State and Local Taxes Weekly, 10/27/2008, Volume 19, No. 43
Commerce Clause Does Not Require Physical Presence in Indiana to Subject Out-of-State Bank to Financial Institutions Tax
by Margaret Eisler, Esq. (RIA)
The Indiana Tax Court has held that an out-of-state bank with no physical presence in Indiana was subject to the state's Financial Institutions Tax. The bank's economic presence in Indiana satisfied the substantial nexus requirement of the Commerce Clause. (MBNA America Bank, N.A. & Affiliates v. Indiana Department of State Revenue, Ind. Tax Ct., Cause No. 49T10-0506-TA-53, 10/20/2008 .)
MBNA bank. MBNA is a national bank with its principal place of business in Delaware. MBNA issues Visa and MasterCard credit cards to consumers throughout the United States, including Indiana. During the 1992 through 1998 tax years, MBNA did not maintain any place of business within Indiana, nor did its employees enter Indiana on business. MBNA acquired its Indiana customers through telephone and mail solicitation. MBNA extended credit to its Indiana customers and regularly received interest and fees from them. The Indiana Department of Revenue issued a Notice of Assessment to MBNA for the state's Financial Institutions Tax (FIT) for the years at issue. MBNA filed FIT returns for the years at issue and paid the tax in full, then subsequently filed a claim for refund of all FIT taxes paid. The Department denied MBNA's claim for refund, and MBNA initiated a tax appeal.
Financial Institutions Tax. Indiana's FIT is an excise tax on the corporate privilege of transacting the business of a financial institution in Indiana. The FIT is intended to tax both traditional financial institutions (such as banks and savings and loans, etc.), that are transacting business within Indiana, as well as other types of businesses that are deemed to be transacting the business of a financial institution in Indiana.
MBNA and the Department stipulated that MBNA was transacting business as a financial institution because it regularly solicited business from potential customers in Indiana and regularly engaged in transactions with customers in Indiana that involved intangible property, which resulted in receipts flowing to MBNA from within Indiana.
Substantial nexus requirement met. The Commerce Clause prohibits a state from imposing tax obligations on an out-of-state business unless the business has a “substantial nexus” with the taxing state. The Department argued that MBNA's economic presence in Indiana satisfied the substantial nexus requirement. MBNA countered that economic presence was not enough to meet the substantial nexus requirement, but that physical presence was required.
The Indiana Tax Court first determined that the U.S. Supreme Court decisions in National Bellas Hess v. Department of Revenue of Illinois (1967) 386 U.S. 753 , and Quill Corporation v. North Dakota (1992) 504 US 298 , did not apply to the Indiana FIT. The U.S. Supreme Court held in Bellas Hess that some physical presence in the taxing state was required for nexus to exist for the imposition of use tax, and reaffirmed this physical presence rule in Quill. The Indiana Tax Court looked to the U.S. Supreme Court's language specifying that the Bellas Hess and Quill decisions drew a bright-line, physical-presence requirement for sales and use taxes, and to relevant case law, and determined that the U.S. Supreme Court had not extended the physical presence requirement beyond the realm of sales and use taxes.
The Indiana Tax Court then determined the issue to be whether an economic presence can also satisfy the substantial nexus requirement for purposes of the FIT. The Court looked to two other state courts that had analyzed whether the imposition of tax on the income of a company who issued credit cards in the taxing state, but did not have a physical presence therein, was proper. In one case, a Tennessee Court of Appeals determined that Bellas Hess and Quill were controlling, and therefore the company in that case had no franchise/excise tax liability. In the other case, the Supreme Court of West Virginia reached the opposite conclusion, holding that Quill's physical-presence requirement for showing a substantial Commerce Clause nexus applied only to use and sales taxes and not to business franchise and corporation net income taxes. The West Virginia Court provided several reasons for its conclusion, including that the Quill court expressly limited its holding to sales and use taxes and noting that different types of taxes imposed different levels of burdens on interstate commerce. Although neither the Tennessee nor the West Virginia holdings were binding on the Indiana Supreme Court, it found the reasoning of the West Virginia Supreme Court more instructive and persuasive for MBNA, and held that economic presence is sufficient to establish the substantial nexus requirement. Because MBNA had an economic presence in Indiana during the years in issue, it had a substantial nexus with Indiana for purposes of the FIT, and was subject to the FIT.