From the days of Geoffrey through 2011, the states were largely victorious in corporate income tax nexus cases involving “foreign” holding companies. For example, Geoffrey itself lost in Louisiana (2008) (Bridges v. Geoffrey, Inc., 984 So. 2d 115 (La. Ct. App. 2008)), Massachusetts (2009) (Geoffrey, Inc. v. Comm’r of Revenue, 899 N.E. 2d 87 (Mass. 2009)), and Oklahoma (2005) (Geoffrey, Inc. v. Oklahoma Tax Comm’n, 132 P.3d 632 (Okla. Ct. App. 2005)). Other companies such as Lanco Inc in New Jersey (Lanco, Inc. v. Director, 908 A. 2d 176 (N.J. 2006)), Abercrombie & Fitch in North Carolina (A&F Trademarks, Inc. v. Tolson, 605 SE 2d 187 (N.C. App. 2004)), and The Classics Chicago, Inc. in Maryland (The Classics Chicago, Inc. v. Comptroller, 985 A 2d 593 (Md. Ct. Speical App. 2010)) all marked taxpayer losses.
In 2006, the Geoffrey concept was extended by the Supreme Court of West Virginia in Tax Commissioner v. MBNA America Bank, 640 SE 2d 226 (W. Va. 2006).
In MBNA, a credit card company with its headquarters in Delaware had no real or tangible property in West Virginia. For the two years of corporate income tax at issue, MBNA had gross receipts totaling over $18 million. The court concluded that while physical presence was required for sales and use tax purposes, it was not for corporate income tax purposes.
With sparse logic and a few “authoritative law review” articles, the court opined that Quill was limited by the following language:
Although in our cases subsequent to Bellas Hess and concerning other types of taxes we have not adopted a similar bright-line, physical-presence requirement, our reasoning in those cases does not compel that we now reject the rule that Bellas Hess established in the area of sales and use taxes.
One could see where West Virginia is coming from in that this language does imply that the physical presence test of Quill is limited to sales tax cases. State and local tax attorneys and professionals could also take this language at its face–meaning that a bright line rule for other taxes has not been adopted because the Supreme Court has not taken any other state and local tax case on the issue. In short, the court held that if a company has an economic presence in a state then it could be held accountable for state corporate income tax.
The court went on to apply its “economic presence” test to the facts of MBNA. Again, applying sound reasoning, the court ruled that MBNA had economic presence because it had sales attributable to West Virginia in excess of $18 million.
Specifically the court stated:
We now turn our attention to the facts of the instant case to determine whether MBNA had a substantial nexus with this State during the time period in question. The record shows that MBNA continuously and systematically engaged in direct mail and telephone solicitation and promotion in West Virginia. Further, in tax year 1998, MBNA had significant gross receipts attributable to West Virginia customers in the amount of $8,419,431. 00, and in tax year 1999, MBNA had significant gross receipts attributable to its West Virginia customers in the amount of $10,163,788.00. In light of these facts, this Court has no trouble concluding that MBNA’s systematic and continuous business activity in this State produced significant gross receipts attributable to its West Virginia customers which indicate a significant economic presence sufficient to meet the substantial nexus prong of Complete Auto.
It seems the court concluded that if a company has significant sales attributable to West Virginia, then West Virginia should be allowed to collect state corporate income tax. The obvious question arises for multi-state companies – is $10 million in sales “systematic and continuous?” What about $5 million? One can only guess as to what is enough to amount to economic presence.
It is also noteworthy that under nearly identical facts, a Tennessee Appellate Court held struck down an economic nexus statute in J.C. Penney National Bank v. Johnson.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, and Florida probate. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone listed on this page. Please also visit my firm website here.