In Capital One Auto Finance, Inc. v. Department of Revenue, Dkt. No. TC 5197 (Oregon Tax Ct. Dec. 23, 2016), the Oregon Tax Court held that physical presence was unnecessary to establish nexus for corporate excise and corporate income tax purposes. As we reported last month, the Ohio Supreme Court similarly upheld the constitutionality of Ohio’s factor presence (or, economic nexus) standard for purposes of the Ohio Commercial Activity Tax. Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760 (Ohio 2016). (See our previous post, Ohio Supreme Court Physical Presence Not Required for Commercial Activity Tax.)
In Capital One Auto Finance, Inc., Oregon joins Indiana, Massachusetts, and West Virginia among states that have recognized an economic nexus standard for banking activities, i.e., finding that an in-state physical presence is not a prerequisite for imposing income tax on banks, specifically credit card issuers. See Comm’r v. MBNA America Bank, N.A., 640 S.E.2d 226 (WV 2006); MBNA America Bank, N.A. v. Indiana Dep’t of Revenue, 895 N.E.2d 140 (Ind. Tax Ct. 2008); Capital One Bank v. Commissioner of Revenue, 899 N.E.2d 76 (Mass. 2009). This decision is consistent with the Oregon nexus regulation effective as of May 2008, which contains an example providing that a credit card company without an in-state physical presence has substantial nexus with Oregon through its in-state lending and solicitation by mail activities.
Capital One Auto Finance, Inc., (“COAF”), a subsidiary of Capital One Financial Corporation (the parent corporation of a federal consolidated group), filed Oregon consolidated excise tax returns for tax years 2006-2008 with its affiliates, including two banks (the “Banks”) that did not have any physical presence in Oregon. In those returns, COAF excluded the Banks’ Oregon gross receipts from the numerator of the apportionment factor. COAF contended that the Banks were not taxable in Oregon because they did not have separate nexus in Oregon.
The Banks had no real or tangible personal property, offices, or employees in Oregon. The Banks did, however, have approximately 500,000 customers in Oregon in each year at issue and, earned approximately $150,000,000 in annual revenue from the use of their branded credit cards and other consumer lending in Oregon. In each year at issue, the Banks also initiated collection lawsuits in Oregon courts, approximately: 2,500 in 2006; 9,800 in 2007; and 9,000 in 2008. The Oregon Tax Court looked to the character, number, and purposefulness of the Oregon transactions; the amount of income generated from Oregon sources; and the usage of Oregon courts for debt enforcement purposes to hold that “Taxpayer’s significant economic activities in Oregon established substantial nexus with Oregon.”
The court addressed the taxpayer’s contention that Quill Corp. v. North Dakota, 504 U.S. 298 (1992), created a physical presence prerequisite for taxation in order to satisfy the Commerce Clause. The court acknowledged that, under Quill, in-state physical presence was a prerequisite to the imposition of sales tax in a manner that satisfied the Commerce Clause; however, the court distinguished sales tax from the Oregon income or excise tax at issue. The court acknowledged that, with respect to sales tax, “[t]he benefit of a bright-line physical presence rule is clear,” as sales tax is collected from customers and “[f]or sales and use taxes, a corporation would…need to know at the first sale what its obligations are and whether it would have substantial nexus with the state such that it would need to collect and remit the tax to the state.”
In distinguishing income tax from sales tax, the court noted that, unlike sales tax, “…with respect to income or excise taxes, there is no burden of collecting the tax from third parties.” The court recognized that the collection and remittance of sales or use taxes could be burdensome “if the seller does not reasonably know whether it will have substantial nexus with the taxing state” before making its first sale into a state and pointed out that income or excise taxes do not have similar challenges because they “are paid based upon the income earned in the state as determined at the end of a tax period and not at the beginning.” Accordingly, the court found that the bright-line physical presence standard of Quill was not applicable to Oregon income or excise tax.
In the wake of the recent sales tax challenges in Alabama and South Dakota to the physical presence standard of Quill (see our previous post, South Dakota and Alabama Hatch Newegg Challenges to Quill), the Oregon Tax Court’s analysis of the viability of a physical presence standard in the sales tax context is timely.