Coalition to Protection Interstate Commerce

US Supreme Court Rejects State Tax Challenge

by Glen Shapiro

The United States Supreme Court has handed victory to the state of Massachusetts in a case where its right to charge business activity tax was challenged.

The US Supreme Court stated in a decision issued on June 21 that it would not hear an appeal by Capital One Bank against a Massachusetts revenue authority decision to tax the company based on the amount of business it conducted in the state, regardless of the fact that the company had no ‘physical presence.’

Capital One had attempted to argued that because it didn’t have a physical presence in the state, it was entitled to dispute a USD1.76m tax bill for providing credit card services and an additional USD159,000 charge for the provision of banking services within the state’s borders. However, the Massachusetts Supreme Court found that the company nevertheless had a “ substantial nexus” in the state, and that this could be used as the basis for taxation.

"By issuing credit cards with the 'Capital One' logo to Massachusetts customers, the Capital banks essentially were guaranteeing payment to merchants of the amounts charged by those customers, if approved," said the US Supreme Court.

"The Capital banks bore the risk of a cardholder's non-payment. In the event of such non-payment, the Capital banks worked with collection agencies and Massachusetts attorneys to collect delinquent accounts, which included the filing of civil actions on behalf of the Capital banks in Massachusetts courts,” the decision said.

Toys R Us subsidiary Geoffrey, Inc., was also challenging the tax law.

The case highlights an increasingly hazardous area of tax law for companies doing business outside of their state of incorporation - especially for e-commerce firms selling goods and services over the internet - with state tax authorities increasingly keen to tax companies with no physical presence in the state.

The Securities Industry and Financial Markets Association (SIFMA) commented that the Supreme Court’s decision not to hear the Capital One case was “ disappointing” and part of a “disturbing trend” by state taxing authorities and legislatures to impose taxes on out-of-state businesses based on in-state marketing activities “without providing clarity or certainty as to whether and to what extent operations will create a tax liability in various states.”

“Without a bright-line test, investment will be discouraged, litigation costs will rise, and compliance burdens for institutions will increase,” SIFMA cautioned.