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Massachusetts Supreme Court Finds Substantial Nexus in Activities of Out-of-State Companies Despite Lack of Physical Presence |
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In two separate decisions, the Massachusetts Supreme Judicial Court, affirming the decisions of the Appellate Tax Board, held that Massachusetts can impose a corporate excise tax and a financial institution excise tax on out-of-state corporations that do not have a physical presence in Massachusetts. In Capital One Bank v. Commissioner of Revenue, the Court concluded that the constitutionality, under the Commerce Clause, of the states imposition of an income-based excise on an out-of-state entity is not determined by the “physical presence” test articulated in Quill Corp. v. North Dakota (1992) 504 US 298 , but by the “substantial nexus” test articulated in Complete Auto Transit, Inc. v. Brady (1977) 430 US 274 . The banks were soliciting and conducting significant credit card business with hundreds of thousands of Massachusetts residents, generating millions of dollars in income for the banks. The Court found that, in essence, the banks were providing valuable financial services to Massachusetts consumers, for which the banks were compensated in the form of interest payments, interchange fees, and finance charges. They could not provide such services in the state without using Massachusetts banking and credit facilities. In addition, the banks addressed customer complaints with the assistance of the Massachusetts Attorney General's office, and, when necessary, they used the Massachusetts court system to recover payment for delinquent accounts. In Geoffrey, Inc. v. Commissioner of Revenue, the court based its resolution of the physical presence issue under the Commerce Clause analysis in its decision in Capital One. The Court concluded that substantial nexus can be established where a taxpayer domiciled in one state carries on business in another state through the licensing of its intangible property that generates income for the taxpayer. More details will be provided in the next edition. (Capital One Bank v. Commissioner of Revenue, Massachusetts Supreme Judicial Court, Dkt. No. SJC-10105, 01/08/2009 ; Geoffrey, Inc. v. Commissioner of Revenue, Massachusetts Supreme Judicial Court, Dkt. No. SJC-10106, 01/08/2009 .)
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