Tax Com'R v. Mbna America Bank, N.A.

• Citation: 640 S.E.2d 226
• Decision Date: 21 November 2006
• Docket Number: No. 33049.,33049.
• Parties: TAX COMMISSIONER OF the STATE of West Virginia, Petitioner Below, Appellee v. MBNA AMERICA BANK, N.A., Respondent Below, Appellant.
• Court: Supreme Court of West Virginia

640 S.E.2d 226

TAX COMMISSIONER OF the STATE of West Virginia, Petitioner Below, Appellee v. MBNA AMERICA BANK, N.A., Respondent Below, Appellant.

No. 33049.

Supreme Court of Appeals of West Virginia.

Submitted September 19, 2006.

Decided November 21, 2006.

Dissenting Opinion of Justice Benjamin January 2, 2007.

Concurring Opinion of Chief Justice Davis January 8, 2007.

Syllabus by the Court

1. "A state tax on interstate commerce will not be sustained unless it: `(1) has a substantial nexus with the State; (2) is fairly apportioned; (3) does not discriminate; and (4) is fairly related to the services provided by the State.' Maryland v. Louisiana, , 101 S.Ct. 2114, 2133, 68 L.Ed.2d 576 (1981)." Syllabus Point 1, Western Maryland Ry. Co. v. Goodwin, 167 W.Va. 804, 282 S.E.2d 240 (1981).

2. The United States Supreme Court's determination in Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), that an entity's physical presence in a state is required to meet the "substantial nexus" prong of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), applies only to state sales and use taxes and not to state business franchise and corporation net income taxes.

Darrell V. McGraw, Jr., Attorney General, Barbara H. Allen, Managing Deputy Attorney General, Katherine A. Schultz, Senior Deputy Attorney General, A.M. "Fenway" Pollack, Assistant Attorney General, Charleston, WV, for the Tax Commissioner.

G. Thomas Battle, Craig A. Griffith, Spilman, Thomas & Battle, Charleston, WV, and Arthur R. Rosen (Pro Hac Vice), Margaret C. Wilson (Pro Hac Vice), Donald M. Griswold (Pro Hac Vice), McDermott, Will & Emery, New York City, for MBNA America Bank.

MAYNARD, Justice:

Appellant MBNA America Bank appeals the June 27, 2005, order of the Circuit Court of Kanawha County that ruled that imposition of West Virginia's business franchise tax and corporation net income tax on MBNA, a Delaware Corporation, for tax years 1998 and 1999, does not violate the Commerce Clause. For the reasons that follow, we affirm the circuit court.

I. FACTS

Appellant MBNA America Bank is a foreign corporation which has its principal place of business and commercial domicile in Wilmington, Delaware. During the two years in question, 1998 and 1999, MBNA had no real or tangible personal property and no employees located in West Virginia. The principal business of MBNA at the relevant times in this case was issuing and servicing VISA and MasterCard credit cards. This business included the extension of unsecured credit to customers who use these credit cards. MBNA promoted its business in West Virginia via mail and telephone solicitation.

As noted above, the two tax years at issue are 1998 and 1999. In 1998, MBNA's gross receipts attributable to West Virginia customers amounted to $8,419,431.00, and in 1999, its gross receipts amounted to $10,163,788.00. For tax year 1998, MBNA paid a West Virginia Business Franchise Tax¹ of $32,010.00 and a West Virginia Corporation Net Income tax² of $168,034.00. For tax year 1999, MBNA paid a Business Franchise Tax in the amount of $42,339.00 and a Corporation Net Income Tax in the amount of $220,897.00.

Thereafter, MBNA filed refund claims with the State Tax Commissioner seeking the return of the business franchise and corporation net income taxes paid for 1998 and 1999, on the basis that the Tax Commissioner lacked jurisdiction over MBNA. The Commissioner denied the refunds based on its finding that MBNA regularly engaged in business in West Virginia under the applicable statutes.³

MBNA subsequently filed an appeal from the Tax Commissioner's decision with the Office of Tax Appeals (hereafter "OTA"). By decision dated October 22, 2004, the Chief Administrative Law Judge (hereafter "ALJ") of the OTA ruled in favor of MBNA and authorized refunds to MBNA of its 1998 and 1999 franchise and corporation net income taxes. The ALJ reasoned that under the Commerce Clause, a state may not subject an activity to a tax unless that activity has a "substantial nexus" with the taxing state. The ALJ further reasoned that a substantial nexus requires a finding that the putative taxpayer has a physical presence in the taxing state, and mere economic exploitation of the market is not sufficient. Because it was agreed that MBNA does not have a physical presence in West Virginia, the ALJ concluded that the State's business franchise and corporation net income taxes could not be imposed on MBNA's activity within the State.

The Tax Commissioner appealed the ALJ's decision to the Circuit Court of Kanawha County. The circuit court reversed the decision of the ALJ. According to the circuit court, physical presence is not necessary in order to show a substantial nexus for purposes of state taxation of foreign corporations. Rather, the circuit court found that MBNA's significant business in the state is sufficient to meet the substantial nexus standard. Therefore, concluded the circuit court, MBNA had a substantial nexus with West Virginia during the tax years in question so that imposition of the State's business franchise and corporate net income taxes on MBNA did not violate the Commerce Clause. MBNA now appeals the circuit court's order.

II. STANDARD OF REVIEW

The Court has previously recognized that a lower court's determination of whether a state tax violates the Commerce Clause is reviewed de novo. See Hartley Marine Corp. v. Mierke, 196 W.Va. 669, 474 S.E.2d 599 (1996) (explaining that review of lower court judgment on whether state legislation interferes with free flow of interstate commerce is de novo).

III. DISCUSSION

The single issue⁴ raised in this appeal is whether application of West Virginia's business franchise and corporation net income taxes to MBNA, a business with no physical presence in this state, violates the Commerce Clause of the United States Constitution.⁵ In Article 1, § 8 of the United States Constitution, Congress is expressly granted the authority "[t]o regulate Commerce with foreign Nations, and among the several States."⁶ The Supreme Court has determined that the Commerce Clause, in addition to being a positive grant of power to Congress, also acts to prevent certain state regulation that interferes with interstate commerce. See South Carolina State Highway Dept. v. Barnwell Bros., Inc., 303 U.S. 177, 58 S.Ct. 510, 82 L.Ed. 734 (1938). This prohibition on state action is known as the "negative" or "dormant" Commerce Clause.

The Supreme Court's interpretation of the dormant Commerce Clause "has evolved substantially over the years, particularly as that Clause concerns limitations on state taxation powers." Quill Corp. v. North Dakota, 504 U.S. 298, 309, 112 S.Ct. 1904, 1911, 119 L.Ed.2d 91 (1992) (citation omitted). In tracing this evolution, the Court has explained:

Our early cases, beginning with Brown v. Maryland, 12 Wheat. 419, 6 L.Ed. 678 (1827), swept broadly, and in Leloup v. Port of Mobile, 127 U.S. 640, 648, 8 S.Ct. 1380, 1384, 32 L.Ed. 311 (1888), we declared that "no State has the right to lay a tax on interstate commerce in any form." We later narrowed that rule and distinguished between direct burdens on interstate commerce, which were prohibited, and indirect burdens, which generally were not. See, e.g., Sanford v. Poe, 69 F. 546 (C.A.6 1895), aff'd sub. nom., Adams Express Co. v. Ohio State Auditor, 165 U.S. 194, 220, 17 S.Ct. 305, 41 L.Ed. 683 (1897). Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 256-258, 58 S.Ct. 546, 549-550, 82 L.Ed. 823 (1938), and subsequent decisions rejected this formal, categorical analysis and adopted a "multiple-taxation doctrine" that focused not on whether a tax was "direct" or "indirect" but rather on whether a tax subjected interstate commerce to a risk of multiple taxation. However, in Freeman v. Hewit, 329 U.S. 249, 256, 67 S.Ct. 274, 278, 91 L.Ed. 265 (1946), we embraced again the formal distinction between direct and indirect taxation, invalidating Indiana's imposition of a gross receipts tax on a particular transaction because that application would "impos[e] a direct tax on interstate sales."

Quill, 504 U.S. at 309-310, 112 S.Ct. at 1911. The Court subsequently abandoned formal distinctions in favor of looking at the practical effects of state taxing statutes. In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), the Court set forth the current test for determining whether a state tax violated the Commerce Clause. This Court recognized the Complete Auto test in Syllabus Point 1 of Western Maryland Ry. Co. v. Goodwin, 167 W.Va. 804, 282 S.E.2d 240 (1981), where we held that,

A state tax on interstate commerce will not be sustained unless it: "(1) has a substantial nexus with the State; (2) is fairly apportioned; (3) does not discriminate; and (4) is fairly related to the services provided by the State." Maryland v. Louisiana, , 101 S.Ct. 2114, 2133, 68 L.Ed.2d 576 (1981).⁷ (Footnote added).

The current issue deals solely with the "substantial nexus" prong of the Complete Auto test. Specifically, we are asked to decide whether the substantial nexus standard can only be met by showing that the putative taxpayer has an actual physical presence in the taxing state. In answering this question, we must consider the Supreme Court's decisions in National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), overruled, in part, Quill supra,⁸ and Quill, the Court's most recent pronouncement on state tax jurisdiction.

Bellas Hess involved an attempt by Illinois to require a mail-order business to collect and pay use taxes on goods purchased within the state. National Bellas Hess (hereinafter "National") was incorporated in Delaware and had its principal place of business in Missouri. It had neither outlets nor employees in Illinois. Twice a year, National mailed catalogues to the company's customers in...