In Harley-Davidson, Inc. & Subsidiaries v. California Franchise Tax Board (May 1, 2013), the San Diego Superior Court held that special purpose entities (SPEs) created by the plaintiff as securitization subsidiaries had substantial nexus with California for corporation and income tax purposes, even though the SPEs themselves had no physical presence in California. The SPEs were part of a corporate enterprise that loaned money to buyers of motorcycles, apparel, and warranties; the loans were securitized and bundled into notes; the notes were sold to investors; and the money from the sales of the notes were used to offer additional loans. The SPEs’ sole business was to serve as the capitalization branch of the overall enterprise and provide liquidity to the financial subsidiary (the lending branch), thus enabling the lenders to offer loans.
The court determined that nexus existed by looking at the functional integration between the SPEs and the corporate enterprise. Control existed as well due to common directors. The SPEs were not third-party independent contractors, because the parent company had a right to exercise control over the SPEs, and the SPEs only did business for the financial subsidiaries. As a result, the court determined that the SPEs had substantial nexus with the state through their California agents—the parent company, financial subsidiary, and various in-state dealerships.
The ultimate result of the ruling is that the SPEs’ California-sourced sales could be included in the sales factor of their combined reporting group for apportionment purposes.
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