On February 24, 2023, the Wisconsin Tax Appeals Commission upheld the Department’s assessment that Skechers’ licensing transaction with its wholly owned subsidiary, Skechers USA Inc. II (SKII), lacked a valid business purpose and economic substance. On the formation of SKII, Skechers entered into a license agreement with its subsidiary that generated significant royalty deductions, which Skechers claimed on its Wisconsin tax returns. The Department disallowed the royalty expense paid by Skechers to SKII, assessing that the intercompany transactions between Skechers and SKII were sham transactions.
In its decision, the Commission agreed with the Department, finding that Skechers was unable to show that these intercompany transactions had a valid business purpose other than tax avoidance. While the Commission acknowledged that there may be some valid, non-tax, intellectual property related benefits to the formation of SKII, none of these benefits were considered by Skechers before the formation of SKII. The Commission further found that the royalty payments had no economic substance as Skechers failed to provide any documentary evidence showing a change to business practices, profitability or intellectual property before and after the creation of SKII and the transactions at issue.
Therefore, the Commission upheld the Department’s assessments, finding that Skechers failed to present persuasive evidence or testimony that it had a valid business purpose for entering into the licensing transaction with SKII that generated royalty deductions claimed on its Wisconsin tax returns and that the licensing transaction had economic substance.