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US Supreme Court Rejects State Tax Challenge,
by Glen Shapiro, LawAndTax-News.com, New York
Thursday, June 25, 2009
The United States Supreme Court has handed victory to the state of Massachusetts
in a case where its right to charge business activity tax was challenged.
The US Supreme Court stated in a decision issued on June 21 that it would not
hear an appeal by Capital One Bank against a Massachusetts revenue authority
decision to tax the company based on the amount of business it conducted in
the state, regardless of the fact that the company had no ‘physical presence.’
Capital One had attempted to argued that because it didn’t have a physical presence
in the state, it was entitled to dispute a USD1.76m tax bill for providing credit card services
and an additional USD159,000 charge for the provision of banking services within
the state’s borders. However, the Massachusetts Supreme Court found that
the company nevertheless had a “substantial nexus” in the state,
and that this could be used as the basis for taxation.
"By issuing credit cards with the 'Capital One' logo to Massachusetts
customers, the Capital banks essentially were guaranteeing payment to merchants
of the amounts charged by those customers, if approved," said the US Supreme
Court.
"The Capital banks bore the risk of a cardholder's non-payment. In the
event of such non-payment, the Capital banks worked with collection agencies
and Massachusetts attorneys to collect delinquent accounts, which included the
filing of civil actions on behalf of the Capital banks in Massachusetts courts,”
the decision said.
Toys R Us subsidiary Geoffrey, Inc., was also challenging the tax law.
The case highlights an increasingly hazardous area of tax law for companies
doing business outside of their state of incorporation – especially for
e-commerce firms selling goods and services over the internet - with state tax
authorities increasingly keen to tax companies with no physical presence in
the state.
The Securities Industry and Financial Markets Association (SIFMA) commented
that the Supreme Court’s decision not to hear the Capital One case was
“disappointing” and part of a “disturbing trend” by
state taxing authorities and legislatures to impose taxes on out-of-state businesses
based on in-state marketing activities “without providing clarity or certainty
as to whether and to what extent operations will create a tax liability in various
states.”
“Without a bright-line test, investment will be discouraged, litigation
costs will rise, and compliance burdens for institutions will increase,”
SIFMA cautioned.
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