West Virginia Record

Sunday, September 22, 2019

Justices say state can collect income, franchise taxes from out-of-state businesses

By Steve Korris | Jan 12, 2007



CHARLESTON – West Virginia cannot collect sales taxes from businesses in other states but the state can collect income tax and franchise taxes from businesses in other states, the West Virginia Supreme Court of Appeals has decided.

Four of five Justices in a Nov. 15 opinion distinguished between sales taxes and business taxes because they believed the U. S. Supreme Court wanted them to do so, though the U. S. Supreme Court has not made the distinction.

In his dissent, Justice Brent Benjamin wrote, "There is no precedential support whatsoever for the conclusions reached by the majority. None. None at the state level. None at the federal level."

The majority denied $463,280 in refunds to MNBA America Bank, depository of Visa and MasterCard, from 1998 and 1999 payments of corporate income taxes and a franchise tax the state imposes for the privilege of doing business.

MBNA, a Delaware corporation, reported West Virginia profits of $8,419,431 in 1998 and $10,163,788 in 1999, though it lacked any physical presence in the state.

Justice Spike Maynard wrote for the majority that MBNA "continuously and systematically engaged in direct mail and telephone solicitation and promotion in West Virginia."

He wrote, "In light of these facts, this Court has no trouble concluding that MBNA's systematic and continuous business activity in this State produced significant gross receipts ..."

Joining Maynard in the majority opinion were Chief Justice Robin Davis and Justices Larry Starcher and Joseph Albright.

After paying the taxes, MBNA challenged the state tax commissioner's jurisdiction. MBNA applied for an income tax refund of $388,931 and a franchise tax refund of $74,349.

The tax commissioner denied the refunds, finding that MBNA regularly engaged in business in West Virginia.

According to state tax law, regularly engaging in business means obtaining or soliciting business with 20 or more persons in the state, or exceeding $100,000 in gross receipts.

MBNA took its refund application to the Office of Tax Appeals.

In 2004, an administrative law judge granted refunds, finding that under the Commerce Clause of the U. S. Constitution, taxation required physical presence in West Virginia.

The tax commissioner appealed to Kanawha Circuit Court. Judge Louis Bloom reversed the Office of Tax Appeals, finding that significant business satisfied the Commerce Cluase without physical presence.

MBNA carried its case to the Supreme Court of Appeals.

Charleston attorneys Thomas Battle and Craig Griffith represented MBNA, along with Arthur Rosen, Margaret Wilson and Donald Griswold of New York City.

Attorney General Darrell McGraw represented the tax commissioner, along with managing deputy Barbara Allen, senior deputy Katherine Schultz and assistant attorney general Fenway Pollack.

MBNA asked for the same protection the U. S. Supreme Court provided in 1992 to Quill Corporation, a Delaware corporation that sold office equipment to North Dakota residents.

The Court ruled that North Dakota could not tax a business without physical presence in North Dakota.

Maynard wrote that after careful consideration, the majority concluded that Quill's physical presence requirement applied only to sales taxes and use taxes and not to franchise and corporate income taxes.

Straining for support, he wrote that the Quill decision "appears to have expressly limited Quill's scope to sales and use taxes." He wrote that it "clearly implies that Quill applies only to sales and use taxes and not to other types of state taxes."

In place of the test of physical presence, the majority prescribed a test of "significant economic presence." Maynard attributed the phrase to an article in Tax Lawyer.

Maynard closed with a rousing section about a world the framers of the Constitution could not imagine.

He wrote, "When they fashioned the Commerce Clause, they could not possibly have foreseen the complex and varied ways that commerce is conducted today…"

He wrote, "It would be nonsense to suggest that they could foresee or fathom a time when 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 without leaving home."

This disturbed Benjamin.

He wrote, "I must admit to some disdain for the elite nature of 'foreseeability of the framers' arguments. Frequently, such invocations serve no purpose other than an attempt to excuse legislating from the bench."

He wrote, "Caution should by necessity be the watchword when any court seeks to expand the power of the State on the basis of the 'foreseeability of the framers' argument."

He wrote that the majority boldly went where no court had gone before, relying on "legal commentaries with thinly veiled state-favoring taxing agendas…"

He wrote, "…it does not appear that the differences between the use tax collection obligation and liability for income taxation are so significant as to justify different rules under the Commerce Clause."

This disturbed Chief Justice Robin Davis. She filed a concurring opinion, "to respond to several misconceptions contained in the dissenting opinion."

She wrote, "The critical point that the dissent fails to acknowledge is that there is no established precedent, either way, from the United States Supreme Court."

She wrote, "When a company, whether out-of-state or in-state, earns millions of dollars directly as a result of its dealings with West Virginia customers, should it not be compelled to pay taxes?"

She wrote, "If not, then all companies would only deal with out-of-state customers so as to avoid all business franchise and corporation net income taxes."

She wrote, "I see no reason why a small 'mom and pop' store in the State of West Virginia, with gross receipts in the thousands, should be compelled to pay business franchise and corporation net income taxes due to its physical presence in the State, while a large corporation, like MBNA, who makes millions of dollars from West Virginia's economy, would be exempt from such taxes ..."

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