Tuesday, December 12, 2006


The case of Tax Commissioner of West Virginia v. MBNA America Bank, N.A. is a very big deal. In that case, the Supreme Court of West Virginia held that the state could impose a corporate income tax on MBNA even though MBNA had no physical presence in West Virginia.

A state cannot impose a tax on a business engaged in interstate commerce unless, inter alia, the business has a substantial nexus with the state. In the sales tax area, in Quill Corp. v. North Dakota, the U.S. Supreme Court has held that there is such nexus only when the seller of taxable goods or services has a physical presence in the state attempting to impose the tax. The question remains open, however, whether substantial nexus sufficient to support the imposition of income tax requires the physical presence of the taxpayer.

In MBNA, the West Virginia Supreme Court held that the actual physical presence of a taxpayer was not required to allow the state to impose income tax. The money quote is the antithesis of the doctrine of original intent:
[P]rior to concluding, we simply wish to acknowledge the great challenge in applying the Commerce Clause to the ever-evolving practices of the marketplace. James Madison, Benjamin Franklin, and the other Framers at the Constitutional Convention who adopted the Commerce Clause lived in a world that is impossible for people living today to imagine. The Framers' concept of commerce consisted of goods transported in horse-drawn, wooden-wheeled wagons or ships with sails. They lived in a world with no electricity, no indoor plumbing, no automobiles, no paved roads, no airplanes, no telephones, no televisions, no computers, no plastic credit cards, no recorded music, and no iPods. Likewise, it would have been impossible for the Framers to imagine our world. When they fashioned the Commerce Clause, they could not possibly have foreseen the complex and varied ways that commerce is conducted today, especially via the internet and electronic commerce. It would be nonsense to suggest that they could foresee or fathom a time in which a person's telephone call to his or her local credit card company would be routinely answered by a person in Bombay, India, or that a consumer could purchase virtually any product on a computer with the click of a mouse without leaving home. This recognition of the staggering evolution in commerce from the Framers' time up through today suggests to this Court that in applying the Commerce Clause we must eschew rigid and mechanical legal formulas in favor of a fresh application of Commerce Clause principles tempered with healthy doses of fairness and common sense. This is what we have attempted to do herein.
Since I represent clients in this area, I will not offer any editorial comment on the West Virginia opinion. I would note, however, that the Court's holding is diametrically opposite to the holding of an intermediate appellate court that considered the same issue and was presented with essentially the same facts. See J.C. Penney Nat'l Bank v. Johnson, 19 S.W.3d 831 (Tenn.Ct.App. 1999). My guess is that this case will either go to the Supreme Court or it will set off a chain reaction of tax litigation in other states that will ultimately have to be resolved by the Supreme Court.

Hat Tip: The Tax Foundation's Tax Policy Blog which criticizes the MBNA opinion.

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