Whole Foods Must Pay $3.2 Million to N.Y., But Not Penalties

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By Che Odom

Whole Foods Market Group Inc. must pay the state of New York nearly $3.2 million for underpayment of taxes related to payments it made to a related entity.

That’s according to a New York Tax Appeals Tribunal decision released Sept. 21. However, the purveyor of natural and organic groceries, won’t have to pay more than a quarter-million dollars in penalties for the underpayment because it acted in good faith, the tribunal said ( In re Whole Foods Mkt. Grp. Inc. , N.Y. Tax App. Trib., DTA No. 826409, 9/11/17 ).

The controversy stems from transactions between two entities owned and controlled by Whole Foods Market Inc., the parent company headquartered in Austin, Texas. Whole Foods Market Group paid royalties to Whole Foods Market IP, LP (WFMIP) for the use of trademarks, trade names, and other intangible assets.

Whole Foods must pay back taxes and interest for tax years ending Sept. 28, 2008, Sept. 27, 2009, and Sept. 26, 2010.

Duty to Report

The tax tribunal ruled that the effect of N.Y. Tax Law Section 211 (4) is to “include a related member in a combined report where there are substantial intercorporate transactions of many types, including royalty payments, with that related member.” Whole Foods Market Group had a duty to report the earnings involved in the royalty payments, the tribunal found.

“Interpreting Tax Law Sections 208 and 211 in the manner that petitioner suggests is inconsistent with both the language and intent of the overall statutory scheme, especially in light of the amendment of Tax Law Section 211 (4) that requires the commissioner to ‘consider and evaluate all activities and transactions of the taxpayer and its related corporations,’ including transactions for rights to trademarks,” the decision said.

However, the tribunal found there was good cause for Whole Foods’ reporting position and that the company wasn’t liable for the penalty for substantial understatement of tax.

Whole Foods “reasonably, but erroneously, interpreted” guidance from the Division of Taxation “as requiring it to back out the intercorporate royalty transactions in arriving at WFMIP’s entire net income for purposes of determining whether 50% of WFMIP’s receipts were from a related member,” according to the decision. “In light of the circumstances, we find that there was good cause for petitioner’s understatement of its tax liability for the tax years in question and that it reported its New York taxable income in good faith.”

Amazon.com Inc. announced June 16 it would acquire Whole Foods Market Inc. for $13.7 billion in a cash deal, giving the online retailer hundreds of physical stores.

To contact the reporter on this story: Che Odom in Washington at COdom@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

Text of the decision is at http://src.bna.com/sNf.

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