This Article asserts that the correct constitutional nexus standard for state taxation of royalty income derived from the use of trademarks and tradenames is the well-established business situs rule for taxing intangibles. Pursuant to the business situs rule, a state may, consistent with federal constitutional requirements, levy an appropriately apportioned tax on the trademark royalty income of a business that has purposefully availed itself of the benefits and opportunities of doing business in that state. That is, intellectual property is presumed to have a taxing situs at any location where it is used to realize income. A state may therefore assert income tax nexus with a business located in another state if the business derives trademark royalty income in the taxing state; the creation of a PIC in a state that does not tax the royalty income (hereinafter, "tax haven state") is ineffective in shielding the trademark-holding company from income tax nexus in its affiliate's market states.

Part II briefly discusses the general differences between combined and separate entity income tax reporting, the primary methods by which a multi-state business reports its income to the states in which it operates.

Part III describes how separate entity reporting encourages the formation of PICs so as to avoid income tax on operating income earned in the separate entity states. Part III also explores state responses to this tax avoidance technique. Part III then analyzes the physical presence use tax collection nexus rule and examines the state case law that has addressed the issue of whether the physical presence nexus rule should also apply to the corporate income tax.

Part IV presents an historical overview of the business situs rule for taxing income derived from intangibles. Part IV also explains why the Supreme Court's use tax collection nexus jurisprudence does not preclude application of the business situs rule in taxing trademark royalty income.

Part V discusses several ramifications of the business situs rule as applied to PICs, including implications for the taxation of an author's royalty income and the appropriate apportionment formula for taxing trademark royalty income.

Part VI is a critique of recent proposed federal legislation that would create a physical presence income tax nexus standard.

Part VII provides a broad analytical framework for approaching income tax nexus as applied to electronic commerce.

This Article concludes that a physical presence nexus rule for taxing the income derived from intangibles is inconsistent with well-established and soundly reasoned Supreme Court jurisprudence and would be totally incongruous in our modem, service-based economy. Instead, the business situs rule for taxing intangibles remains the appropriate nexus rule for taxing the income of a PIC. Finally, this Article proposes that nexus should be determined through the use of uniform, easily verifiable economic thresholds that would apply irrespective of the form in which the business provides its services or products.

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