The Massachusetts Supreme Judicial Court has held that mere “economic presence” is sufficient to satisfy the Commerce Clause substantial nexus requirement in two long-awaited decisions, Capital One and Geoffrey, issued Jan. 8, 2009.1
In Capital One, the court found that a credit-card bank (and its subsidiary) with no physical presence in the state could have substantial nexus through its economic ties to Massachusetts. Following the reasoning of the West Virginia Supreme Court’s MBNA decision, the court held that by issuing credit cards to thousands of Massachusetts customers and by relying on the Massachusetts Attorney General and courts to uphold its rights within the state, Capital One met the substantial nexus requirement. Thus, the court followed the ever-growing line of state cases that have found that the physical presence standard articulated by the United States Supreme Court in National Bellas Hess and Quill was limited to sales and use taxes.
In a similar case, Geoffrey, the court ruled that an intangible holding company, with no physical presence in Massachusetts, had substantial nexus with Massachusetts through the licensing of intangibles to retailers for use within Massachusetts. Significantly, the court also upheld the Commissioner’s imposition of penalties, finding that Geoffrey lacked reasonable cause when it failed to file returns in Massachusetts.
Because Massachusetts has adopted unitary combined filing for years beginning in 2009, many corporations with a mere economic presence in Massachusetts would have been required to file in Massachusetts beginning in 2009, regardless of the decisions in Capital One and Geoffrey. Thus, the biggest effect of the two decisions will likely be on taxpayers’ Massachusetts filing obligations for years ending before 2009.
Massachusetts now represents the eighth state in which a taxpayer has litigated the economic nexus issue to the state’s highest state court and lost. While taxpayer losses continue to pile up, the U.S. Supreme Court has shown little inclination to grant certiorari in an economic nexus case. Taxpayers with economic nexus exposure, therefore, would be well-advised to consider a variety of options to reduce future liabilities. These options should include a review of negotiated settlement opportunities through published and unpublished state voluntary disclosure programs, which may allow taxpayers to cut off back years and waive some or all penalties. At the same time, taxpayers that have an economic presence in a state should explore potential arguments that could minimize apportionment.
In particular, taxpayers that may have nexus in Massachusetts for periods before 2009, as a result of the Capital One and Geoffrey decisions, should consider taking advantage of Massachusetts voluntary disclosure program before they are contacted by the Massachusetts Department of Revenue. Massachusetts will generally limit the look-back period for non-filing corporations that come forward voluntarily to three years (although the look-back period will be longer for intangible holding companies). In addition, even if taxpayers are ineligible to participate in the Massachusetts voluntary disclosure program, because they have previously been contacted by the Department of Revenue, they still may benefit from an amnesty program that is scheduled for spring 2009, under which the Department of Revenue is authorized to waive penalties.
- Massachusetts has joined a growing list of states in which the highest court has held that a physical presence is not required for income tax nexus.
- Taxpayers with Massachusetts nexus exposure as a result of the Capital One and Geoffrey decisions may still be able to minimize their tax and penalty obligations in Massachusetts by participating in Massachusetts’ voluntary disclosure program or an amnesty program scheduled for spring 2009.