RDA, INC. v. Franchise Tax Bd.

DAVIS, Acting P.J.

In this action for a refund of franchise taxes, The Reader's Digest Association, Inc. (RDA), appeals from a judgment in favor of the California tax authorities. Federal law exempts an out-of-state company from income-based state taxation if that company merely sells or solicits sales through an in-state independent contractor. [1] The pivotal issue here is whether a wholly-owned subsidiary of RDA, Reader's Digest Sales & Services, Inc. (RDS & S), which sold and solicited sales of advertising pages for RDA, was such a contractor. We agree with the trial court that RDS & S was not and affirm.

This case involves the context of state income taxation of an out-of-state company engaged in interstate commerce in the taxing state.

In the 1959 decision Portland Cement Co. v. Minnesota , the United States Supreme Court concluded that the net income of an out-of-state company derived from interstate commerce activities within the taxing state "may be subjected to state taxation provided the levy is not discriminatory and is properly apportioned to local activities within the taxing State forming sufficient nexus to support the same." [2]

To clarify this Northwestern…