Supreme Court inaction could change nexus rules

The U.S. Supreme Court announced on Monday it would not hear two cases that could have long-ranging effects on the nexus rules followed by state taxing authorities. The cases both involved situations where states assessed income and franchise taxes to companies with no physical presence in the state.

In West Virginia, Bank of America's FIA Card Services, formerly MBNA, was attempting to seek a refund of $460,000 in income and franchise taxes assessed by the state. While Bank of America has no physical presence in West Virginia, the state took the position that the bank had an economic presence in the state through its credit card customers.

In New Jersey, Lanco Inc., a subsidiary of Charming Shoppes Inc., licenses trademarks to women's apparel stores in the state. New Jersey found that to be sufficient grounds to assess income and franchise taxes. Lanco is a Delaware company.

These cases chip away at the nexus requirements established by a previous Supreme Court decision, Quill v. North Dakota, a ruling that stated a company must have a physical presence in a state in order for that state to collect sales and use taxes. Both West Virginia and New Jersey have taken the position that physical presence isn't a requirement for the collection of income and franchise taxes.

"We will probably see a surge in the adoption of taxes by [other] states based on nothing more than the quantum of business that institution does in the state," said David Swayze, a Wilmington, DE-based attorney, in a comment to the Wilmington News Journal.

Some states have already taken a firm position in their nexus laws regarding physical presence being a requirement for collection of income and franchise taxes. States that have not established a position in this area might now rely on the New Jersey and West Virginia cases and the Supreme Court's refusal to hear the cases as precedent.

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