The Oregon Tax Court found two banks in the Capital One financial group had economic nexus with Oregon. The court concluded that their Oregon-based receipts should have been included in the numerator of the unitary group’s sales factor.1 This decision comes just one month after the Ohio Supreme Court ruled that an out-of-state online retailer had nexus for purposes of Ohio’s commercial activity tax, based upon its economic presence in the state.2 In both cases, the courts found that the economic activity of the taxpayers, in and of itself, met the substantial nexus requirement found in Complete Auto.3
The Capital One case principally focuses on whether the physical presence requirement under the Commerce Clause in Quill4 applies to excise or income taxes. The Tax Court found that imposing the Oregon tax does not impose an undue burden on interstate commerce, in that income taxes create a less onerous burden than the imposition of a sales tax. Secondly, that there are no settled expectations regarding physical presence with respect to an income tax, unlike the expectations in Quill, provided by Bellas Hess.5 The Court concluded that the activities of the banks consisting of extending credit, loaning money, pursuing collection, and earning revenue in Oregon created substantial nexus under Complete Auto.
Although not mentioned in Capital One, this case closely resembles two other state court decisions on the topic, Tax Commissioner v. MBNA America Bank, N.A.6 and J.C. Penney National Bank v. Commissioner of Revenue, State of Tennessee.7 Both cases considered whether an income tax may be imposed against a bank that has no physical presence in the state. In MBNA, the court concluded that economic presence through the solicitation and providing of credit cards to West Virginia residents met the substantial nexus requirement of Complete Auto. In addition, the West Virginia court concluded that the physical presence requirement in Quill, only applied to sales and use taxes, not income taxes.
However, in J.C. Penney, the court found that although the bank undertook the same activities as in MBNA, physical presence was required to satisfy the Commerce Clause requirement of substantial nexus. The court found that merely soliciting in Tennessee did not rise to the level of substantial nexus. Because the credit facility and the activities associated with granting, collecting, and administering the credit were out of state, Tennessee could not assess an income tax against the revenue generated by the bank.
While the trend seems to be to ignore the physical presence requirement of Quill, at least as it related to income taxes, several commentators, including the court in Capital One, ask for a review of Quill and Bellas Hess by the U.S. Supreme Court. Many note Justice Kennedy’s concurrence in the recent case of Direct Marketing Ass’n v. Brohl.8 However, it should be noted that each time Justice Kennedy has considered limitations on nexus in Quill and Wrigley, 9 his concurrence and dissent appear to call for greater protections from a state asserting nexus. In fact, in his concurrence in Quill, he specifically agrees with the physical presence requirement under stare decisis based on National Bellas Hess. It will be interesting to see if the U.S. Supreme Court takes on this issue or whether it continues to expect the U.S. Congress to take up the issue.
1 Capital One Auto Fin. Inc., v. Dep't of Revenue, Or. T.C., No. TC 5197, December 23, 2016.
2 Newegg, Inc. v. Testa, Ohio, Slip Opinion No. 2016-Ohio-7762, November 17, 2016.
3 Complete Auto Transit, Inc., v. Brady, 430 US 274 (1977).
4 Quill Corporation v. North Dakota, 504 US 298 (1992).
5 National Bellas Hess, Inc., v. Department of Revenue of Illinois, 386 US 753 (1967).
6 220 W VA 163 (2005).
7 19 S. W. 3d 831, Tennessee Court of Appeals (1999).
8 135 S. Ct. 1124 (2015).
9 Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 506 US 214 (1992).
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