Santa Comes Early for MBNA in West Virginia: State Rejects "Economic Nexus" Theory for Corporate Income and Business Franchise Taxes

MBNA filed refund claims for the tax years in issue, asserting that because it had no physical presence in West Virginia, it lacked "substantial nexus" as required by the Commerce Clause of the United States Constitution. The Office of Tax Appeals agreed, holding that MBNA successfully rebutted the statutory presumption of nexus and was not constitutionally subject to tax.

In an important taxpayer victory, the West Virginia Office of Tax Appeals rejected "economic nexus" principles and recently held that an outof- state credit card company lacked nexus with the state. See MBNA America Bank v. Steager, West Virginia Office of Tax Appeals, Docket Nos. 03-185 RN, 03-186 RFN, 04-074 RFN, 04- 075RN, CCH W.Va. Tax Rptr. ¶ 400-370 (Oct. 22, 2004). The taxpayer, MBNA, is a Delaware bank that issues and services VISA and Mastercard credit cards to customers nationwide. Under West Virginia’s tax statutes, an out-ofstate financial institution such as MBNA is presumed to have nexus for income/franchise tax purposes if it solicits business from twenty or more customers in the state, or if it has $100,000 in gross receipts attributable to West Virginia. MBNA met the statutory standard and thus was presumed to have nexus in West Virginia.

MBNA conducted its credit card business exclusively from outside the State of West Virginia. MBNA had no office, place of business or property of any kind in the state. It had no employees or other representatives who were physically present in West Virginia or who solicited business on its behalf there. Instead, MBNA solicited business by direct mail and over the telephone. None of these marketing activities originated in West Virginia.

MBNA did have several isolated physical contacts that the Tax Commissioner focused on in asserting nexus. Three credit card debt collection actions had been brought on MBNA’s behalf in state court and were pending during the period in issue. MBNA hired attorneys to represent it in these three collection actions.

The nexus presumption contained in the West Virginia statute adopts an economic "exploitation of the market" standard for nexus, rather than a physical presence nexus standard. Indeed, under the statute, soliciting business from just twenty customers in the state would be enough to trigger to income and franchise tax liabilities. MBNA clearly met this test.

However, the ALJ applied Quill and found that the Commerce Clause requires more than more than an economic presence. Rejecting arguments that Quill’s physical presence test applies only to sales and use taxes, the ALJ found that the Quill test applies with equal force to any state tax, including the corporate income and business franchise taxes at issue. Thus, the ALJ concluded that each financial organization having its commercial domicile in another state is entitled to rebut the statutory presumption — that it was regularly engaging in business in the state by having at least the minimum number of customers or in-state receipts — by showing that it lacked a physical presence or otherwise was not "engaging in business" in West Virginia for nexus purposes.

For MBNA, the case was clear. During the years in question, the ALJ found that "MBNA’s only physical presence in West Virginia involved the extremely isolated and sporadic use of the in-state lawyer’s services and courts of the state in the de minimis number of credit card debtcollection actions. This extremely limited type and frequency of physical presence in statecompared with the total volume of the taxpayer’s business with West Virginia customers - constitutes a ‘slightest presence’ and is not ‘significantly’ associated with the taxpayer’s ability to establish and maintain a market in this state . . . "

In this case, the only physical ties related to the in-state debt collection activities, but the frequency did not rise to a level sufficient to create nexus. The ALJ made it very clear that the "no nexus" finding was based on quantitative factors, not qualitative ones, by noting that "[t]his tribunal does believe that a sufficient level of debt-collection work by in-state lawyers, or a sufficient level of use of this state’s courts, on behalf of a taxpayer would constitute a ‘substantial nexus,’ but the same are clearly lacking here."

The ALJ’s analysis on this point contrasts with the analysis of collection activities in Dillard National Bank v. Johnson, No. 960545-III (Tenn. Chancery Ct. Davidson Cty. 2004), a recent Tennessee Chancery Court decision also involving a credit card company. Although the court found that the taxpayer in Dillard had nexus based on contacts other than its debt collection activities, the court found that "approximately 250 judgments [that] were obtained in collection suits filed in Tennessee on behalf of [the credit card company] with respect to the delinquent credit card accounts with its Tennessee customers" were "neither dispositive nor probative to a finding that substantial nexus exists." As a result, the Dillard decision creates a "safe harbor" for debt collection activities in Tennessee.

The MBNA decision did not adopt this qualitative distinction. Although the Tennessee court found that debt collection activities are irrelevant for nexus purpose, such activities will create nexus in West Virginia under the MBNA analysis, if they occur on a sufficiently regular basis.

MBNA is a significant taxpayer win, and not just for those companies engaged in credit card or debt collection activities. By rejecting concepts of economic nexus and refusing to limit Quill to sales/use taxes only, the West Virginia decision will be an important tool for any out-of-state company faced with state attempts to assert nexus in the absence of a physical presence.

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