No. 33049 Tax Commissioner of the State of West Virginia v. MBNA America Bank,
N.A.
Benjamin, Justice, dissenting:
There is no precedential support whatsoever for the conclusions reached by the
majority decision. None. None at the state level. None at the federal level. Ignoring that our
consideration here should be the effect of the tax in question on interstate commerce, rather
than the type of tax it is, none of the rhetoric raised by the majority opinion explains why a
state's imposition of a tax on an out-of-state corporation with no presence, tangible or
intangible, on income realized from an out-of-state account does not adversely affect the
nation's interstate commerce, an analysis identified by the United States Supreme Court as
the cornerstone of constitutional jurisprudence. Id.; Allied-Signal, Inc. v. Director, Div. of
Taxation, 504 U.S. 768, 112 S.Ct. 2251, 119 L.Ed.2d 533 (1992). The only state court
decision on point with the specific credit card issues raised herein determined that the the
State of Tennessee exceeded its taxing jurisdiction in attempting to collect taxes from an out-
of-state corporation on income generated by out-of-state credit accounts. J.C. Penney
National Bank v. Johnson, 19 S.W.3d 831 (Tenn. Ct. App. 1999), cert. denied, 531 U.S. 927,
121 S.Ct. 305, 148 L.Ed.2d 245 (2005);
State taxation of companies engaged in interstate commerce must comport with
the Due Process and Commerce Clauses of the United States Constitution. In Quill, the
United States Supreme Court emphasized that separate constitutional analyses are required
in evaluating the validity of state taxes under each provision. Quill, 504 U.S. at 305 (“The
two constitutional requirements differ fundamentally [and] reflect different constitutional
concerns.”). Though both the Due Process Clause and the Commerce Clause require an out-
of-state taxpayer to have established a meaningful nexus with a given state to be the proper
subject of taxation of that state, imposition of a tax on an out-of-state taxpayer may meet the
less stringent nexus requirements of the Due Process Clause, yet fail to meet the more
substantial nexus requirements of the Commerce Clause. Id. (“[W]hile a State may,
consistent with the Due Process Clause, have the authority to tax a particular taxpayer,
imposition of the tax may nonetheless violate the Commerce Clause.”)
Among the most fundamental precepts of state taxation from a Commerce
Clause perspective is that there must be a “substantial nexus” between the interstate activity
sought to be taxed and the taxing State. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274
97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Under Complete Auto, a state tax is permitted under
the Commerce Clause if it (1) is applied to an activity with a substantial nexus with the
taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce,
and (4) is fairly related to the services provided by the state. 430 U.S. at 279. (See footnote 2) While I agree
with my colleagues that the “substantial nexus” prong of this test is ripe for clarification by
the United States Supreme Court, I disagree with them to the extent that the majority opinion
finds insufficient guidance in the existing jurisprudence of the United States Supreme Court
to conclude that the State's present attempt to levy a tax on income realized outside the State
by an out-of-state corporation with no presence, tangible or intangible, in the State violates
the Commerce Clause.
Three years after deciding Complete Auto, the Supreme Court noted in Mobil
Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980),
that for an application of state tax jurisdiction to be constitutional under the Due Process
Clause, there must be: (1) nexus or some minimal connection between the taxing state and
the activity from which the income is derived; and (2) a rational relationship between the
income attributed to the taxing state and the interstate values of the enterprise. 445 U.S. at
436-7. These constitutional requirements were subsequently confirmed in D.H. Holmes Co.
v. McNamara, 486 U.S. 24, 108 S.Ct. 1619, 100 L.Ed.2d 21 (1988), Allied-Signal, and Quill.
Reading Complete Auto and Mobil Oil together, one discerns two aspects to
the consideration of nexus. First, there must be an adequate connection between the taxing
state and the out-of-state corporation upon which a tax is being assessed; i.e., a “presence”
consideration. Second, there must also be an adequate connection between the taxing state
and the event which gives rise to the claimed tax; i.e., a “transaction” consideration.
Prior to the United States Supreme Court's decisions in Allied-Signal and Quill,
some argued for a merging of the Due Process and Commerce Clause nexus considerations
through application of a so-called “economic exploitation” nexus consideration. Quill establishes that, for Commerce Clause purposes, a higher presence nexus is required than the
minimal nexus connection required for Due Process purposes. In other words, a
corporation's “presence” may suffice for taxing jurisdiction under the minimal Due Process
nexus test, but fail to meet the “substantial” higher presence nexus test required by the
Commerce Clause.
We must assume that the United States Supreme Court chose its words
carefully in setting forth the first prong of the Complete Auto test, that the tax in question is
sought by the taxing state to be applied “to an activity” with a substantial nexus with the
taxing state. Even if the majority opinion was correct, which I believe it was not, that
MBNA's interstate activities constitute a sufficiently high showing of presence to permit
taxing jurisdiction under the “substantial” nexus test of the Commerce Clause, the majority
opinion simply reaches the question of whether the State of West Virginia may seek to tax
MBNA as an out-of-state corporation. The majority opinion completely fails to consider the
effect of the tax on interstate commerce. On this second question of whether a state can
impose tax on income generated out-of-state, the majority opinion likewise fails. Here, there
is no question but that the credit card accounts which give rise to MBNA's income are
located outside West Virginia.
I must admit to being intrigued by the majority opinion's description of its
nexus requirement as a “significant economic presence test” as much for its vagueness as for
its embodiment as the antithesis of the “bright line” standards set forth by the United States
Supreme Court in Quill and National Bellas Hess v. Department of Revenue of Illinois, 386
U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), overruled, in part, by Quill. The reality is
that by endorsing a nexus standard which permits West Virginia to assess a tax on an out-of-
state corporation with no property, tangible or intangible, in this state on income realized
from credit accounts maintained and serviced in another state, the majority merges the nexus
requirements of the Due Process Clause and the Commerce Clause and effectively returns
to the merged nexus jurisprudence of 1967, in Bellas Hess, albeit with the minimal due
process requirements now carrying the day for nexus determination rather that the physical
presence requirement of Bellas Hess. While MBNA may meet the minimal nexus
requirement for it to be on notice from a due process basis that it may be subject to taxation,
the majority opinion fails to show how the out-of-state credit account, which is the basis for
the income sought to be taxed, meets the substantial nexus requirements of Complete Auto and Quill. Indeed, one might seriously question the due process basis for West Virginia's
attempted actions herein. (See footnote 3)
The majority opinion attempts mightily to distinguish between forms of taxes,
such as sales and use taxes on the one hand, and income and franchise taxes on the other
hand, in attempting to defend its disregard for the substantial nexus standards required in Quill. The majority's argument appears to be that because the instant case concerns the
taxation of income realized by an out-of-state corporation from accounts in Delaware and
because Quill instead involved use and sales taxes from purchases made by purchasers within
the taxing state with delivery of goods to occur also within the taxing state, this Court is at
liberty to disregard those parts of Quill with which it disagrees. This argument is not
persuasive. In so disregarding the substantial nexus requirements of Quill because Quill involved use and sales taxes, it is interesting that the majority opinion nevertheless fully
embraces the precedent of the United States Supreme Court in Complete Auto, a case which
also involved use and sales taxes _ not income taxes. Perhaps the real dichotomy here may
not be between sales and income taxes, with the relevant question being when is a tax not a
tax, but how the limitations set forth in the United States Constitution can be avoided to
provide the State with a better opportunity to expand its taxing opportunities.
The reality is that the United States Supreme Court has not generally treated
the question of state authority to tax interstate commerce as turning on the specific type of
tax involved. Rather, the United States Supreme Court has focused instead on the effect of
the tax which the taxing state seeks to levy on interstate commerce, regardless of the type of
tax. (See footnote 4) Indeed, there is no immediately clear doctrinal foundation which can be observed for
distinguishing sales and use tax collection on sales between states from income taxes sought
to be collected from out-of-state companies for income realized from out-of-state intangible
accounts simply because the out-of-state corporation availed itself of the United States mails
and other forms of interstate communication. (See footnote 5)
The jurisprudential reality is that the United States Supreme Court has never
held in any state tax case that the nexus requirements of the Commerce Clause can be
satisfied in the absence of a taxpayer's physical presence in the taxing state. The principles
of stare decisis are no less relevant to state taxes in general, than they are to sales and use
taxes particularly, when Congress has the ultimate power to prescribe the appropriate law in
this area. See, Quill, 504 U.S. at 316-17. Cases decided by the United States Supreme Court
both before and after Quill have made it clear that a substantial nexus is required for the
imposition of any state tax on an out-of-state corporation. See, Allied-Signal, 504 U.S. at 778
(“The constitutional question in a case such as Quill Corp. is whether the State has the
authority to tax the corporation at all.”); Commonwealth Edison Co. v. Montana, 453 U.S.
609, 626, 101 S.Ct. 2946, 69 L.Ed.2d 884 (1981) (“Under this threshold test, the interstate
business must have a substantial nexus with the State before any tax may be levied on it.”)
It would be a strange constitutional doctrine that would countenance one nexus standard for
sales and use taxes under the Commerce Clause, and a more relaxed nexus standard for
corporate net income and other state taxes. (See footnote 6)
In the first place, 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. It is certainly difficult to see distinctions that give effect
to physical presence as a necessary element for “substantial nexus” for some taxes and not
for others. Arguably, the collection of use and sales taxes involves no more complexity than
the determination of individual state income tax liability for a multistate corporation involved
in interstate commerce where each taxing state has separate laws and seeks to maximize the
definition of that which each such state contends may be taxed from out-of-state. (See footnote 7) Arguably,
if taxes should be treated differently under the Commerce Clause based on what the taxing
state claims to tax rather than on the tax's actual impact on interstate commerce, one might
well argue that something more than a due process minimal nexus standard should be
considered for non-transactional taxes such as income taxes. Under such an argument, one
might be tempted to argue that the minimum nexus standard for due process considerations
in cases such as Quill, which involved transactions which had a tangible connection with a
given state, were not intended to also apply to income taxes which a taxing state sought to
apply to income generated by accounts located outside the taxing state. As this endeavor
demonstrates, the same speculation which the majority employs to attempt to differentiate
“substantial nexus” standards based on tax types could be alternatively applied in any number
of ways not so attractive to taxing states. Absent precedential support for differentiating
“substantial nexus” standards based upon tax types, this Court should resist the State's
invitation for us to speculate based on semantics and, instead, focus on the effect which the
state tax has on interstate commerce _ here, attempting to levy an income tax on an out-of-
state corporation with no property, tangible or intangible, in West Virginia where the income
in question was generated from credit accounts held outside of this state.
The majority opinion also claims that a variety of changes _ changes which it
claims were not of a type which could be foreseen by the framers of the United States
Constitution _ support their extension of state tax jurisdiction into a realm considered by all
others to be unconstitutional. Initially, I note some measure of foreboding anytime a court
invokes the “foreseeability of the framers'” as a basis for a decision _ fear not because the
rule of stare decisis is about to be followed by the court, but rather because the court is about
to engage in some form of legislative activism for which the only support is political, not
legal. (See footnote 8) Here, the rationale for the majority's “economic exploitation” nexus approach, which
might more accurately be termed a “tax it if you can follow it, even if it is earned in another
state” nexus approach, rings remarkably like the arguments set forth in Justice Fortas' dissent
in Bellas Hess. In his dissent to the 1967 case, Justice Fortas advocated for an “economic
exploitation nexus” test for state taxing jurisdiction. Bellas Hess, 386 U.S. at 761-62. Justice
Fortas argued that Bellas Hess should be subject to the taxing jurisdiction of Illinois because
of its “large-scale, systematic, continuous solicitation and exploitation of the Illinois
consumer market.” Id., at 761. Furthermore, Justice Fortas argued that Bellas Hess enjoyed
“. . . the benefits of, and profits from the facilities nurtured by, the State of Illinois as fully
as if it were a retail store or maintained salesmen therein.” Id., at 762. I find it remarkable
that our Court now endorses this same position _ a position which the United States Supreme
Court has rejected.
Yet our Court has not been the only court to embrace Justice Fortas' arguments.
So too did the North Dakota Supreme Court, in its decision in Quill. Therein, that state
supreme court, also claiming changes in society and economy, stated that “. . . within the
context of contemporary society and commercial practice, we conclude that the concept of
nexus encompasses more than mere physical presence within the state, and that the
determination of nexus should take into consideration all connections between the out-of-state seller and the state, all benefits and opportunities provided by the State, and should
stress economic realities rather than artificial benchmarks.” State by and through Heitkamp
v. Quill Corp., 470 N.W.2d 203, 215 (N.D. 1991), rev'd, 504 U.S. 298, 112 S.Ct. 1904, 111
L.Ed.2d 91 (1992). As Quill demonstrates, when given the chance to again consider the
“economic exploitation” nexus argument, the United States Supreme Court once again
declined.
While the majority herein apparently believes, as did the North Dakota
Supreme Court in Quill, that it may disregard the actual nexus decisions of the United States
Supreme Court in favor of a theoretical nexus argument which favors the State's ability to
reach out and tax income generated out-of-state by an out-of-state corporation with no
presence, tangible or intangible, in West Virginia, I believe the sage reminder of Justice
Scalia (joined in by Justices Kennedy and Thomas) should serve as a reminder of our duty
in considering this case:
We have recently told lower courts that “[i]f a precedent of this
Court has direct application in a case, yet appears to rest on
reasons rejected in some other line of decisions, [they] should
follow the case which directly controls, leaving to this Court the
prerogative of overruling its own decisions.” Rodriguez de
Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 109
S.Ct. 1917, 1921, 104 L.Ed.2d 526 (1989).
Quill, 490 U.S. at 303. We would do well to follow the precedent that is applicable herein
and not attempt to anticipate an overruling by the United Supreme Court of its prior
jurisprudence. The taxes in question are unconstitutional.