Another state supreme court has sustained imposing a state’s income tax on companies that earn substantial income by deploying intangible assets within the state, even though they have no tangible property, offices, employees, or independent contractors located in the state. Capital One Bk. v. Commissioner, 2009 WL 32700 (Mass. Jan. 8, 2009) and Geoffrey, Inc. v. Commissioner, 2009 WL 32679 (Mass. Jan. 8, 2009).
In Capital One, the Massachusetts Supreme Court found that Capital One Bank, which is domiciled in Virginia, had a substantial presence in Massachusetts and was “engaging in business” there. The main facts upon which the court relied were that Capital One Bank issued credit cards, bearing its name, and made consumer loans to Massachusetts residents (loan approval occurred in Virginia). The Court upheld assessments of Massachusetts’ financial institution excise tax, which is based on net income.
In Geoffrey, decided the same day, the Court sustained assessments of income taxes and also of penalties. This case is much like the well known case of Geoffrey, Inc. v. South Carolina Tax Commission, 313 S.C. 15 (1993). In both cases, Geoffrey, Inc., licensed trade names and trade marks to related Toys ‘R’ Us stores located in the state, and the state succeeded in taxing Geoffrey, Inc., on its royalty income from licensing the intangibles for use in the state.
In sustaining penalties, the Massachusetts court concluded that, in view of the decision of the South Carolina court and Geoffrey’s failure to seek guidance from Massachusetts regarding nexus to tax, Geoffrey, Inc., lacked reasonable cause for failing to file tax returns and pay the tax.
Both Massachusetts cases present the question of constitutional law whether, when a company has no physical presence in a state, the state may impose income taxes on income attributable to deploying intangible assets in the state. In Quill Corp. v. North Dakota, 504 U.S. 298, 317-318 (1992), the Supreme Court, although holding that a physical presence in a state is a necessary predicate to imposing sales and use taxes, all but held that for other kinds of tax some other substantial presence within a state suffices.