc. v. Director, Division of Taxation, 879 A.2d 1234, 1235 (N.J. Super. Ct. App. Div. 2005), aff'd, 908 A.2d 176 (N.J. 2006), the Appellate Division of the New Jersey Superior Court upheld an income-based tax on a foreign trademark holding company with "no physical presence in the state [which] derive[d] income from a New Jersey source pursuant only to a license agreement with another corporation that conducts a retail business" in the state. In affirming the Appellate Division, the New Jersey Supreme Court held that "[i] Quill, the court did not attempt to equate the substantial-nexus requirement with a universal physical-presence requirement." 908 A.2d at 177. See also Secretary, Department of Revenue v. Gap (Apparel), Inc., 886 S.2d 459, 462 (La. Ct. App. 2004)("While Apparel may not have a physical presence in Louisiana, its intangible property clearly has a connection with Louisiana … [and] it is clear that the marks licensed by Apparel have been used in Louisiana in such a way as to become an integral part of the licensees' business in this state.") Accord Kmart Properties, Inc. v. Taxation and Revenue Department, 139 N.M. 177, 185 (N.M. Ct. App. 2001); A&F Trademark, Inc. v. Tolson, 605 S.E.2d 187, 195 (N.C. Ct. App. 2004).
	The Board held in Capitol One "consistent with the overwhelming weight of authority from the Supreme Court and those jurisdictions that have addressed the question, that the physical presence requirement in Quill is not applicable to an income based excise…." ATB Findings of Fact and Report at 2007-572-573. Instead, as the Board observed, "the use of Capitol One's intangible property-the Capitol One trademark on the cards-within the Massachusetts economic market to generate substantial revenue further supports the Board's ruling that there was substantial nexus." 
      As in Capitol One, Geoffrey here purposefully "derived substantial economic gain from the Massachusetts market through a sophisticated marketing campaign" that harnessed the value of its intangibles to induce Massachusetts customers to make purchases from which it profited. Cf. ATB Findings of Fact and Report at 2007-573. The good will represented by Geoffrey's Trademarks, which was carefully guarded, and the assurance of product quality they were intended to give, enabled transactions to occur in Massachusetts from which Geoffrey obtained substantial royalty income. The Board found compelling the fact that Geoffrey derived over $33 million in royalties from the Massachusetts consumer marketplace during the years at issue, in ruling that the "substantial nexus" prong of Complete Auto Transit was satisfied by its economic presence in Massachusetts.
	Geoffrey's final argument seeks abatement of penalties for underpayment of tax and late filing, pursuant to G.L. c. 62C, § 33(a). It contends that justifiable reliance on the Quill decision supplied reasonable cause for its decision not to file Massachusetts tax returns or pay Massachusetts corporate excise, given its lack of physical presence. However, Quill addresses sales and use taxation, not an income-based corporate excise, a fact the Supreme Judicial Court stressed in Truck Renting and Leasing Ass'n v. Commissioner of Revenue, 433 Mass. 733, 740 n.13 (2001)("In Quill … the Court upheld a 'physical-presence requirement' before a State, consistent with the commerce clause, could subject an out-of-State vendor to a use or sales tax. The Court did not extend this rule to other types of tax.")(Emphasis added.) Geoffrey's efforts to have the rule of Quill extended beyond the sales and use tax context did not justify its failure to comply with the taxing laws of the Commonwealth, which are entitled to a presumption of constitutionality. See, e.g., Kienzler v. Dalkon Shield Claimants Trust, 426 Mass. 87, 89 (1997). "Reasonable cause … 'should not be read to include a clearly erroneous view of the law, stubbornly adhered to after investigation should have disclosed the error.'" United States v. Bell Credit Union, 860 F.2d 365, 372 (10th Cir. 1988), quoting United States v. Sterling Nat'l Bank & Trust Co., 494 F.2d 919, 925 (2nd Cir. 1974)(Friendly, J., dissenting).
In conclusion, the Board found that the disputed assessment was authorized by the corporate excise statute, and did not transgress the constitutional limits on the exercise of a state's taxing power. Moreover, Geoffrey did not demonstrate that it acted with reasonable cause in its failure to file returns or pay taxes. The Board decided this appeal for the appellee.

THE APPELLATE TAX BOARD
 		


				 By:	___________________________________
					Frank J. Scharaffa, Commissioner




A true copy,

Attest: _____________________________
   Assistant Clerk of the Board

 On September 11, 2006, Commissioner Gorton was sworn as a temporary member of the Appellate Tax Board pursuant to G.L. c. 58A, § 1, his status as a member of the Board having terminated on that date with the appointment and qualification of his successor. See G.L. c. 30, § 8. Commissioner Gorton's material participation in the deliberations of these appeals included, inter alia, drafting and distributing proposed findings of fact supplying a report on the evidence and his observations as to witness credibility. He also made oral presentations of his recommendations to the Board members. 

 The parties' Second Supplemental Stipulation of Facts corrected that the amount of tax in dispute is actually $1,257,793.
 For the first four years at issue, appellant was based in Wilmington, Delaware. On January 1, 2000, Geoffrey moved its offices and employees to Paramus, New Jersey.

 Similar provisions appear in Geoffrey's 1997 license agreement with Baby Superstore, Inc.
   Mr. Weiss attended to quality control issues on behalf of Geoffrey.
 The hearing officer's participation in the deliberations and decision of this case, which included the preparation of recommended findings of fact and rulings of law and consultations with Board members, satisfied the requirements of Bayer v. Commissioner of Revenue, 436 Mass. 302 (2002), as interpreted in the Board's decision in Mayflower Emerald Square, LLC v. Board of Assessors of the Town of North Attleborough, ATB Findings of Fact and Report 2007-421, 517-18.
 The tax imposed under G.L. c. 63 is measured on the basis of net income and corporate net worth. See G.L. c. 63, § 39(a). 
 According to the Audit Narrative, offered jointly by the parties as a stipulated exhibit, DOR simply accepted the numbers for the property and payroll factors that were reflected in Geoffrey's pro forma returns. 
 The record does not indicate that Geoffrey's royalties from Baby Superstore, Inc. were greater in "any other one state" than in Massachusetts. See Interface Group-Nevada, Inc. v. Commissioner of Revenue, ATB Findings of Fact and Report 2000-324, 359-60. 
 Geoffrey also argued that passage of Stat. 2004, c. 262, § 42, which made explicit that use of an intangible asset in Massachusetts qualifies as "income producing activity" for purposes of G.L. c. 63, § 38(f), indicates that the law was otherwise for the years at issue. The Board agreed with the contemporaneous view of TIR 04-22 IV. that "the amendment restates and clarifies existing law in manner consistent with the Commissioner's prior interpretation and practice." Citing 830 CMR 63.38.1(9(d)(3)(c).
 There is no indication on the record that Geoffrey actually applied to the Commissioner utilizing the G.L. c. 63, § 42 procedure.
 The use of an "economic presence" criterion to apply the "substantial nexus" requirement also accords with the "well established" rule in the field of taxation "'that the substance should prevail over form.'" See generally Spirit of Yankee, Inc. v. Commissioner of Revenue, ATB Findings of Fact and Report 1998-723, 733 (Citations omitted.) Although intangibles definitionally lack a physical situs, the effective presence of the Trademarks in Massachusetts is substantiated every day by Massachusetts consumers' purchase decisions in reliance on the assurances of product quality and value represented by the name "Toys 'R' Us." Cf. Allied Building Credits, 344 Mass. at 507-08.
 As in Capitol One, the Board found that Geoffrey's expert witness's "opinions from an economic and policy perspective" to be unpersuasive in resolving the statutory and constitutional questions presented.  ATB Findings of Fact and Report at 2007-574. The Board's task is to adhere to the policy choices made by the legislature and follow the precedents set by the courts.

ATB 2007-690