# Petition for Writ of Certiorari — Capital One One Bank (USA), N.A. v. Commissioner of Revenue of Massachusetts (No. 08-1169)

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_0307%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2009

## Text

Sumer CEUs

Oo 081169 MAR 19 2009
(
OFFICE OF THE CLERK

No.

IN THE
Supreme Court of the United States

CAPITAL ONE BANK (USA), N.A.,
F/K/A CAPITAL ONE BANK, AND CAPITAL ONE, N.A..,
AS SUCCESSOR TO CAPITAL ONE F:S.B.,

Petitioners,
Vv.

COMMISSIONER OF REVENUE OF MASSACHUSETTS,
Respondent.

On Petition For A Writ Of Certiorari
To The Supreme Judicial Court Of Massachusetts

PETITION FOR A WRIT OF CERTIORARI

THEODORE B. OLSON
Counsel of Record
THOMAS G. HUNGAR
INDRANEEL SUR
MISHA TSEYTLIN
GIBSON, DUNN & CRUTCHER LLP
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
(202) 955-8500

Counsel for Petitioners

QUESTION PRESENTED

In National Bellas Hess, Inc. v. Department of
Revenue, 386 U.S. 753 (1967), and Quill Corp. v.
North Dakota, 504 U.S. 298 (1992), this Court held
that the Commerce Clause does not permit a State to
impose a sales or use tax on out-of-state corporations
that have no physical presence in the State, because
such corporations necessarily lack the “substantial
nexus” with the taxing State that is a constitutional
prerequisite to the exercise of the State’s power to
tax the business activities of such out-of-state corpo-
rations. The question presented is:

Whether the Supreme Judicial Court of
Massachusetts erred in holding that a State
may evade the “substantial nexus” require-
ment as explicated in Quill and Bellas Hess
by imposing an income or excise tax on the
very same out-of-state corporations that are
constitutionally immune from sales and use
taxes because they lack a physical presence
in the taxing State.

PARTIES TO THE PROCEEDING
AND RULE 29.6 STATEMENT

The parent company of petitioner Capital One
Bank (USA), N.A. (formerly known as Capital One
Bank) and petitioner Capital One, N.A. (the succes-
sor by merger to Capital One F.S.B.) is Capital One
Financial Corporation, a publicly-traded corporation.
There is no other publicly-held corporation that owns
10 percent or more of the stock of either petitioner.

ill

TABLE OF CONTENTS

Page
Eee IN PRESEN CIDD), ...0..00000..cc0necsersccesscescssccoesese i
PARTIES TO THE PROCEEDING AND
ES 9 8S, ii
Oe. 6 yr ill
Fe Pe FR BIN ED ives scnsccs ceseccscvesiecccsnesscecces vi
Nene cs ciscovbcasnesecssveressesessessassecces 1
sed Chas sepukesdeeessevencsouseseens 1
CONSTITUTIONAL PROVISION INVOLVED ........ 1
Neen ee ne suidunsoodavberevousavers 1
A. Commerce Clause Principles................... 3
B. Factual Back@rounid.............ccccccsssesssressees 5
C. Procedural Background .....................00000 7
REASONS FOR GRANTING THE PETITION ......... 9

I. THE DECISION BELOW
CONFLICTS WITH THIS COURT'S
esd sthgnendakckeossstxenssceseons 9

A. Quill’s Explication Of “Substantial
Nexus” Cannot Be Confined To
The Sales-And-Use-Tax Context........... 10

B. The SJC Contradicted This Court’s
Assessment Of The Economic
Burdens Imposed By Income Taxes ...... 13

C. The Decision Below Conflicts With
This Court’s Rejection Of
Formalism In Commerce-Clause
Se cl cauaaavseacevsenesss 17

D. The SJC Disregarded Quiil By
Ignoring The Constitutionally-

E.

iV

Significant Benefits Of A Bright-
Pe I calito Bef pe tice datsnsebiccicseesevane 18

The SJC Contradicted Quill By

Conflating The Separate Analyses

Under The Due Process And

CI © TIES ooo ccccesnccscesescsccccsessses 19

Il. THE DECISION BELOW
EXACERBATES A GROWING
CONFLICT AMONG STATE
APPELLATE COURTS OVER
APPLICATION OF QUILL TO
pe Gg ee 8, Te ee 21

IL THE QUESTION PRESENTED IS
CRITICALLY IMPORTANT TO
INTERSTATE COMMERCE AND
WARRANTS THIS COURT'S

ep iy 2 Sy 6) Sa 26
A. State Abandonment Of The

Physical-Presence Requirement

Harms The Nation’s Economy............... 26
B. The Problem Has Grown

Dramatically Worse Since The

Denial Of Certiorari In MBNA.............. 30
C. Awaiting Congressional Action

WE Se I oe nvskn kccson bee bccsanescs vnesssncine 33

S| ak BET GURU rasa pct neat np seat Ore edt sR YP I 35

APPENDIX A: Opinion of the Supreme

Judicial Court of Massachusetts .......................0cee08 la
APPENDIX B: Opinion of the Appellate Tax
Board Of MASSACIUSCtES .......00.ccscccccccccoccccscscceccccecses 23a

APPENDIX C: Massachusctts General Laws,
ERY RRR eee tr Oise Omimee anim cere ante 54a

Vv

APPENDIX D: Massachusetts General Laws,
I a cael on oun cagbeninbsdanenkaiel 66a

vl

TABLE OF AUTHORITIES
Page(s)

CASES
A&F Trademark, Inc. v. Tolson,

605 S.E.2d 187 (N.C. Ct. App. 2004),

curt, denied, GAG USS. BZi ([O0B).........cccccccccoscccesceses 25
Allstate Ins. Co. v. Watts,

BRE Bey We oe OOS CLOT, LOOL) ......cccccccscossccesscccccsscces 23
Am. Online, Inc. v. Johnson,

No. M2001-00927COA-R3-CV, 2002 WL

1751434 (Tenn. App. July 30, 2002)............. 23
Barclays Bank PLC v.

Franchise Tax Bd. of Cal.,

os canakeanbtsbancdusetseseescsevsncns 12
Bridges v. Geoffrey, Inc.,

984 So.2d 115 (La. Ct. App. 2008)...................seceeees 25
Burger King Corp. v. Rudzewicz,

471 eo whee snkundivawcasdnseeveansans 20
Commonwealth Edison Co. v. Montana,

ss cucbbguluswaniedass canosivennaes 12
Complete Auto Transit, Inc. v. Brady,

Ce cn cd acawnaveobnaceouseasee 4,17

Geoffrey, Inc. v. Okla. Tax Comm'n,
132 P.3d 632 (Okla. Civ. App. 2008)................ccc00e0 25

vil

Geoffrey, Inc. v. S.C. State Tax Comm’n,

437 S.E.2d 13 (S.C.), cert. denied, 510 U.S.
EE ERS IRE POE AL RTE TTI

Goldberg v. Sweet,

A Ee IE GI ai snkpensunisisivanisudenincasasacensunene

Guardian Indus. Corp. v. Dep't of Treas.,

499 N.W.2d 349 (Mich. Ct. App. 1993).............

House v. Mayo,

EE adits lividieisliircarioness

Hughes v. Oklahoma,

RE re TE oi ctkeescdctusdvasssisennsceaseneescoises

Hunt-Wesson, Inc. v.
Franchise Tax Bd. of Cal.,

ee Fe Oe NE ao crseshcindecisrnetaesutsyancsctavancens

J.C. Penney National Bank v. Johnson,
19 S.W.3d 831 (Tenn. Ct. App. 1999), cert.

dented, 631 U.S. GBT (Q000)........eiccrcressarcoovesseess

Japan Line, Ltd. v. County of Los Angeles,

Be Say Oe FTE Sari cat hckesdescdsaacassnexssasesicxeraeis

Kmart Props., Inc. v.
Taxation & Revenue Dep’t of N.M.,
131 P.3d 27 (N.M. Ct. App. 2001), rev'd on

other grounds, 131 P.3d 22 (N.M. 2005)...........

Lanco, Inc. v. Dir., Div. of Taxation,
908 A.2d 176 (N.J. 2006), cert. denied, 127

pe Ms BE A Fh li aiivka ve estas snnnicecayabnsacanesuacniiuie

aie 29

auees 295

Ege) 25

vill

MBNA Am. Bank, N.A. v.
Ind. Dep’t of State Revenue,

Re Be Be I ogo cnc acccksccccendedesoserasersscnss 22, 23
Meadows v. State,

SASS. W 2G T4B.CTONM. LOGS) ...cccccccccccscvcscescccssccceces 23
Nat'l Bellas Hess, Inc. v. Dep’t of Revenue,

es scsaswacdouenuonekereess 1, 4, 20

Nat'l Geographic Soc’y v.
Cal. Bd. of Equalization,

Oe ee Pe CE i iivrcshsarscescsnnstecsccrcacnasss 13, 14, 15

Norton Co. v. Dep’t of Revenue of I1i.,
er ee IED veccngee cin sncxcsssceccaesssuasedestapaves 12, 14

Nw. States Portland Cement Co. v. Minnesota,
Ce ees as baceutenabbewieks 18

Quill Corp. v. North Dakota,
504 U.S. 298 (1992) ............. 1. 2, 4,6, &. 9, 16, 14, 35

14, 17, 18, 20, 21, 22, 28, 33

Reeves, Inc. v. Stake,
ee Us Suvugniabasdavenidesacds 4

Rylander v. Bandag Licensing Corp.,
18 S.W.3d 296 (Tex. App. 2000)................0cc0000 23, 24

Standard Pressed Steel Co. v.
Wash. Revenue Dep't,
ee ee ccaveacuevedecadivceravecenesdecve 13

State v. Quill Corp.,
470 N.W.2d 203 (N.D. 1991) 5

ee eee eee eee eee eee eee eee eee eee ee |

1X

Tax Comm’r v. MBNA Am. Bank, N.A.,
640 S.E.2d 226 (W. Va. 2006), cert. denied
sub nom. FIA Card Servs., N.A. v. Tax
Comm’r of W. Va., 127 S. Ct. 2997 (2007)............08 21

Tyler Pipe Indus., Inc. v.
Wash. State Dep’t of Revenue,
I SI EBs secu baa peuueaceonnianvaentieeekanlineeeed 11

CONSTITUTIONAL PROVISIONS

rE OB ii ceavevnvctseuiotercoonscoccseactecanasasanunnes 1
STATUTES

Be es PA TI) iv cvisscesscnscnsisehsctiestenssosaereeenee l
EMS wasdaiiccbiaiscncevetstcovaseseenscoamarne 26
CAL. REV. & Tax. CODE § 23101(DX2)......ccccosscecssscoers 32
Coml, Greets TATE INO. KS 1G, SF ocicccccsesccsssvsencntemencteanee 32
DIAG. GEN. LAWS CR. GS, FT osccisssercssssscstsccctpeseennennns 7
MASS. GEN. LAWS Chi. 63, § 2 ...cccccccsccsevccscescesconsees 6, 15
MICH. COMP. LAWS § 208.1200(1)............ccssessscossceeees 32
MICH. STAT. ANN. $ 7.5GB04Z)..0.<ssescocccnsssevcsecesseensasens 24
WH. Ch. 263 GELB. 2), Liew 2007 ciccccsvsrcstccssccccscstsaeeee
N.H. REV. STAT. ANN. § 77-A:1, XII .......ccccssscssesserssesd ld
RULES

Fla. Dep't of Revenue, Advisement 07C1-
007, 2007 WL 4577924 (Oct. 17, 2007)...................388

Xx

Hamilton, Ohio, Ordinance 191.03(b) (2001)........... 16
ee I GMD os cc cacestdncivsseicessossoencvabetesaesezisns 22
Me. Revenue Servs., Maine Tax Alert (Feb.
BOGS), BOGS Wks STIGATSS .nccccrccsccsccccccsesccccccccscocssccces 33
Mich. Revenue Admin. Bulletin 2007-6
Ne se cpupwasdauacvavecuecsetel
N.Y.C. ADMIN. CODE § 11-603 (2008)..............cc cece ee 16

Or. Dep’t of Revenue Substantial Nexus
Guidelines, OR. ADMIN. R. 150-713.010
rs cssmaanssesesbieccaeuesavesenecutel

OTHER AUTHORITIES

Karen J. Boucher & Shona Ponda, Current
Corporate Income Tax Developments (Part
I), THE TAX ADVISER 166 (March 2009),
http://www.aicpa.org/pubs/taxadv/
NN occ occcscsasecensnosersescncnsescoesees 31

Deloitte Development LLC, California
Budget Legislation Contains Significant
Tax Law Changes (Feb. 27, 2009),
http://www.deloitte.com/dtt/cda/doc/content/
us_tax_multistate_California_FLNAL%2002
Ne rs cahaneihibernssuteaceass 32

Marianne Evans & Sarah McGahan,
Economic Nexus and the Uncertainty of
Quill’s Physical-Presence Test, THE TAX
ADVISER (June 2007), Attp://www.aicpa.org/
PUBS/taxadv/online/jun2007/Clinic9.htm ......0.....: 27

xl

Marjorie Gell, Broken Silence:
Congressional Inaction, Judicial Reaction,
and the Need For a Federally Mandated
Physical Presence Standard For State
Business Activity Taxes, 6 PITT. TAX REV.
__ (forthcoming Spring 2009),
http://works. bepress.com/marjorie_gell/1 ....15, 27, 31

Sanjay Gupta & Lillian Mills, Does
Disconformity in State Corporate Income

Tax Systems Affect Compliance Cost
Burdens?, 56 NAT’L Tax J. 355 (2003)...........0.00.00... 28

June Summers Haas, The Michigan
Business Tax Taxpayer: Jurisdiction to
Tax and the Unitary Business Group,
53 WAYNE L. REV. 1351 (2007 ).......ccccccsccesscccssoscceses 32

Jerome R. Hellerstein & Walter Hellerstein,
STATE TAXATION { 6.30 (3d ed. 1998 &
Ns MI ol tnidacn nites arias cia sh acaeemadenbuberecebsteukons 27

Joseph Henchman, Why The Quill Physical
Presence Rule Shouldn’t Go The Way Of
Personal Jurisdiction, 46 STATE TAX NOTES
ee i EE Fas bubrciss trad eticea lndeenieusedetuduceinevesees 27

KPMG LLP, 2008: Year in Review: The
“Economics” of 2008, in TWIST-Q: A
Quarterly Roundup of This Week in State
Tax (Dec. 2008), http:/hjwww.kpmginfo.com/
TWIST/Quarterly/html/Twist_Q December
ISTE LE ORT OE EE ae NE.

Julie Roman Lackner, Note, The Evolution
and Future of Substantial Nexus in State

xl

Taxation of Corporate Income, 48 B.C. L.
Bs le eda ci di as ccnntccepsguicvininennninens 27

Arthur R. Rosen & Jeffrey S. Reed, Stop the
State Tax Grab, LEGAL TIMEs,
I a oii ss sdeiucksndonets 27

Michael S. Schadewald, FIN 48 Forces
Companies to Wrestle with Uncertain State
Nexus Standards, THE CPA JOURNAL ONLINE
(May 2008), http://www.nysscpa.org/
cpajournal/2008/508/essentials/p42.htim.............06+- 29

Megan A. Stombock, Economic Nexus and
Nonresident Corporate Taxpayers: How
Far Will It Go?, 61 Tax LAW. 1225 (2008) ..16, 27, 28

Chris Sullivan, New Hampshire Adopts
Economic Nexus Standard, 45 STATE TAX
re SI Is, PEE Deccsstrigcsescnstasecsvnscvcvascoseoosss 31

Giles Sutton et al., Attributional Nexus,
Flash Title, and the Chaos in Nexus
Standards, 50 STATE TAX NOTES 491
ee ee sdawenbeueatoasccte!

Emma Vandore, OECD Warns Against
Protectionism, ASSOCIATED PRESS,
eS uiskdcdeannvenauenee

David E. Wildasin, State Corporation
Income Taxation: An Economic Perspective
on Nexus, IFIR Working Paper No. 2009-
08 (Feb. 2009), Attp://www.ifigr.org/
publication/ifir_working_papers/IFIR-WP-
I Noe aL Cla a a bonabnkanced 30

Xill

Edward A. Zelinsky, Rethinking Tax Nexus
and Apportionment: Voice, Exit, and the
Dormant Commerce Clause, 28 VA. TAX

ee SE iach cana Zeaciennipaieninnionernosassesacxieenens

Business Activity Tax Simplification Act of

2007, S. 1726, 110th Cong. (2007) ....................

Business Activity Tax Simplification Act of

2009, H.R. 1083, 111th Cong. (2009)................

Internet Tax Fairness Act of 2001, H.R.

2526, 107th Cong. (2001).........c.cccceseseceeeeeseeeerees

New Economy Tax Fairness Act, S. 664,

ee I ID ssi cnnnisineeconcetevcensencndonsonses

United States Model Income Tax

Convention of November 15, 2006 ....................

deltas 30

ee 29

PETITION FOR A WRIT OF CERTIORARI

Capital One Bank (USA), N.A., formerly known
as Capital One Bank, and Capital One, N.A., as suc-
cessor to Capital One F.S.B., respectfully petition for
a writ of certiorari to review the judgment of the Su-
preme Judicial Court of Massachusetts.

OPINIONS BELOW

The opinion of the Supreme Judicial Court of
Massachusetts (App. la-22a) is reported at 899
N.E.2d 76. The opinion of the Appellate Tax Board
(App. 23a-53a) is not published but is electronically
reported at 2007 WL 1810723.

JURISDICTION

The judgment of the court below was entered on
January 8, 2009. The jurisdiction of this Court is in-
voked under 28 U.S.C. § 1257(a).

CONSTITUTIONAL PROVISION INVOLVED
The Commerce Clause provides:

The Congress shall have Power ... To regu-
late Commerce with foreign Nations, and
among the several States, and with the In-
dian Tribes.

U.S. Const. art. I, § 8. The pertinent Massachusetts
statutory provisions are reprinted in an appendix to
this petition. App. 54a-69a.

STATEMENT

This case presents a recurring question of ex-
traordinary significance to the Nation’s economy.
Notwithstanding this Court’s holdings in National
Bellas Hess, Inc. v. Department of Revenue, 386 U.S.
753 (1967), and Quill Corp. v. North Dakota, 504
U.S. 298 (1992)—namely, that the “substantial

2

nexus” required by the Commerce Clause is absent
when a State attempts to impose sales or use taxes
on out-of-state corporations that have no physical
presence in the State—a number of state appellate
courts (including the Supreme Judicial Court of
Massachusetts (SJC) below) have now held that
States may easily evade that constitutional prohibi-
tion through the simple artifice of taxing the same
economic activities by means of income or excise
taxes instead of sales or use taxes. Growing num-
bers of state legislatures and tax collectors have cho-
sen to follow that same course. The resulting heavy
burdens on interstate commerce and disincentives
for economic activity that reaches across state lines
will continue to worsen absent this Court’s interven-
tion. Certiorari is warranted to ensure that the prin-
ciples enunciated in this Court’s decisions are not
flouted by revenue-greedy States to the detriment of
interstate business activities and, ultimately, the
Nation’s economy as a whole.

Further review is necessary in this case, for
three reasons. First, the decision below is funda-
mentally inconsistent with this Court’s explication of
the “substantial nexus” requirement in Quill. That
case reaffirmed the physical-presence requirement
and held that a business “whose only contacts with
the taxing State are by mail or common carrier lacks
the ‘substantial nexus’ required by the Commerce
Clause.” 504 U.S. at 311. To be sure, Quill con-
strued the “substantial nexus” requirement in the
context of a use tax, but there is no principled basis
for applying a different constitutional rule to other
types of taxes so far as “substantial nexus” is con-
cerned. The physical-presence requirement should
govern the income tax at issue here, and there is no
warrant for the SJC’s contrary conclusion.

3

Second, the decision below sharpens a conflict
among state appellate courts over state authority to
tax out-of-state corporations with no in-state physi-
cal presence. While the SJC joins state courts that
have artificially constricted Quill to the sales-and-
use-tax context and adopted a vague economic-nexus
approach for income taxes, other appellate courts
have correctly understood Qui/l as a binding inter-
pretation of the “substantial nexus” requirement that
is fully applicable to income and excise taxes. The
unacceptable result of that growing discord is that
the meaning of the Federal Constitution shifts as
business activity crosses borders, from States that
respect physical presence to those that do not. This
Court’s review is necessary to resolve that conflict.

Finally, the decision below intensifies the al-
ready enormous practical difficulties that multistate
businesses confront in ascertaining and satisfying
their tax obligations to States with which they have
no tangible connection. The problems posed by state
departures from the physical-presence requirement
have grown more severe since the last time this
Court considered the issue two years ago, and indeed
have been exacerbated by this Court’s denial of re-
view at that time. The time to decide the scope of
Quill is now.

A. Commerce Clause Principles

This Court has repeatedly held that the Com-
merce Clause prohibits the States from unduly bur-
dening interstate commerce. “The few simple words
of the Commerce Clause ... reflected a central con-
cern of the Framers that was an immediate reason
for calling the Constitutional Convention: the convic-
tion that in order to succeed, the new Union would
have to avoid the tendencies toward economic Bal-

4

kanization that had plagued relations among the
Colonies and later among the States under the Arti-
cles of Confederation.” Hughes v. Oklahoma, 441
U.S. 322, 325 (1979).

One burden that States are strongly tempted to
impose is taxation that “impedles] free private trade
in the national marketplace.” Reeves, Inc. v. Stake,
447 U.S. 429, 437 (1980). In Complete Auto Transit,
Inc. v. Brady, 430 U.S. 274 (1977), th’: Court articu-
lated the standard for evaluating v.nen such state
taxes violate the Commerce Clause. Under that test,
a state tax is permissible only if the “tax [1] is ap-
plied 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.”
Id. at 279 (emphasis added).

This case concerns the application of Complete
Auto’s “substantial nexus” requirement to state taxa-
tion of businesses that have no in-state physical
presence. Before Complete Auto, this Court con-
fronted such a tax in National Bellas Hess, Inc. v.
Department of Revenue of Illinois, 386 U.S. 753
(1967), holding that a State could not impose a use
tax on a mail-order company with no in-state physi-
cal presence. The Court explained that imposing
sales and use taxes on out-of-state firms would place
“unjustifiable local entanglements” on _ interstate
commerce.” Id. at 759-760.

In Quill Corp. v. North Dakota, 504 U.S. 298
(1992), this Court eliminated any doubt that Bellas
Hess retained its vitality when analyzed using Com-
plete Auto’s “substantial nexus” terminology. The
North Dakota Supreme Court had held that the
State could impose a use tax on a mail-order office

5

supply retailer with no in-state outlets or personnel
because, in its view, Bellas Hess’s bright-line re-
quirement had been rendered “obsole[te]” by Com-
plete Auto and “the tremendous social, economic,
commercial, and legal innovations” that had taken
place since Bellas Hess. State v. Quill Corp., 470
N.W.2d 203, 208 (N.D. 1991). This Court reversed,
reaffirming the physical-presence requirement. The
Court held that the Commerce Clause’s “substantial
nexus” prerequisite is not satisfied when the non-
domiciliary taxpayer has no property or personnel
within the State, even though it may transact busi-
ness with state residents through the channels of in-
terstate commerce. 504 U.S. at 314-318.

B. Factual Background

1. At all times relevant here, petitioner Capital
One Bank (now Capital One Bank (USA), N.A.) was
a bank chartered and domiciled in Virginia that of-
fered credit cards to its customers. App. la-3a. Peti-
tioner Capital One F.S.B. (now Capital One, N.A.)
was a federally-chartered savings bank that offered
secured and unsecured credit cards and unsecured
installment and consumer home loans. App. 3a. Pe-
titioners issued general-purpose credit cards to Mas-
sachusetts residents as part of national marketing
efforts. App. 3a-4a. Petitioners did not own or lease
any real property in Massachusetts, nor did they own
any other in-state property. App. 3a. Moreover, pe-
titioners had no employees, agents, or independent
contractors in Massachusetts. Id.

As members of Visa and MasterCard, two asso-
ciations of banks, petitioners were “issuing banks”
that issued credit cards bearing the “Capital One”
name and branded with a Visa or MasterCard logo
as appropriate. App. 4a-5a. Other members of the

6

associations served as “acquiring banks” that entered
into contractual arrangements with merchants that
accepted Visa or MasterCard. App. 6a-7a. Credit
card transactions were enabled by the transmission
of customer and bank information over electronic
computer and telephone networks that cross state
lines—that is, by the transmission of information
through channels of interstate commerce. /d.

When their customers paid for goods or services
with their credit cards, petitioners effectively guar-
anteed payment to the merchants and thus bore the
risk of non-payment by the customers. App. 7a. Pe-
titioners’ primary assets consisted of unsecured con-
sumer loans arising from customer use of Capital
One credit cards. App. 25a. Petitioners generated
interest and other income through finance charges
on outstanding loan receivables, fees from credit card
transactions, and interest on investments. Id.

Petitioners worked with collection agencies and
attorneys to collect delinquent customer accounts.
App. 7a & n.10. Capital One Services, Inc., an affili-
ate of petitioners’ parent, occasionally engaged at-
torneys in Massachusetts to bring actions against
defaulting customers. App. 29a.

2. The Massachusetts financial institution excise
tax (FIET) statute provides: “[E]very financial insti-
tution engaged in business in the commonwealth
shall pay, on account of each taxable year, an excise
measured by its net income determined to be tax-
able ....” Mass. GEN. Laws ch. 63, § 2 (App. 66a-
69a). FIET liability is based on a percentage of a fi-
nancial institution’s net income. /d.}

! Respondent agreed with petitioners’ characterization of the
FIET as a “tax” on petitioners’ income, even though in Massa-

7

The FIET applies to any financial institution
that “regularly engagles] in transactions with cus-
tomers in the commonwealth that involve intangible
property and result in income flowing to the taxpayer
from residents of the commonwealth,” even if the
taxpayer has no physical presence in Massachusetts.
MASS. GEN. LAWS ch. 63, § 1 (App. 56a). A financial
institution is presumed to be taxable if it engages in
transactions with 100 residents or has $10 million in
assets or $500,000 in receipts attributable to Massa-
chusetts. Id.

C. Procedural Background

1. Respondent, the Commissioner of Revenue of
Massachusetts, sought to impose the FIET on Capi-
tal One Bank for the years 1995 through 1998, and
on Capital One F.S.B. for the years 1996 through
1998. App. la-2a. After respondent assessed FIET
liability of $1,758,454 against Capital One Bank and
$159,075.25 against. Capital One F.S.B., petitioners
applied for abatement, arguing that the Commerce
Clause prohibited the assessments. App. 8a-9a. Re-
spondent denied petitioners’ applications. App. Qa.

[Footnote continued from previous page}

chusetts there are “historical differences between a tax and an
excise.” App. la-2an.2. In any event, where, as here, a state
tax is measured by a share of a taxpayer’s net income, the
statutory designation of that tax is irrelevant for purposes of
the “substantial nexus” inquiry—regardless of whether the tax
is called an excise, franchise tax, business-license tax, gross-
receipts tax, value-added tax, or capital-stock tax. Cf Hunt-
Wesson, Inc. v. Franchise Tax Bd. of Cal., 528 U.S. 458, 464
(2000) (a “tax on sleeping measured by the number of pairs of
shoes you have in your closet is a tax on shoes”) (internal quota-
tion marks omitted).

8

2. The Appellate Tax Board upheld respondent’s
denial of abatement. App. 23a-538a. The Board re-
jected petitioners’ claim that Massachusetts could
not, consistent with the Commerce Clause, impose
the FIET on petitioners’ income because they had no
in-state physical presence and therefore lacked a
“substantial nexus” with Massachusetts. App. 30a-
32a.

3. The SJC affirmed. App. la-22a. Petitioners’
core argument, the SJC stated, “is that the board er-
roneously limited to the sales and use tax context the
United States Supreme Court’s holding in Quill...
that the Federal commerce clause precludes a State
from imposing tax obligations on an out-of-State cor-
poration that has no physical presence in the taxing
State.” App. lla.

The SJC disagreed, holding instead that Quill
had a “narrow focus on sales and use taxes for the
physical presence requirement,” a requirement that
“did not apply to the imposition of other types of
State taxes.” App. 17a. The SJC relied heavily on
dicta in Quill, in which this Court remarked that “it
had not, ‘in [its] review of other types of taxes, ar-
ticulated the same physical-presence requirement
that Bellas Hess established for sales and use taxes,”
and that “concerning other types of taxes, [it had]
not adopted a similar bright-line, physical-presence
requirement.” App. 16a-17a (quoting 504 U.S. at.
314, 317 (alterations in original)). In addition, the
SJC reasoned that for “substantial nexus” purposes,
state income taxes on non-domiciliary corporations
are constitutionally distinguishable from sales and
use taxes because the former are per se less burden-
some than the latter: “An income-basecd excise,” the
SJC opined, “typically is paid only once a year... to
one taxing jurisdiction at the State level, and the

9

payment of such an excise does not entail collection
obligations vis-a-vis consumers.” Jd. at 20a n.17.

Although it rejected physical presence as a pre-
requisite, the SJC identified no method for determin-
ing what degree of connection short of physical pres-
ence counts as a “substantial nexus.” Instead, the
SJC expressed agreement with another court’s con-
clusion that a mere “significant economic presence”
within the state was sufficient to justify income taxa-
tion. App. 20a.

The SJC then announced that the “substantial
nexus” requirement was satisfied in this case, be-
cause petitioners “were providing valuable financial
services to Massachusetts consumers” by “using
Massachusetts banking and credit facilities”; peti-
tioners “addressed customer complaints with the as-
sistance of the Massachusetts Attorney General’s of-
fice”; and petitioners “used the Massachusetts court
system to recover payment for delinquent accounts.”
App. 22a. The SJC thus upheld taxation of petition-
ers’ income under the Commerce Clause (id.), based
in part on the view thai the entire “notion of physi-
cal presence” was “anachronistic” —“even more” so
“today than it was in 1992,” when Quill was decided
(id. at 21a n.18 (quoting 504 U.S. at 327-328 (White,
J., dissenting in part)).

REASONS FOR GRANTING THE PETITION

I. THE DECISION BELOW CONFLICTS WITH
THIS COURT’S PRECEDENTS

The Supreme Judicial Court’s resolution of the
important constitutional question presented is irrec-
oncilable with the reasoning employed by this Court
in Quill and other cases. In particular, the SJC
(1) artificially constricted the physical-presence rule

10

to the sales-and-use-tax context, overlooking Quill’s
significance as an authoritative construction of Com-
plete Auto’s universal “substantial nexus” require-
ment; (2) improperly ignored the heavy burdens on
interstate commerce imposed by state income taxes,
in an attempt to justify preferential treatment of
such taxes; (3) impermissibly elevated form over sub-
stance in treating sales and use taxes as entirely dis-
tinct from income taxes for purposes of assessing
“substantial nexus”; (4) failed to consider the practi-
cal benefits for interstate commerce of adherence to a
clear physical-presence standard rather than the
SJC’s vague economic-nexus approach; and (5) con-
flated the “substantial nexus” inquiry under the
Commerce Clause with the “minimum contacts” in-
quiry under the Due Process Clause. This Court’s
review is necessary to address the SJC’s profound
misinterpretation of the “substantial nexus” prong,
and to clarify that Quill’s physical-presence require-
ment extends beyond the narrow corner into which

the SJC confined it.

A. Quill’s Explication Of “Substantial Nex-
us” Cannot Be Confined To The Sales-
And-Use-Tax Context

Quill held that the physical-presence require-
ment for state taxation of non-domiciliaries, as ar-
ticulated in Bellas Hess, correctly implements the
constitutional mandate that the taxpayer must have
a “substantial nexus” with the taxing State. Quill
did not explicitly resolve the question whether the
physical-presence requirement extends to taxes other
than sales and use taxes, instead leaving that ques-
tion for later consideration (504 U.S. at 314, 317),
but the Court’s reasoning points inexorably to an af-
firmative answer to that question. Quzd/ reaffirmed

Ll

that “a vendor whose only contacts with the taxing
State are by mail or common carrier lacks the ‘sub-
stantial nexus’ required by the Commerce Clause.”
Id. at 311. Indeed, this Court has never construed
the Constitution to authorize a State to impose any
tax on an out-of-state entity that neither owns any
property within the State nor maintains any repre-
sentatives (whether employees or independent con-
tractors) within the State.

The logic of Quill is clear: The Commerce Clause
requires a “substantial nexus” for al/ state taxation,
and a “substantial nexus” requires that a non-
domiciliary corporation have a physical presence in
the State before it may be taxed. Mere contact with
residents of the State through the channels of inter-
state commerce, such as “by mail or common carrier,”
will not suffice. Jd. Connections between a taxpayer
and a State that are equivalent to those present in
Bellas Hess or Quill do not constitute “substantial
nexus,” a principle that logically applies with equal
force to all state taxation of interstate transactions,
whether denominated sales, use, income, or excise
taxes. Accordingly, while Quill applied Commerce-
Clause principles to a use tax, lower courts are not
free to confine the physical-presence requirement to
that context alone.

Defying those principles, the SJC held that Bel-
las Hess and Quill are limited to their facts and that
the physical-presence requirement has a “narrow fo-
cus on sales and use taxes.” App. 17a. No precedent,
however, justifies subjecting sales and use taxes to
sul generis constitutional analysis. Instead, this
Court has regularly cited Bellas Hess when examin-
ing taxes outside the sales-and-use class under Corn-
plete Auto, indicating that the physical-presence rule
applies more broadly. See Tyler Pipe Indus., Inc. v.

12

Wash. State Dep’t of Revenue, 483 U.S. 232 (1987)
(business and occupation taxes); Commonwealth
Edison Co. v. Montana, 453 U.S. 609 (1981) (sever-
ance taxes); Goldberg v. Sweet, 488 U.S. 252 (1989)
(excise taxes). That is, Bellas Hess and Quill ad-
dressed use taxes, but announced a rule applicable to
state taxation generally. See Commonwealth Edison,
453 U.S. at 626 (citing Bellas Hess in severance-tax
case to support statement that “the interstate busi-
ness must have a substantial nexus with the State
before any tax may be levied on it”) (emphasis in
original). In that respect, Bellas Hess and Quill re-
semble Complete Auto, which addressed sales taxes
but also established a rule applicable to income
taxes. See, e.g., Barclays Bank PLC v. Franchise Tax
Bd. of Cal., 512 U.S. 298, 310-311 (1994).

This Court itself, even before Bellas Hess, ap-
plied the physical-presence requirement to taxes
analogous to the income tax at issue here. In Norton
Company v. Department of Revenue of Illinois, 340
U.S. 534 (1951), [Illinois imposed a gross-receipts tax
(a tax on a firm’s total revenues) on an out-of-state
corporation. This Court explained that “[w]here a
corporation chooses to stay at home in all respects
except to send abroad advertising or drummers to
solicit orders which are sent directly to the home of-
fice for acceptance, filling, and delivery back to the
buyer, it is obvious that the State of the buyer has no
local grip on the seller.” Id. at 537 (emphasis added).
Because the corporation had a Chicago branch, how-
ever, the Court held that Illinois could tax earnings
produced through that branch, but not earnings pro-
duced through direct-mail orders to the firm’s out-of-
state headquarters. J/d. at 537-539. As in Bellas
Hess and its progeny, the dispositive question for
Commerce-Clause purposes in Norton was whether

13

the taxpayer had a physical presence in the taxing
state.?

The SJC thus had no principled basis for cabin-
ing Quill to the sales-and-use context. The logic of
Quill applies to income taxation as well. This
Court’s review is required to ensure that state courts
give full effect to the necessary implications of the
“substantial nexus” principles enunciated in Quill.

B. The SJC Contradicted This Court’s
Assessment Of The Economic Burdens
Imposed By Income Taxes

The SJC also disregarded this Court’s mandate
that proper analysis of a Commerce-Clause challenge
to a state tax requires consideration of the true bur-
dens imposed by the tax on firms engaged in inter-
state commerce. As this Court explained, the pur-
pose of the “substantial nexus” requirement is to
“limit the reach of state taxing authority so as to en-
sure that state taxation does not. unduly burden in-
terstate commerce.” Quzil/, 504 U.S. at 313.

2 Accord Standard Pressed Steel Co. v. Wash. Revenue Dep't,
419 U.S. 560, 562 (1975) (holding that imposition of gross-
receipts tax on out-of-state corporation was justified, not by
substantial sales in State, but because the corporation had an
“employee ... with a full-time job within the State”); see also
Nat'l Geographic Soc’y v. Cal. Bd. of Equalization, 430 U.S. 551,
557 (1977) (“Standard Pressed Steel held that maintenance in
the taxing State of u single employee ... whose primary re-
sponsibility was to consult with the Washington-based cus-
tomer regarding its anticipated needs for the out-of-state sup-
pliecr’s product[] established a sufficient. relation to activities
within the State producing the gross receipts as to support im-
position of the tax.”).

14

The Quill Court recognized that when sales and
use taxes are concerned, the obligations imposed on
out-of-state firms would be “unduly burden[some]” in
the absence of a physical-presence rule. Jd. at 313-
316 & n.6. The SJC gave short shrift to those con-
cerns in this case, blithely opining that income taxes
impose less substantial burdens on out-of-state cor-
porations than do sales and use taxes. App. 19a-2la
& n.17. That conclusion conflicts directly with this
Court’s precedents, which make clear that state in-
come taxes place a significantly greater burden on
firms engaged in interstate commerce than do the
sales and use taxes at issue in Quill and Bellas Hess.

In particular, this Court has recognized that the
burden on out-of-state firms is greater from income-
based taxes than from sales and use taxes because
the latter require only that firms collect the levies
from purchasers, whereas income taxes require busi-
nesses to pay the tax out of their own earnings and
also to comply with far more complicated and de-
tailed administrative and computational rules. See
Nat'l Geographic, 430 U.S. at 557-558 (concluding
that “(tlhe case for the validity of”? a “use tax” is
“stronger” than that for a tax on an out-of-state cor-
poration’s revenues, because “[t]he out-of-state
seller” bears only “the administrative [burden] of col-
lecting” the use tax); Norton, 340 U.S. at 537
(concluding that “a state imposing a sales or use tax
can more easily meet this burden” of establishing the
requisite nexus “because the impact of those taxes is
on the local buyer or user,” unlike a gross-receipts
tax).

The financial obligation imposed by income taxes
is thus far more onerous than that imposed by sales
taxes, not only because income taxes fall directly on
and must be paid by the out-of-state business out of

15

its own earnings, but also because income taxation
by multiple jurisdictions can lead to double taxation.
See Nat'l Geographic, 430 U.S. at 557-558 (describing
the “risk of double taxation” as one reason why in-
come taxes are more constitutionally problematic
than sales taxes). The economic-nexus approach
adopted by the court below would greatly exacerbate
the risk of double taxation by making it far more
likely for businesses—even relatively small busi-
nesses doing interstate business- ‘to be subjected to
taxation in multiple States.

The administrative burdens of complying with
numerous and disparate income taxation regimes are
also onerous. Each jurisdiction can have its own ap-
portionment formulae, sourcing definitions, income
classification, depreciation, disclosure requirements,
deductions and various other statutory require-
ments—and these requirements can vary widely
among jurisdictions. For example, the tax at issue in
this case requires compliance with pages of statutory
apportionment rules alone. See Mass. Gen. Laws,
ch. 63, §2 (App. 66a-69a); see generally Marjorie
Gell, Broken Silence: Congressional Inaction, Judi-
cial Reaction, and the Need For a Federally Man-

3 Because of differences in state apportionment rules, a tax-
payer physically located in one State that becomes subject to
another State’s taxing power on an “economic nexus” theory
may be taxed on income that is already being taxed by its domi-
ciliary State. Indeed, Capital One, N.A., faced that situation
here, because the income that Massachusetts seeks to tax was
already taxed by Virginia. Although this Court has kept sub-
stantial-nexus analysis distinct from fair-apportionment analy-
sis, the enhanced risk of double taxation posed by the “economic
nexus” theory confirms the need for a physical-presence re-
quirement in order to avoid unduly burdening interstate com-
merce.

16

dated Physical Presence Standard For State Business
Activity Taxes, 6 PITT. TAX REV. __, _ (manuscript at
22) (forthcoming Spring 2009) (requiring physical
presence is even more appropriate for business-
activity taxes than for sales and use taxes “because
of the sheer number and complexity of different
types of business activity taxes as compared to sales
and use taxes”). In addition to States, various mu-
nicipalities—including localities of very different
sizes, ranging from New York City (N.Y.C. ADMIN.
CODE § 11-603 (2008)) to Hamilton, Ohio (Ordinance
191.03(b) (2001))—have their own corporate income
taxes.

Consequently, the burden of complying with the
various requirements of the numerous income-taxing
jurisdictions, each with its own unique and often
contradictory requirements, can become a crushing
one for multi-state corporations or small businesses
selling products or services nationwide (for example,
through the Internet). See Megan A. Stombock, Eco-
nomic Nexus and Nonresident Corporate Taxpayers:
How Far Will It Go?, 61 TAx LAW. 1225, 1241 (2008).
Indeed, abandoning the physical-presence require-
ment “would require taxpayers to analyze their ac-
tivities on a jurisdiction-by-jurisdiction, entity-by-
entity, year-by-year, and _ issue-by-issue basis
through extensive record maintenance, timely filings
in support of returns, potential simultaneous audits,
and negotiations and litigations in multiple jurisdic-
tions.” Jd. Adhering to Quill would eliminate the
burdens and uncertainty fostered by the SJC’s ap-
proach.

17

C. The Decision Below Conflicts With This
Court’s Rejection Of Formalism In Com-
merce-Clause Analysis

The upshot of the SJC’s artificial constriction of
Quill is that States, by designating a tax as an in-
come tax rather than a sales and use tax, will be able
to evade the Constitution’s physical-presence re-
quirement for taxation of out-of-state businesses.
Under the SJC’s view, the very same activities that
are constitutionally insufficient to establish “sub-
stantial nexus” for purposes of the sales tax do suf-
fice to create such a nexus when the State chooses to
impose an income tax instead.

If the SJC’s understanding of Quill were correct,
North Dakota could have responded to invalidation
of its use tax on non-domiciliary catalog retailers by
simply imposing an excise or other tax on the reve-
nues those same retailers earned on sales to North
Dakotans. By simple labeling, the State could freely
manipulate application of the physical-presence re-
quirement affirmed in Quill.

This Court has refused to give States such an
“on-off switch. “Complete Auto emphasized the im-
portance of looking past ‘the formal language of the
tax statute [to] its practical effect,” because “differ-
ently denominated tax[es] with the same economic
effect” must be treated similarly. Quill, 504 U.S. at
310 (quoting 430 U.S. at 279) (alteration in original).
The decision below thus conflicts with Quill and
Complete Auto by resurrecting a thoughtless formal-
ism that applies one method of constitutional analy-
sis to sales and use taxes, while refusing to apply
that same methodology to other taxes, even those
(ike income taxes) that. impose greater burdens on

18

interstate commerce. This Court’s precedents reject
that misguided approach.

D. The SJC Disregarded Quill By Ignoring
The Constitutionally-Significant Benefits
Of A Bright-Line Rule

Equally inconsistent with Quill is the SJC’s dis-
regard for the benefits of a clear and consistent
bright-line physical-presence rule. This Court em-
phasized that a bright-line rule “firmly establishes
the boundaries of legitimate state authority to im-
pose” tax obligations, “reduces litigation concerning
those taxes,” “encourages settled expectations,” and
“fosters investment by businesses and individuals.”
Quill, 504 U.S. at 315-316. Accordingly, the Court
concluded that “the bright-line [physical-presence]
rule of Bellas Hess furthers the ends of the dormant
Commerce Clause” through “the demarcation of a
discrete realm of commercial activity that is free
from interstate taxation.” Id. at 314-315.

The Court acknowledged that this rule, “[ljike
other bright-line tests,” may “appear[] artificial at its
edges,” but any “artificiality” is “more than offset by
the benefits of a clear rule.” Jd. at 315. Clarity is
particularly important in this context because “[the]
law in this area is something of a ‘quagmire’ and the
‘application of constitutional principles to specific
state statutes leaves much room for controversy and
confusion and little in the way of precise guides to
the States in the exercise of their indispensable
power of taxation.” Jd. at 315-316 (quoting Nw.
States Portland Cement Co. v. Minnesota, 358 U.S.
450, 457-458 (1959)).

Those benefits of the bright-line physical-
presence requirement apply a fortion to income

19

taxes. But the vague economic-nexus approach
adopted by the court below flies directly in the face of
the Quill Court’s emphasis on clarity and ease of ap-
plication. Asserting that the “concept of ‘substantial
nexus’ is more elastic than ‘physical presence” (App.
22a), the SJC announced that petitioners had a sub-
stantial nexus with Massachusetts without setting
forth any standard that would enable out-of-state
firms to determine what general conduct suffices to
enable the State to tax income. The SJC suggested,
for example, that “us[e]” of “Massachusetts banking
and credit facilities” in the course of “provid[ing] ...
services” to Massachusetts customers alone might be
justification enough (id.), which invites a host of
questions—and raises the prospect that, for example,
the SJC would uphold under the Commerce Clause a
tax imposed on a non-domiciliary firm that merely
cashed checks drawn on a Massachusetts bank.
Thus, the decision below clarifies nothing. Instead it
sows confusion about the taxing power and increases
the compliance burdens imposed on interstate busi-
nesses. Quill’s bright-line rule avoids exactly that
outcome, and the SJC erred in departing from it.

EK. The SJC Contradicted Quill By Conflating
The Separate Analyses Under The Due
Process And Commerce Clauses

The SJC’s “elastic” standard conflicts with Quill
in yet another respect. In concluding that petitioners
had a “substantial nexus” sufficient to justify Massa-
chusetts’ income taxation, the SJC essentially dis-
mantled the fence erected by this Court to separate
the Due Process and Commerce Clause inquiries.

The Court in Bellas Hess held that a use tax on
firms with no in-state physical presence violated
both the Due Process and Commerce Clauses, with-

20

out drawing a clear distinction between the inquiries
under those distinct provisions. 386 U.S. at 756-760.
Quill reaffirmed Bellas Hess’s Commerce Clause
holding, but not its Due Process holding. In so doing,
this Court explained that “the ‘substantial nexus’ re-
quirement is not, like due process’ ‘minimum con-
tacts’ requirement, a proxy for notice, but rather a
means for limiting state burdens on interstate com-
merce.” 504 U.S. at 313. In other words, the ques-
tion under the Commerce Clause is not whether it is
“fair” to subject a company to taxation in a particular
State, but whether a state tax will place an undue
burden on interstate commerce. /d.

Although the SJC purported to acknowledge the
difference between the Due Process and Commerce
Clause analyses, its truncated nexus discussion
amounted merely to the “fairness” inquiry, looking
exclusively to the benefits that petitioners received
from engaging in business transactions with Massa-
chusetts customers and using state-based services.
App. 22a. The SJC’s reliance, for example, on peti-
tioners’ “soliciting and conducting significant credit
card business” with Massachusetts residents (id.) es-
sentially mimicked the analysis that would have
been appropriate under the Due Process Clause to
determine whether petitioners could be sued in Mas-
sachusetts courts. See, e.g., Burger King Corp. v.
Rudzewicz, 471 U.S. 462, 472 (1985). The SJC
thereby collapsed the Due Process and Commerce
Clause inquiries in exactly the way Quill forbids.

21

Il, THE DECISION BELOW EXACERBATES A
GROWING CONFLICT AMONG STATE AP-
PELLATE COURTS OVER APPLICATION
OF QUILL TO INCOME TAXATION

The decision below expands the preexisting con-
flict among state appellate courts over the question
whether Quill’s interpretation of the substantial-
nexus prong can be confined to sales and use taxes.
That conflict is now both clear and mature. Indeed,
it has become more pronounced since this Court last
considered the question, and only review by this
Court will resolve the conflict.

In holding that Quill’s interpretation of “sub-
stantial nexus” was dependent on and strictly lim-
ited to the particular tax at issue in that case, the
court. below followed the West Virginia Supreme
Court of Appeals, which reached the same conclusion
in Tax Commissioner v. MBNA America Bank, N.A.,
640 S.E.2d 226 (W. Va. 2006) (“MBNA”), cert. denied
sub nom. FIA Card Serus., N.A. v. Tax Comm’r of W.
Va., 127 S. Ct. 2997 (2007). Volunteering that the
physical-presence test reaffirmed by this Court in
Quill “makes little sense in today’s world,” the West
Virginia court announced that Quill “applies only to
sales and use taxes” and not to other state taxes. Id.
at. 234. In lieu of the Quill test, the court selected an
amorphous “economic presence” standard for assess-
ing “substantial nexus.” Id. The dissent vigorously
criticized the majority’s “strained and inaccurate
reading” of Quill and its reliance on “legal commen-
taries with thinly veiled state-favoring taxing agen-
das,” observing that “[i]t would be a strange constitu-
tional doctrine that would countenance one nexus
standard for sales and use taxes under the Com-
merce Clause, and a more relaxed nexus standard for

22

corporate net income and other state taxes.” Id. at
236, 239-240 (Benjamin, J., dissenting).

The Indiana Tax Court also recently and explic-
itly sided with West Virginia. See MBNA Am. Bank,
N.A. v. Ind. Dep’t of State Revenue, 895 N.E.2d 140
(2008). Relying on the West Virginia MBNA deci-
sion, the Indiana court upheld the challenged tax be-
cause it viewed “economic presence” as establishing
substantial nexus. Jd. at 144.4

Other state appellate courts have reached the
opposite conclusion, recognizing that the Quill
Court’s rationale cannot arbitrarily be limited to the
particular tax at issue there because the Court was
construing the meaning of the “substantial nexus”
requirement, which applies to all state taxes. Most
saliently, in J.C. Penney National Bank v. Johnson,
19 S.W.3d 831 (Tenn. Ct. App. 1999), the Tennessee
Court of Appeals rejected the State’s bid to cabin
Quill to sales and use taxes, seeing “no basis for con-
cluding that the analysis should be different in the
present case.” Jd. at 839. As the court observed,
none of this Court’s precedents has “upheld a state
tax where the out-of-state taxpayer had absolutely
no physical presence in the taxing state.” Jd. at 842.
The court concluded that the taxpayer—like peti-
tioners here, a non-domiciliary credit card issuer
with no in-state personnel or property—lacked the
substantial nexus required to sustain the franchise
and excise taxes imposed. /Jd. The Tennessee Su-
preme Court denied review, and permitted publica-
tion of the Court of Appeals’ decision. J.C. Penney,
No. M1998-00497-SC-R11-CV (Tenn. May 8, 2000)

4 Indiana Tax Court decisions are directly appealable to the
Indiana Supreme Court. See IND. App. P. R. 63(A).

23

(per curiam). That order gave the appellate court’s
decision binding statewide precedential effect. See
Meadows v. Staie, 849 S.W.2d 748, 752 (Tenn. 1993)
(published opinions of Tennessee Court of Appeals
may be relied on with same “confidence and reliabil-
ity” as those of Tennessee Supreme Court).°

The direct conflict between the decision below
and J.C. Penney—the functional equivalent of a
judgment by the highest court of Tennessee—makes
this Court’s intervention necessary. In addition,
however, appellate courts in other States have also
rejected the view, adopted below, that Quill’s reason-
ing is limited to the sales-and-use-tax context.

Thus, in Rylander v. Bandag Licensing Corp., 18
S.W.3d 296 (Tex. App. 2000), a case involving a state
franchise tax, the Texas Court of Appeals explicitly
considered and rejected the State’s assertion that

5 The West Virginia (640 S.E.2d at 235) and Indiana (895
N.E.2d at 143) courts acknowledged, but failed to grapple with,
J.C. Penney. The SJC erroneously deemed J.C. Penney to have
been undercut by a later unpublished decision. App. 18a n.16
(citing Am. Online, Inc. v. Johnson, No. M2001-00927COA-R3-
CV, 2002 WL 1751434 at *2 (Tenn. Ct. App. July 30, 2002)
(“AOL”)). But AOL held merely that disputed fact issues fore-
closed summary judgment, because it was unclear to what ex-
tent the taxpayer had personnel or leased components in the
State. 2002 WL 1751434 at *1, *3. Moreover, the unpublished
AOL decision could not have overruled the published J.C. Pen-
ney decision. See Allstate Ins. Co. v. Watts, 811 S.W.2d 883, 886
n.2 (Tenn. 1991) (unpublished decisions have only “persuasive
force”).

6 This Court has often addressed Commerce-Clause issues in
the state taxation context without waiting for the emergence of
a split in authority as pronounced and mature as the one here.
See Cert. Pet. in Hunt Wesson, Inc. v. Franchise Tax Bd. of Cal.,
No. 98-2043, at 15-27 (no conflict asserted); Cert. Pet. in Gen-
eral Motors Corp. v. Tracy, No. 95-1232, at 14 (same).

24

“Quill Corp. and Bellas Hess should be limited to the
context of sales and use taxes.” Jd. at 299. The court
explained that, “[w]hile the decisions in Quill Corp.
and Bellas Hess involved sales and use taxes, we see
no principled distinction when the basic issue re-
mains whether the state cam tax the corporation at
all under the Commerce Clause.” Id. at 300.
“(W]hen the corporation conducts its activity solely
through interstate commerce and lacks any physical
presence in the state,” the court concluded, “no suffi-

cient nexus exists to permit the state to assess tax.”
Id.

Similarly, in Guardian Industries Corp. v. De-
partment of Treasury, 499 N.W.2d 349 (Mich. Ct.
App. 1993), an in-state taxpayer contended that “be-
cause it was subject to income taxation for sales in”
other, “target” States in which it had solicited busi-
ness, it was entitled under Michigan law to reduce
the amount of its income taxable in Michigan by a
corresponding amount. Jd. at 352-353. The then-
applicable statute exempted sales taxable in another
State from Michigan tax if “that [other] state has ju-
risdiction” to impose the tax. Jd. at 353 (quoting
MicH. STAT. ANN. § 7.558(42)). The dispositive ques-
tion, therefore, was whether income taxation by “tar-
get” States would violate the Commerce Clause. /d.
at 356. The court held that the physical-presence
test controlled the answer: “[A]fter Quz//, it. is abun-
dantly clear that Guardian must show a physical
presence within a target state to establish a substan-
tial nexus to it.” Jd. Remanding for factual devel-
opment, the court explained that “[a] target state
that taxed Guardian’s [sales] solicitation activities
would be in violation of the |Clommerce [C]lause if
Guardian’s employees were never present within the
state.” Id. at 357.

25

The decision below therefore is irreconcilable
with the reasoning of appellate decisions in Tennes-
see, Texas, and Michigan, each of which holds that
Quill’s interpretation of “substantial nexus” cannot
be confined to the sales-and-use-tax context. This
conflict among state appellate courts is now substan-
tial and mature. Resolution by this Court is neces-
sary.’

Because the constitutional question presented
arises from state taxation, this Court cannot await a
federal circuit conflict before answering it. Taxpay-
ers are barred from raising Commerce-Clause chal-
lenges to state taxes in the lower federal courts, be-
cause the Tax Injunction Act prohibits those courts
from restraining “the assessment, levy or collection
of any tax under State law where a plain, speedy and

7 A distinct question is whether a State may tax non-
domiciliaries (often called intangible holding companies) whose
only assets are intellectual property rights that they license to
corporations—typically commonly-owned—that use those rights
within the State while selling goods or services, and pay royal-
ties to the out-of-state licensor. Some courts addressing intan
gible holding companies have held that the out-of-state licen-
sor’s lack of physical presence does not bar taxation. See
Bridges v. Geoffrey, Inc., 984 So.2d 115 (La. Ct. App. 2008);
Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176 (N.J. 2006);
A&F Trademark, Inc. v. Tolson, 605 S.E.2d 187 (N.C. Ct. App.
2004); Kmart Props., Inc. v. Taxation & Revenue Dep’t of N.M.,
131 P.3d 27 (N.M. Ct. App. 2001); Geoffrey, Inc. v. Okla. Tax
Comm'n, 132 P.3d 632 (Okla. Civ. App. 2005); Geoffrey, Inc. v.
S.C. State Tax Comm’n, 437 S.E.2d 13 (S.C. 1993). Those cases
are not controlling here, as the SJC acknowledged; they “in-
volved foreign corporations with intangible property ... that
was being used in the taxing State by a licensee.” App. 2la
n.19. By contrast, during the tax years at issue here, petition
ers did not earn income through the in-state use of their intel-
lectual or other property by a commonly-controlled affiliate.

26

efficient remedy may be had in the courts of such
State.” 28 U.S.C. § 1341. Accordingly, this Court is
the only federal court that can resolve the growing
disagreement and confusion in the state appellate

courts regarding the import of this Court’s decision
in Quill.

IL THE QUESTION PRESENTED IS CRITI-
CALLY IMPORTANT TO INTERSTATE
COMMERCE AND WARRANTS THIS
COURT’S REVIEW AT THIS TIME

As Bellas Hess and Quill recognized, when a
state abandons the physical-presence requirement, it
adversely affects interstate commerce by creating
confusion and placing onerous burdens on multistate
firms. In recent years, those harms have multiplied,
as a growing number of States has adopted amor-
phous and inconsistent economic-nexus tests for in-
come and excise taxes. That trend accelerated after
this Court’s denial of certiorari in MBNA, and is
growing increasingly out of control as ever-more
States seek to increase their revenues at the expense
of out-of-state businesses. Given the current eco-
nomic crisis and Congress’s consistent inaction, only
a ruling from this Court can stop the flood of state
efforts to impose unduly heavy burdens on interstate
commerce.

A. State Abandonment Of The Physical-
Presence Requirement Harms The
Nation’s Economy

The question presented is “one of the most im-
portant unanswered questions facing state taxpay-

27

ers,”8 because it has major implications for every tax-
payer whose business activities cross state lines. At
present, the lack of sufficiently clear guidance from
this Court regarding the constitutional limits on
state income taxation of out-of-state corporations has
led to a confusing patchwork of inconsistent state
case law, legislation, and administrative determina-
tions adopting widely varying standards for identify-
ing those limits.? State approaches range from con-
tinued insistence on the physical-presence require-
ment to various versions of the economic-nexus ap-
proach, often with different standards applied to dif-
ferent types of entities. 19

This wide variation among the States regarding
what is fundamentally a question of federal constitu-
tional law creates substantial burdens and uncer-
tainty for businesses faced with deciding whether
they are obligated to pay income taxes in multiple
States. See Stombock, supra, at 1231. Particularly

8 Marianne Evans & Sarah McGahan, Economic Nexus and
the Uncertainty of Quill’s Physical-Presence Test, THE TAX AD-
VISER (June 2007).

9 See Point II, supra; Arthur R. Rosen & Jeffrey S. Reed, Stop
the State Tax Grab, LEGAL TIMES, April 14, 2008 at 28 (observ-
ing that “what constitutes ‘substantial nexus’ is unclear and
has provoked a firestorm of fierce debate”); Gell, supra, (manu-
script at 22); Joseph Henchman, Why The Quill Physical Pres-
ence Rule Shouldn't Go The Way Of Personal Jurisdiction, 46
STATE TAX NOTES 387 (Nov. 5, 2007); Julie Roman Lackner,
Note, The Evolution and Future of Substantial Nexus in State
Taxation of Corporate Income, 48 B.C. L. REV. 1387, 1408-1415
(2007).

10 For example, some States have pursued non domiciliary
financial institutions with particular force. See Jerome R. Hel-
lerstein & Walter Hellerstein, STATE ‘TAXATION J] 6.30 (3d ed.
1998 & Supp. 2009).

28

problematic in this regard are those States, now in-
cluding Massachusetts, that have rejected the tradi-
tional bright-line physical-presence standard in favor
of some version of “economic nexus.” That inherently
vague approach maximizes discretion in the tax col-
lector, provides little or no guidance to potentially
liable multistate businesses, and greatly increases
the risk of double taxation. See Point I.B., supra.

~ Even when two States both say they apply an
“economic nexus” standard, that phrase is so malle-
able that they may mean very different things.
States are thus sowing confusion even as they seri-
ously undermine the Commerce Clause’s restraint on
state taxation. See n.9, supra; n.12, infra; see also
Stombock, supra, at 1231. This growing uncertainty
is exactly the sort of “controversy and confusion” that
has previously been of concern to this Court, offering
“little in the way of precise guides to the States in
the exercise of their” taxation powers. Quill, 504
U.S. at 315 Gnternal quotation marks omitted).

The cost of complying with state income taxes is
already double the cost of complying with the federal
income tax, and such disproportionate compliance
costs will only increase as firms are required to file
in more and more jurisdictions under vague “eco-
nomic nexus” tests. See Sanjay Gupta & Lillian
Mills, Does Disconformity in State Corporate Income
Tax Systems Affect Compliance Cost Burdens?, 56
NAT'L TAX J. 355, 357 (2003). This increased burden
will hit small and medium-sized businesses espe-
cially hard, because those firms do not have the re-
sources to comply with numerous different income
taxation regimes or contest tax assessments in far-
flung jurisdictions. Such businesses may well decide
against expanding their operations to other States or
the Internet, out of a justified fear that they may be

29

opening themselves up to onerous tax liabilities and
compliance costs.1!1

Moreover, state abandonment of the physical-
presence requirement threatens to disrupt this Na-
tion’s international tax policy. Pursuant to bilateral
tax treaties, the United States has agreed not to im-
pose national income taxes on foreign firms that do
not have a “permanent establishment” in the United
States, in exchange for reciprocal commitments from
our treaty partners. See United States Model In-
come Tax Convention of November 15, 2006, art. 7,
{ 1; see also id. art. 5. As States become more ag-
gressive in enforcing income taxes against foreign-
based corporations with no in-state physical-
presence, that increasingly burdensome taxation will
create tensions with our tax-treaty partners, poten-
tially encouraging them to abandon their physical-
presence commitments, thereby undermining the
United States’ efforts to promote foreign commerce
and harming U.S.-based firms. As this Court has
warned, “a state tax on the instrumentalities of for-
eign commerce may impair federal uniformity in an
area where federal uniformity is essential.” Japan

11 Moreover, state abandonment of the physical-presence re-
quirement hampers business compliance with applicable ac-
counting rules. Under Interpretation Number 48 issued by the
Financial Accounting Standards Board—which sets standards
for preparing audited financial statements in the United
States—a corporation must record a liability for the full amount
of an unpaid tax liability unless it is “more likely than not” that
the corporation will prevail in contesting that liability. Uncer-
tainty over the permissibility and meaning of the vague eco-
nomic-nexus standard makes compliance with this requirement
increasingly difficult and problematic. See Michael S. Schade-
wald, FIN 48 Forces Companies to Wrestle with Uncertain State
Nexus Standards, THE CPA JOURNAL ONLINE (May 2008).

30

Line, Ltd. v. County of Los Angeles, 441 U.S. 434,
448-449 (1979). The prospect of interference with
tax treaties is an especially dangerous one given the
pressures toward protectionism and economic bal-
kanization during the current economic crisis. See
Emma Vandore, OECD Warns Against Protection-
ism, ASSOCIATED PRESS, March 38, 2009.

B. The Problem Has Grown Dramatically
Worse Since The Denial Of Certiorari In
MBNA

The need for this Court’s review is more urgent
now than it was when this Court denied certiorari in
MBNA in 2007. Academic commentators and practi-
tioners alike have increasingly recognized the prob-
lems created by state adoption of the economic-nexus
approach and the growing uncertainty and confusion
in this area of the law.!12 In addition, the past two
years have seen a headlong rush by revenve-greedy
state legislatures and tax collectors to adopt amor-
phous economic-nexus standards as a means of in-
creasing tax revenues without raising the ire of in-
state taxpayers.

12 See, e.g., Giles Sutton et al., Attributional Nexus, Flash Tt-
tle, and the Chaos in Nexus Standards, 50 STATE TAX NOTES
491 (Nov. 24, 2008); Edward A. Zelinsky, Rethinking Tax Nexus
and Apportionment: Votce, Exit, and the Dormant Commerce
Clause, 28 Va. TAX REV. 1, 15-20 (2008); articles cited supra n.9;
see also David E. Wildasin, State Corporation Income Taxation:
An Economic Perspective on Nexus, IFIR Working Paper No.
2009-08, at 13 (Feb. 2009) (economic analysis concluding that
corporate income taxes imposed on out-of-state corporations
based on in-state sales “impose[} an implicit tanff o[n] imports
from other states, distorting interstate trade and generating
deadweight efficiency losses”).

31

As one major accounting firm recently observed:
“The ‘rash’ of economic nexus decisions and legisla-
tion ... really kicked off with the 2007 certliorari]
denial(]” in MBNA and “spread like poison ivy in
2008.” KPMG LLP, 2008: Year in Review: The
“Economics” of 2008, in TWIST-Q: A Quarterly
Roundup of This Week in State Tax (Dec. 2008); see
also Gell, supra, (manuscript at 24). Thus, numer-
ous States have adopted economic-nexus approaches
in the past two years. See, e.g., Karen J. Boucher &
Shona Ponda, Current Corporate Income Tax Devel-
opments (Part I), THE TAX ADVISER 166, 166-168
(March 2009). The proliferation of economic-nexus
theories since review was denied in MBNA has oc-
curred notwithstanding this Court’s reminders that
denial of certiorari “imports no expression of opinion
upon the merits of a case.” House v. Mayo, 324 U.S.
42, 48 (1945). These state actions in disregard of
Quill indicate that unless this Court intervenes, the
burdens inflicted on interstate commerce by amor-
phous economic nexus standards will only continue
to grow.

Just weeks after this Court denied review in
MBNA, for example, the New Hampshire legislature
amended the statutory definition of taxable “busi-
ness activity” to include “a substantial economic
presence evidenced by a purposeful direction of busi-
ness toward the state examined in light of the fre-
quency, quantity, and systematic nature of a busi-
ness organization’s economic contacts with the state”
(emphases added). That amendment took effect July
1, 2007. Ch. 263 (H.B. 2), Laws 2007, amending
N.H. Rev. STAT. ANN. § 77-A:1, XII; see Chris Sulli-
van, New Hampshire Adopts Economic Nexus Stan-
dard, 45 STATE TAX NOTES 213 (July 23, 2007) (not-
ing that the legislature “deferred consideration of the

32

provision while the economic nexus question was
pending before the Supreme Court” and then acted
promptly upon denial of certiorari).

Similarly, Michigan has embraced “a broadly ex-
panded economic presence nexus standard that will
increase the number of businesses subject to... tax”
in the wake of the denial of review in MBNA. June
Summers Haas, The Michigan Business Tax Tax-
payer: Jurisdiction to Tax and the Unitary Business
Group, 53 WAYNE L. REV. 1351, 1351 (2007). In par-
ticular, under the Michigan Business Tax (MBT),
enacted in July 2007 Gust weeks after the denial of
certiorari) and effective January 1, 2008, a person is
considered to have a nexus with Michigan sufficient
to require payment of the MBT if the person “actively
solicits” sales within the State, and has in-state gross
receipts of or exceeding a specified dollar threshold.
MicH. Comp. LAws § 208.1200(1). Michigan has
opined that “[w]hether substantial economic pres-
ence is established depends on the quality and quan-
tity of the taxpayer’s contacts with the taxing state
and the degree to which the taxpayer exploits the
market.” Mich. Revenue Admin. Bulletin 2007-6, at
4 (Dec. 28, 2007). That highly malleable formulation
“is more of a Due Process nexus standard” than a
test under the Commerce Clause. Haas, supra, at
1359.18 ?

13 California made a similar change recently in enacting its
2009-10 budget. Effective January 1, 2011, the State amended
the statutory definition of “doing business” for tax purposes to
cover any taxpayers whose in-state sales exceed the lesser of
$500,000 or 25% of total sales. Senate Bill No. X38 15, §7
(amending CAL. REV. & TAX. CODE § 23101(b\2)) (enrolled Feb.
19, 2009); see Deloitte Development LLC, California Budget
Legislation Contains Significant Tax Law Changes 4 (Feb. 27,
2009) (“The adoption of a doing business standard that relies

33

Other States likewise have seized upon denial of
review in MBNA as an occasion for issuing regula-
tory guidance asserting authority to tax non-
domiciliary corporations with no in-state physical
presence. Florida, for example, found MBNA “per-
suasive, especially given the fact that the U.S. Su-
preme Court declined to hear the case[].” Fla. Dep’t
of Revenue, Advisement 07C1-007, 2007 WL
4577924, at *6 (Oct. 17, 2007); see also Me. Revenue
Servs., Maine Tax Alert (Feb. 2008), 2008 WL
2764732, at **2-3 (noting denial of review in MBNA,
and stating that Maine “considers taxpayers with
economic nexus alone to be subject to Maine’s income
tax laws”); Or. Dep’t of Revenue Substantial Nexus
Guidelines, OR. ADMIN. R. 150-713.010 (rev. May
2008) (“[s]lubstantial nexus” “does not require a tax-
payer to have a physical presence in Oregon” and
“exists where a taxpayer regularly takes advantage
of Oregon’s economy to produce income for the tax-
payer and may be established through the significant
economic presence of a taxpayer in the state.”).

C. Awaiting Congressional Action Would
Be Futile

Review by this Court should not be further de-
layed based on a speculative hope that Congress
might at some point decide to address the problem
posed by the economic-nexus theory. Questions
about the scope of state taxing powers under the
Commerce Clause are ones “that Congress has the
ultimate power to resolve” (Quill, 504 U.S. at 318),

[Footnote continued from previous page]

solely on having sales in California would appear to effectively
adopt an ‘economic nexus’ standard for California.”).

34

but Congress has shown no inclination to address the
issue. Accordingly, this Court has both the authority
and the responsibility to ensure compliance with its
precedents, and it is not for the States to legislate
away the bright-line physical-presence requirement.
Rather, if States conclude that the physical-presence
requirement should be abandoned (or limited only to
certain taxes), they are free to present that argument
to Congress through the ordinary political process.

In MBNA, the State argued that the Court
should deny review in order to give Congress a
chance to act. See Br. in Opp., No. 06-1228, at 17-18.
But Congress still has not acted in the two years
since denial of review in MBNA, while the States
have increasingly violated the principles enunciated
in Quill, exacerbating the problems created by the
economic-nexus approach. In fact, in the 17 years
since Quill invited congressional resolution of the
scope of state taxing power over non-domiciliaries,
Congress has not addressed the issue, indicating that
there is no realistic prospect that Congress will do so
in the foreseeable future.!4 This Court should take
this opportunity to ensure that States, in their insa-
tiable demand for more sources of revenue (particu-
larly from politically disenfranchised out-of-state
businesses), do not continue to defy the principles
enunciated in Quill and Bellas Hess.

14 For example, although business-activity-tax simplification
bills have been introduced in recent Congresses, no votes have
ever been cast on the portions of such legislation addressing the
scope of the physical-presence requirement. Business Activity
Tax Simplification Act of 2009, H.R. 1083, 111th Cong. (2009);
Business Activity Tax Simplification Act of 2007, S. 1726, 110th
Cong. (2007); Internet Tax Fairness Act of 2001, H.R. 2526,
107th Cong. (2001); New Economy ‘l'ax Fairness Act, S. 664,
107th Cong. (2001).

35

CONCLUSION

The petition for a writ of certiorari should be
granted.

Respectfully submitted.

THEODORE B. OLSON
Counsel of Record
THOMAS G. HUNGAK
INDRANEEL SUR
MISHA TSEYTLIN
GIBSON, DUNN & CRUTCHER LLP
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
(202) 955-8500

March 19, 2009

APPENDIX

la

APPENDIX A

Supreme Judicial Court of Massachusetts,
Suffolk.

CAPITAL ONE BANK & another!
Vv.
COMMISSIONER OF REVENUE.
Argued Oct. 7, 2008.
Decided Jan. 8, 2009.

Present: MARSHALL, C.J., IRELAND, SPINA,
COWIN, CORDY, & BOTSFORD, JJ.

SPINA, J.

The present. appeal is from a decision of the Ap-
pellate Tax Board (board) affirming the denial by the
Commissioner of Revenue (commissioner) of applica-
tions by the taxpayers, Capital One Bank (Capital
One) and Capital One F.S.B. (FSB) (collectively,
Capital banks), for the abatement of financial insti-
tution excises (FIET).2 Capital One sought abate-

1 Capital One F.S.B.

2 The Appellate Tax Board (board) noted that G.L. c. 63, § 2,
imposes an excise, not a tax, on financial institutions. For an
extensive discussion of the historical differences between a tax
and an excise, see P. Nichols, Taxation in Massachusetts 15-17

[Footnote continued on next page}

2a

ment for the tax years 1995 through 1998, and FSB
sought abatement for the tax years 1996 through
1998. At issue is whether, consistent with the Fed-
eral commerce clause of the United States Constitu-
tion art. 1, § 8, the Commonwealth can impose the
FIET, pursuant to G.L. c. 63, § 2, on financial insti-
tutions? that do not have a physical presence in
Massachusetts. We granted the Capital banks’ ap-
plication for direct appellate review, and now affirm
the board’s decision.4

The board found the following facts, based on the
parties’ detailed stipulation of facts and the testi-
mony and exhibits introduced at the hearing. See
G.L. c. 58A, § 18 (“The decision of the board shall be
final as to findings of fact”); United Church of Reli-
gious Science v. Assessors of Attleboro, 372 Mass.
280, 281, 361 N.E.2d 1254 (1977).

In 1994, Capital One was established as a wholly
owned subsidiary of Capital One Financial Corpora-

[Footnote continued from previous page]

(3d ed. 938). Here, for consistency and ease of reference, we,
like the parties and the board, shall refer to the excise at issue
as the financial institution excise tax (FIET).

3 A “[flinancial institution” includes “any bank, banking asso-
ciation, trust company, federal or state savings and loan asso-
ciation, including all banks for cooperatives organized under
the United States Farm Credit Act of 1933, whether of issue or
not, existing by authority of the United States, or any state, or
a foreign country, or any law of the commonwealth.” G.L. c. 63,

§ 1.

4 We acknowledge the amicus brief filed by Multistate Tax
Commission in support of the board, and the amicus brief filed
by the Council on State Taxation in support of Capital One
Bank and Capital One F.S.B.

3a

tion (COFC), a Delaware corporation. Capital One is
a Virginia-chartered credit card bank that offers
credit card products. FSB was established in 1996,
also as a wholly owned subsidiary of COFC. Itis a
federally chartered savings bank that offers con-
sumer lending and deposit products, including se-
cured and unsecured credit cards, to individuals and
small businesses. FSB also makes unsecured in-
stallment loans and has a consumer home loan busi-
ness.

The commercial domicil for each bank is Vir-
ginia, where credit approval activities occurred.
During the tax years at issue, the Capital banks nei-
ther owned nor leased any real property in the
Commonwealth. Further, the board assumed, based
on the record before it, that the Capital banks owned
no other Massachusetts property,° and no employee,
agent, or independent contractor of the Capital
banks was located in Massachusetts during the tax
years at issue. As credit card issuers doing business
in the Commonwealth, the Capital banks had been
required to file quarterly credit card issuer’s reports

S The board noted that it was unclear whether credit card
readers used by merchants were the property of the Capital
banks, the merchants, or some other entity. Further, the record
was not clear as to whether the cardholders, the Capital banks,
or both had ownership of the credit cards themselves. The
board stated that because its decision was not dependent on the
Capital banks’ ownership of property or other physical presence
in Massachusetts, the ownership of the credit cards and the
card readers was immaterial.

4a

with the Massachusetts division of banks. See G.L.
c. 140, § 114C, inserted by St.1987, c. 595, § 1.6

COFC is the owner of the trademark “Capital
One,” which it provided to the Capital banks, with-
out license or royalty, for placement on their credit
cards. Using a system called “Information-Based
Strategy,” which employs statistical modeling tech-
niques to segment potential customer lists based on
credit scores, demographics, and other characteris-
tics, the Capital banks targeted specific potential
customers nationwide, including customers in the
Commonwealth. As pertinent here, the Capital
banks then entered into agreements with Massachu-
setts residents for the issuance of “general purpose”
credit cards branded with the “Capital One” trade-
mark and the logo of either Visa U.S.A. Inc. (Visa), or
MasterCard International (MasterCard).’ Pursuant

6 In 1996, the filing requirement for a credit card issuer's re-
ports was changed from quarterly to semiannually. See St.
1996, c. 359, § 2. Subsequent legislation deleted this filing re-
quirement from G.L. c. 140, § 114C, altogether. See St. 2002, c.
455, § 1.

7 Visa and MasterCard are structured as open associations
whose members issue Visa-branded or MasterCard-branded
payment cards, acquire merchants that will accept such pay-
ment cards, or do both. Visa and MasterCard provide services
for their members, including the authorization, settlement, and
clearance of transactions. With certain limited exceptions,
Visa’s membership is open to any institution that is eligible for
Federal Deposit Insurance Corporation deposit insurance or
share insurance. As of 2005, Visa had approximately 14,000
members in the United States, including over 12,000 Visa card
issuers (and had similar membership numbers during the tax
years at issue). MasterCard’s membership is generally open to
any organization that is authorized to engage in financial

[Footnote continued on next page]

5a

to these agreements, the Capital banks would ad-
vance funds on behalf of their customers for transac-
tions in which the customers used a “Capital One”
Visa-branded or MasterCard-branded credit card to
make purchases of goods and services from mer-
chants nationwide. The Capital banks also would
allow customers to obtain cash advances at Capital
banks nationwide displaying the Visa or MasterCard
logo, or at bank automated teller machine (ATM) ki-
osks displaying the Visa or MasterCard logo, or at
ATM kiosks displaying the PLUS or CIRRUS logo, if
such logo also appeared on the credit card. The
Capital banks’ customers agreed to repay the ad-
vanced funds, subject to finance charges and other
fees set forth in their credit card agreements.

As members of the Visa and MasterCard associa-
tions, the Capital banks paid fees to those associa-
tions relating to credit card transactions nationwide,
including transactions by the Capital banks’ Massa-
chusetts customers. In return, the Capital banks re-
ceived numerous benefits from the Visa and Master-
Card associations, including technology and equip-
ment necessary to process credit card transactions.
On a larger scale, the Capital banks were able to ac-
cess a nationwide interconnected credit infrastruc-

[Footnote continued from previous page]

transactions under the laws or government regulations of the
country in which it is organized or principally engaged in busi-
ness, subject to additional requirements set out in MasterCard
bylaws and rules.

8 The PLUS name is a trademark owned by Visa Interna-
tional Service Association and licensed to Visa. The CIRRUS
name is a trademark owned by MasterCard.

6a

ture that provided enormous value both to their own
businesses and to the Capital banks’ customers.

A typical credit card transaction proceeded as fol-
lows. When a Massachusetts customer presented a
“Capital One” Visa-branded or MasterCard-branded
credit card in payment for goods or services, the
cardholder or merchant would “swipe” the card
through a card reader located at the merchant’s
place of business. The credit card information would
be relayed to an “acquiring bank” with which the
merchant had contracted for the handling of credit
card transactions. The acquiring bank verified,
processed, and transmitted the credit card informa-
tion to Visa or MasterCard, which, in turn, relayed
the transaction information to the cardholder’s “issu-
ing bank” (here, the Capital banks), which then
checked the cardholder’s credit line and account
status. Assuming that the cardholder had sufficient
credit, the issuing bank approved the transaction,
and such approval was sent by the issuing bank
through the association network to the acquiring
bank, which relayed the approval to the merchant at
the point of sale. This process occurred in one rapid
series of events. Subsequently, payment requests
were sent by the merchant to the acquiring bank,
which forwarded them to the issuing bank for reim-
bursement. The issuing bank paid the acquiring
bank the amount requested, less an “interchange
fee.” The acquiring bank then retained its own proc-
essing fee from the amount received, and paid the
remainder to the merchant.2 During the tax years at

9 To put these fees in perspective, the board noted that in a
typical Visa or MasterCard transaction, the issuing bank re-

[Footnote continued on next page]

Ta

issue, the Capital banks received interchange fees
related to Massachusetts customers ranging between
$4.2 million and $6.8 million annually.

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 ap-
proved. The Capital banks bore the risk of a card-
holder’s nonpayment. In the event of such nonpay-
ment, the Capital banks worked with collection
agencies!0 and Massachusetts attorneys to collect
delinquent accounts, which included the filing of civil
actions on behalf of the Capital banks in Massachu-
setts courts. When necessary, the Capital banks ob-
tained garnishments or liens against their custom-
ers’ personal property, and, on two occasions, secured
writs of execution against Massachusetts real prop-
erty. If legal proceedings were commenced in Vir-
ginia against Massachusetts residents under the
Virginia long-arm statute, Va. Code Ann. § 8.01-
328.1 (2007), the resulting judgments were, at times,
domesticated to Massachusetts for further enforce-
ment proceedings. In addition, the Massachusetts
Attorney General’s office, through its consumer com-

[Footnote continued from previous page]

tained an “interchange fee” of approximately 1.4 per cent of the
transaction price, and the acquiring bank retained an addi-
tional fee of approximately .6 per cent. Consequently, a total of
=pproximately 2.0 per cent of the transaction amount, known as
the “merchant discount,” would be paid to the issuing and ac-
quiring banks. See United States v. Visa U.S.A., Inc., 344 F.3d
229, 235 (2d Cir. 2003).

10 None of the collection agencies used during the tax years at
issue was located in Massachusetts.

8a

plaints and information section, helped resolve dis-
putes between the Capital banks and Massachusetts
residents during the tax years at issue.

As a result of the Capital banks’ marketing ef-
forts in the Commonwealth, the number of Massa-
chusetts residents carrying Capital One credit cards
rose from 196,645 in 1995 to 465,571 in 1998, and
the number of Massachusetts residents carrying FSB
credit cards rose from 3,845 in 1996 to 7,363 in 1998.
In total, the Capital banks spent more than $20 mil-
hon, through its marketing efforts, to acquire Com-
monwealth residents as customers during the tax
years atissue. Capital One’s outstanding receivables
from accounts held by Massachusetts cardholders
grew from $72,162,796 in 1995 to $113,655,624 in
1998. FSB’s outstanding receivables from accounts
held by Massachusetts cardholders grew from
$11,457,826 in 1996 to $16,588,914 in 1998. Capital
One’s income, derived from interest, fees, and penal-
ties associated with the use of its credit cards by
Massachusetts residents, rose from $22,319,653 in
1995 to $57,941,377 in 1998. FSB’s income, derived
from the same sources, rose from $1,534,525 in 1996
to $3,483,093 in 1998.

On February 28, 2000, in response to notification
from the commissioner that they had not filed FIET
returns for the tax years at issue, the Capital banks
provided the Department of Revenue (department)
with apportionment and other relevant information.
On August 6, 2000, the department issued to the
Capital banks separate notices of intention to assess,
followed shortly thereafter by notices of assessment
for the tax years at issue. The amounts of the as-
sessments were $1,758,454 for Capital One, and
$159,075.25 for FSB. The Capital banks filed timely
applications for abatement of the FIET. See G.L. c.

9a

62C, § 37. The commissioner denied the applica-
tions, and the Capital banks appealed to the board
pursuant to G.L. c. 62C, § 39.

In affirming the commissioner’s denial of the
abatements, the board stated that the Capital banks’
activities in Massachusetts constituted a “substan-
tial nexus” with the Commonwealth that justified
imposition of the FIET for the tax years at issue, In
particular, the board based its determination on the
Capital banks’ purposeful, targeted marketing of
their credit card business to Massachusetts custom-
ers; their required filing of quarterly credit card is-
suer’s reports with the Massachusetts division of
banks; their use of the Massachusetts court system
and the Massachusetts Attorney General’s office to
collect delinquent accounts and resolve disputes;
their use of sophisticated networks, including the
Visa and MasterCard associations and Massachu-
setts acquiring ‘»anks, which linked the Capital
banks with Massachusetts customers and mer-
chants, and by which the Capital banks, through
their customers’ use of “Capital One” branded credit
cards, guaranteed payment to the merchants on be-
half of the customers; and their receipt of hundreds
of millions of dollars in income from millions of
transactions involving Massachusetts residents and
merchants.!! The board stated that, pursuant to its

11 The Capital banks contend that the record does not show
that they actually filed any credit card issuer's reports with the
Massachusetts division of banks or initiated contact with the
Attorney General's office. The Capital banks may not, in fact,
have filed any reports pursuant to G.L. c. 140 § 114C, but the
statutory language suggests that they were required to do so.
In addition, even if the Capital banks did not initiate any con-

[Footnote continued on next page]

10a

reading of Quill Corp. v. North Dakota, 504 U.S. 298,
112 S. Ct. 1904, 119 L.Ed.2d 91 (1992) (Quill), a fi-
nancial institution’s “physical presence” in the taxing
State was not required to establish “substantial
nexus” for purposes of the State’s imposition of an
income-based tax on that institution. Consequently,
the board concluded that the Commonweaith’s as-
sessment of the FIET on the Capital banks was con-
stitutional under the Federal commerce clause. 1?

A decision by the board will not be modified or
reversed if the decision “is based on both substantial
evidence and a correct application of the law.” Bos-
ton Professional Hockey Ass’n v. Commissioner of
Revenue, 443 Mass. 276, 285, 820 N.E.2d 792 (2005).
We presume that a tax is constitutionally valid
unless the party challenging it establishes its inva-
lidity “beyond a rational doubt.” Andover Sav. Bank
v. Commissioner of Revenue, 387 Mass. 229, 235, 439
N.E.2d 282 (1982). While we give deference to the
board’s expertise in interpreting the tax laws of the
Commonwealth, see French v. Assessors of Boston,
383 Mass. 481, 482, 419 N.E.2d 1372 (1981), we ap-

[Footnote continued from previous page]
tact with the Attorney General’s office, Massachusetts consum-
ers filed complaints against them with that office, and the Capi-
tal banks responded to those complaints.

12 The board also concluded that the privileges associated with
the Capital banks’ right. to do business in Massachusetts and
the Capital banks’ sale of financial services in the Common-
wealth were “commodities,” and that the FIET was a “reason-
able” excise on such commodities under the Massachusetts
Constitution. See Part 2, c. 1, § 1, art. 4, of the Constitution of
the Commonwealth. The Capital banks have not challenged
this determination in the present appeal, so we need not con-
sider it further.

lla

ply our independent judgment as to both the law and
the facts on constitutional issues. See Opinion of the
Justices, 328 Mass. 679, 687, 106 N.E.2d 259 (1952).

The thrust of the Capital banks’ appeal is that
the board erroneously limited to the sales and use
tax context the United States Supreme Court’s hold-
ing in Quill, supra at 317-318, 112 S. Ct. 1904, that
the Federal commerce clause precludes a State from
imposing tax obligations on an out-of-State corpora-
tion that has no physical presence in the taxing
State. In the Capital banks’ view, this physical pres-
ence requirement should be equally applicable to a
State’s assessment of an income-based excise, like
the FIET. The Capital banks contend that the board
disregarded the reasons stated in Quill for upholding
a “bright-line” test for tax liability and the benefits of
such a clear standard. Contrary to the board’s de-
termination, the Capital banks continue, sales and
use taxes do not impose a more significant burden on
interstate commerce than income-based taxes such
that the two types of taxes should be treated differ-
ently under the commerce clause. For these reasons,
the Capital banks argue that the FIET should be
deemed unconstitutional as inconsistent with the
Federal commerce clause. We disagree.

Pursuant to G.L. c. 63, § 2, “every financial insti-
tution engaged in business in the commonwealth
shall pay, on account of each taxable year, an excise
measured by its net income determined to be taxable
under [G.L. c. 63, § 2A,] at the [designated] rate.”13

13 General Laws c. 63, § 2A ( ), provides that “[i]f the finan-
cial institution has income from business activity which is tax-
able both within and without this commonwealth, its net in-

[Footnote continued on next page]

12a

The Capital banks have not asserted that they are
not “financial institutions” for purposes of imposition
of the FIET. See G.L. c. 63, § 1 (defining “[flinancial
institution”). As pertinent to the factual circum-
stances here, the phrase “engaged in business in the
commonwealth” includes “regularly engaging in
transactions with customers in the commonwealth
that involve intangible property and result in income
flowing to the taxpayer from residents of the com-
monwealth.” Jd. These activities “shall be pre-
sumed, subject to rebuttal, to be conducted on a regu-
lar basis within the commonwealth, if any of such
activities are conducted with one hundred or more
residents of the commonwealth during any taxable
year or if the taxpayer has ten million dollars or
more of assets attributable to sources within the
commonwealth, or has in excess of five hundred
thousand dollars in receipts attributable to sources
within the commonwealth.” Jd. The Capital banks
have challenged the imposition of the FIET only on
constitutional grounds; they have not rebutted the
statutory presumption that they have regularly en-
gaged in business in Massachusetts.

A State’s ability to tax businesses like the Capi-
tal banks, that operate in interstate commerce, “is
constrained by the Federal government’s broad
power to regulate interstate commerce under the
commerce clause.”!4 Aloha Freightways, Inc. v.

[Footnote continued from previous page]
come shall] be apportioned to this commonwealth by multiplying
its net income by the apportionment. percentage.”

14 Because the Capital banks have challenged the constitu-
tionality of the FIET under only the commerce clause, that is
the focus of our consideration. Nonetheless, we point out that a

[Footnote continued on next page]

13a

Commissioner of Revenue, 428 Mass. 418, 421, 701

[Footnote continued from previous page]

State’s ability to tax businesses operating in interstate com-
merce also is constrainec. by the due process clause of the Four-
teenth Amendment to the United States Constitution. Al-
though unconstitutional taxation claims under the due process
and commerce clauses are closely related, see National Bellas
Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753, 756, 87
S. Ct. 1389, 18 L.Ed.2d 505 (1967), they are separate and “pose
distinct limits on the taxing powers of the States.” Quill Corp.
v. North Dakota, 504 U.S. 298, 305, 112 S. Ct. 1904, 119
L.Ed.2d 91 (1992) (Quill). The due process clause and the
commerce clause address different constitutional concerns. Due
process focuses on “the fundamental] fairness of governmental
activity” and requires consideration “whether an individual’s
connections with a State are substantial enough to legitimate
the State’s exercise of power over him.” Z/d. at 312, 112 S. Ct.
1904. Thus, the due process clause requires “some definite link,
some minimum connection, between a state and the person,
property or transaction it seeks to tax.” Miller Bros. v. Mary-
land, 347 U.S. 340, 344-345, 74 S. Ct. 535, 98 L.Ed. 744 (1954).
See International Harvester Co. v. Wisconsin Dep’t of Taxation,
322 U.S. 435, 441-442, 64 S. Ct. 1060, 88 L.Ed. 1373 (1944) (“A
state may tax such part of the income of a nonresident as is
fairly attributable either to property located in the state or to
events or transactions which, occurring there, are subject to
state regulation and which are within the protection of the
state and entitled to the numerous other benefits which it con-
fers”). See also Truck Renting & Leasing Ass’n v. Commissioner
of Revenue, 433 Mass. 733, 736, 746 N.E.2d 143 (2001). “In con-
trast, the Commerce Clause and its nexus requirement are in-
formed not so much by concerns about fairness for the individ-
ual defendant as by structural concerns about the effects of
state regulation on the national economy.” Quill, supra. Con-
sistent with the due process clause, a State may have the au-
thority to impose a tax based on minimum contacts, but the im-
position of such a tax may unconstitutionally' burden interstate
commerce because the taxpayer lacks a “substantial nexus”
with the taxing State. See id. at 308, 313, 112S. Ct. 1904.

14a

N.E.2d 961 (1998). The commerce clause authorizes
Congress to “regulate Commerce ... among the sev-
eral States.” Art. 1, § 8. The United States Supreme
Court has consistently held that the commerce
clause includes “a further, negative command,
known as the dormant Commerce Clause, prohibit-
ing certain state taxation even when Congress has
failed to legislate on the subject.” Oklahoma Tax
Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 179,
115 S. Ct. 1331, 131 L.Ed.2d 261 (1995). See Quill,
supra at 309-312, 112 S. Ct. 1904 (discussing evolu-
tion of dormant commerce clause).

Consistent with the commerce clause, a State
may impose a tax on a business engaged in interstate
commerce where the tax “[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.” Complete Auto
Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct.
1076, 51 L.Ed.2d 326 (1977) (Complete Auto). See
Truck Renting & Leasing Ass’n v. Commissioner of
Revenue, 433 Mass. 7338, 740, 746 N.E.2d 148 (2001).
By permitting States to tax purely interstate com-
merce, the United States Supreme Court affirmed
the principle that “interstate commerce may be made
to pay its way.” Complete Auto, supra at 281, 284, 97
S. Ct. 1076. See Commonwealth Edison Co. v. Mon-
tana, 453 U.S. 609, 623624, 101 S. Ct. 2946, 69
L.Ed.2d 884 (1981), quoting Colonial Pipeline Co. v.
Traigle, 421 U.S. 100, 108, 95 S. Ct. 1538, 44 L.Ed.2d
1 (1975) (“It was not the purpose of the commerce
clause to relieve those engaged in interstate com-
merce from their just share of [the] state tax burden
even though it increases the cost of doing business”).

15a

The Capital banks’ challenge to the constitution-
ality of the FIET focuses solely on the first prong of
the Complete Auto test, namely whether the Capital
banks’ activities had a “substantial nexus” with Mas-
sachusetts.15 To satisfy this requirement, “[t]he
business must have some constitutionally sufficient
degree of contact with the taxing State before the
State can impose any tax on it.” Aloha Freightways,
Inc. v. Commissioner of Revenue, supra. It is a stan-
dard that is designed to prevent overreaching by
States. Id. at 423, 701 N.E.2d 961. “(T]he ‘substan-
tial nexus’ requirement is not, like due process’
‘minimum contacts’ requirement, a proxy for notice,
but rather a means for limiting state burdens on in-
terstate commerce.” Quzill, supra at 313, 112 S. Ct.
1904.

The roots of a “physical presence” requirement
under commerce clause analysis were firmly estab-
lished in National Bellas Hess, Inc. v. Department of
Revenue of Ill., 386 U.S. 753, 87 S. Ct. 1389, 18
L.Ed.2d 505 (1967) (Bellas Hess), which involved a
constitutional challenge to a State’s assessment of a
use tax on goods purchased for use in the taxing
State from an out-of-State mail order merchant that
had no in-State retail outlets, sales representatives,
or property. The United States Supreme Court con-
cluded that a State’s assessment of a use tax in such
circumstances created an unconstitutional burden on
interstate commerce because the merchant’s only

15 Because the Capital banks’ challenge to the constitutional-
ity of the FIET under the commerce clause pertains only to the
first prong of the Complete Auto test, we limit our discussion to
that requirement.

16a

connections with the taxing State were by mail or
common carrier. Id. at 758-759, 87 S. Ct. 1889. The
Court’s reasoning for its decision was based, in sig-
nificant part, on the fact that the many local varia-
tions in rates of use tax, in allowable exemptions,
and in administrative requirements would impede
the free conduct of interstate business. Jd. at 759-
760, 87 S. Ct. 1889. The very purpose of the com-
merce clause, the Court stated, “was to ensure a na-
tional economy free from such unjustifiable local en-
tanglements.” Id. at 760, 87 S. Ct. 1389.

Twenty-five years later, the United States Su-
preme Court reaffirmed in Quill, supra at 317-318,
112 S. Ct. 1904, that, with respect to the imposition
of sales and use taxes, the constitutionally sustain-
able measure of contact required for substantial
nexus under the commerce clause was “physical
presence” in the taxing State. The Court made a
point of stating that “[wlJhile contemporary Com-
merce Clause jurisprudence might not dictate the
same result were the issue to arise for the first time
today,” id. at 311, 87 S. Ct. 1389, the Bellas Hess
bright-line physical presence requirement was not
inconsistent with the four-part Complete Auto test,
which the Court described as “continuling] to govern
the validity of state taxes under the Commerce
Clause.” Quill, supra at 310, 112 S. Ct. 1904. Noth-
ing, however, in Quill suggested that physical pres-
ence is required for the imposition of other types of
taxes, including an income-based excise such as the
FIET. To the contrary, while not repudiating the
Bellas Hess rule, the Supreme Court stated in Quill
that it had not, “in [its] review of other types of
taxes, articulated the same physical-presence re-
quirement that Bellas Hess established for sales and
use taxes.” Jd. at 314, 112 S. Ct. 1904 (stating that

17a

Court’s commerce clause jurisprudence “now favors
more flexible balancing analyses”). Moreover, when
summarizing the precedent established in Bellas
Hess, the Court reiterated that, in cases “subsequent
to Bellas Hess and concerning other types of taxes, [it
had] not adopted a similar bright-line, physical-
presence requirement.” /d. at 317, 87 S. Ct. 1389.
See Truck Renting & Leasing Ass’n v. Commissioner
of Revenue, supra at 740 n. 18, 746 N.E.2d 1483 (not-
ing that, in Quill, Supreme Court did not extend
physical presence requirement for imposition of use
or sales tax on out-of-State vendor to other types of
taxes). Cf. Borden Chems. & Plastics v. Zehnder, 312
Ill.App.3d 35, 44, 244 Ill.Dec. 477, 726 N.E.2d 73
(2000) (declining to extend Quill’s physical presence
requirement to income-based taxation, but recogniz-
ing that such requirement would have been satisfied
by taxpayer at issue); Couchot v. State Lottery
Comm’n, 74 Ohio St.3d 417, 425, 659 N.E.2d 1225,
cert. denied, 519 U.S. 810, 117 S. Ct. 55, 186 L.Ed.2d
18 (1996) (same).

The language of the Supreme Court’s decision in
Quill explicitly emphasized, on more than one occa-
sion, a narrow focus on sales and use taxes for the
physical presence requirement, and suggested that
this requirement was limited to those specific as-
sessments and did not apply to the imposition of
other types of State taxes. We will not expand the
Court’s reasoning beyond its articulated boundaries,
particularly where the Court, itself, has limited its
holding to a particular form of taxation.

In a case similar to the present one, the West
Virginia Supreme Court of Appeals considered in
Tax Comm’r of W. Va. v. MBNA Am. Bank, N.A., 220
W.Va. 163, 164-166, 640 S.E.2d 226 (2006), cert. de-
nied sub nom. FIA Card Services, N.A. v. Tax

18a

Comm’r of W. Va., ___ U.S. ___, 127 S. Ct. 2997, 168
L.Ed.2d 719 (2007) (MBNA), whether imposition of
that State’s business franchise and corporation net
income taxes on MBNA America Bank, a Delaware
corporation with no physical presence in West Vir-
ginia, violated the substantial nexus requirement of
the commerce clause. The principal business of
MBNA America Bank was issuing and servicing Visa
and MasterCard credit cards, which it promoted in
West Virginia by mail and telephone solicitation. Jd.
at 164, 640 S.E.2d 226. After considering the evolu-
tion of the Supreme Court’s interpretation of the
dormant commerce clause, the court in MBNA con-
cluded that “Quill’s physical-presence requirement
for showing a substantial Commerce Clause nexus
applie[d] only to use and sales taxes and not to busi-
ness franchise and corporation net income taxes.”
Id. at 169, 640 S.E.2d 226.16

In reaching its conclusion, the West Virginia Su-
preme Court of Appeals opined that (1) the United
States Supreme Court’s decision in Quill was based

16 Contrast J.C. Penney Natl Bank v. Johnson, 19 S.W.3d 831,
842 (Tenn. Ct. App. 1999), cert. denied, 531 U.S. 927, 1218S. Ct.
305, 148 L.Ed.2d 245 (2000) (stating that, while it was not
court’s purpose “to decide whether ‘physical presence’ is re-
quired under the Commerce Clause,” lack of substantial nexus
did not justify assessment of franchise and excise taxes on out-
of-State credit card company), questioned in America Online,
Inc. v. Johnson, No. M2001-00927COA-R3-CV, 2002 WL
1751434 (Tenn. Ct. App. July 30, 2002) (noting that in J.C.
Penney Nat'l Bank v. Johnson, supra, it might have been more
accurate for court to say that “the Supreme Court had rejected
state taxes on interstate commerce where no activities had been
carried on in the taxing state on the taxpayer's behalf” [empha-
sis in original]).

19a

primarily on stare decisis and on the fact that the
precedent established in Bellas Hess had engendered
substantial reliance by the mail order industry, cir-
cumstances that did not compel application beyond
the context of sales and use taxes; (2) the Supreme
Court appeared to have expressly limited the scope of
Quill to sales and use taxes; and (3) the Supreme
Court’s decisions in Bellas Hess and Quill were
based, in part, on the fact that compliance with spe-
cific administrative regulations associated with the
collection of sales and use taxes unduly burdened in-
terstate commerce, but that the collection of fran-
chise and income taxes did not appear to cause simi-
lar compliance burdens.1!7 Jd. at 169-170, 640 S.E.2d

17 Contrary to the Capital banks’ assertion, the board’s finding
that sales and use taxes impose special burdens on interstate
commerce was not based on faulty logic. In its discussion of
these burdens with respect to an out-of-State mail order com-
pany, the United States Supreme Court observed in National
Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753,
759, 87S. Ct. 1389, 18 L.Ed.2d 505 (1967), that if one State can
impede “the free conduct of [such company’s] interstate busi-
ness,” then “so can every other State, and so, indeed, can every
municipality, every school district, and every other political
subdivision throughout the Nation with power to impose sales
and use taxes.” As a result, the Court stated, “(t]he many
variations in rates of tax, in allowable exemptions, and in ad-
ministrative and record-keeping requirements could entangle
{the mail order company] in a virtual welter of complicated ob-
ligations to local jurisdictions with no legitimate claim to im-
pose ‘a fair share of the cost of the local government.” Jd. at
759-760, 87 S. Ct. 1389, quoting Freeman v. Hewit, 329 U.S.
249, 253, 67 S. Ct. 274, 91 L.Ed. 265 (1946). Similarly, in Quill,
supra at 313 n. 6, 112 S. Ct. 1904, the Supreme Court noted
that upholding one State's imposition of a use tax on an out-of-
State mail order company could unduly burden interstate com-

[Footnote continued on next page]

20a

226. The court further stated that the physical pres-
ence test “makes little sense in today’s world” where,
for example, “electronic commerce now makes it pos-
sible for an entity to have a significant economic
presence in a state absent any physical presence
there.”18 Jd. at 171, 640 S.E.2d 226. The analysis
set forth in MBNA is persuasive. !9

[Footnote continued from previous page]

merce where “sinilar obligations might be imposed by the Na-
tion’s 6,000-plus taxing jurisdictions.” Such burdens associated
with the imposition of sales and use taxes are not inconsequen-
tial. An income-based excise, on the other hand, typically is
paid only once a year (except when quarterly estimated taxes
are required), to one taxing jurisdiction at the State level, and
the payment of such an excise does not entail collection obliga-
tions vis-a-vis consumers. See Tax Comm'r of W. Va. v. MBNA
Am. Bank, N.A., 220 W.Va. 163, 170-171, 640 S.E.2d 226
(2006), cert. denied sub nom. FIA Card Serus., N.A. u Tax
Comm’'r of W. Va., __. U.S. ___, 127 S. Ct. 2997, 168 L.Ed.2d
719 (2007). Determinations about whether the Capital banks
are subject to the FIET, in the first instance, and how to appor-
tion income from business activity that is taxable within the
Commonwealth are the sorts of decisions that, more broadly,
can confront all taxpayers, local or out-of-State, when calculat-
ing, reporting, and paying taxes on their income. While the
making of these determinations is certainly more complex for’
large corporate taxpayers, it is part of the cost of doing business
and is not, in our opinion, unduly burdensome on interstate
commerce, particularly where such taxpayers, like the Capital
banks, are earning substantial income from their business ac-
tivities in Massachusetts and where the common usage of com-
puter technology and specialized software has eased the admin-
istrative burdens of tax compliance.

18 In a separate opinion in Quill, Justice White stated: “Per-
haps long ago a seller's ‘physical presence’ was a sufficient part
of a trade to condition imposition of a tax on such presence. But
in today’s economy, physical presence frequently has very little

[Footnote continued on next. page]

2la

Like the West Virginia court, we conclude that
the constitutionality, under the commerce clause, of
the Commonwealth’s imposition of the FIET is de-

[Footnote continued from previous page]

to do with a transaction a State might seek to tax. Wire trans-
fers of money involving billions of dollars occur every day; pur-
chasers place orders with sellers by fax, phone, and computer
linkup; sellers ship goods by air, road, and sea through sundry
delivery services without leaving their place of business.... [A]n
out-of-state direct marketer derives numerous commercial
benefits from the State in which it does business [and the Court
should not, under the commerce clause,] attempt to justify an
anachronistic notion of physical presence in economic terms.”
Quill, supra at 327-328, 112 S. Ct. 1904 (White, J., concurring
in part and dissenting in part). This observation is even more
true today than it was in 1992.

19 In its determination, the board cited several post-Quill de-
cisions that upheld the imposition of income-based taxes on out-
of-State corporations that had no tangible physical presence in
the taxing State. See, e.g., Geoffrey, Inc. v. South Carolina Tax
Comm’n, 313 S.C. 15, 23-24 & n. 4, 437 S.E.2d 138, cert. denied,
510 U.S. 992, 114 S. Ct. 550, 126 L.Ed.2d 461 (1993) (stating
that Quill did not extend physical presence requirement beyond
sales and use taxes, and concluding that licensing intangible
property for use in taxing State established substantial nexus
for imposition of income-based tax). See also Lanco, Inc. v. Di-
rector, Div. of Taxation, 188 N.J. 380, 383, 908 A.2d 176 (2006)
(per curtam), cert. denied, US. __, 127 S. Ct. 2974, 168
L.Ed.2d 702 (2007); Kmart Props., Inc. v. Taxation & Revenue
Dep't, 139 N.M. 177, 185-186, 131 P.3d 27 (Ct. App. 2001), reu’d
on other grounds, 139 N.M. 172, 131 P.3d 22 (2005); A & F
Trademark, Inc. v. Tolson, 167 N.C.App. 150, 159-163, 605
S.E.2d 187 (2004), cert. denied, 546 U.S. 821, 126 S. Ct. 353,
163 L.Ed.2d 62 (2005). While these cases ure instructive with
respect to their analysis of Quill, they are not directly on point
factually, because all involved foreign corporations with intan-
gible property (trademarks, trade names, and service marks)
that was being used in the taxing State by a licensee.

22a

termined not by Quill’s physical presence test, but by
the “substantial nexus” test articulated in Complete
Auto. Accordingly, we turn to the facts of the present
case to determine whether Capital One and FSB had
a substantial nexus with this Commonwealth during
the tax years at issue.

While the concept of “substantial nexus” is more
elastic than “physical presence,” it plainly means a
greater presence, both qualitatively and quantita-
tively, than the minimum connection between a
State and a taxpayer that would satisfy a due proc-
ess inquiry. See note 14, supra. Simply put, the test
is “substantial” nexus, not “minimal” nexus. In addi-
tion to their consumer lending activities, the Capital
banks were soliciting and conducting significant
credit card business in the Commonwealth with
hundreds of thousands of Massachusetts residents,
generating millions of dollars in income for the Capi-
tal banks. In essence, the Capital banks were pro-
viding valuable financial services to Massachusetts
consumers, for which the Capital banks were com-
pensated in the form of interest payments, inter-
change fees, and finance charges. They could not
provide such services in the Commonwealth without
using Massachusetts banking and credit facilities.
In addition, the Capital banks addressed customer
complaints with the assistance of the Massachusetts
Attorney General’s office, and, when necessary, they
used the Massachusetts court system to recover
payment for delinquent accounts. Based on the find-
ings of the board, we conclude that the Capital
banks’ activities in Massachusetts established a sub-
stantial nexus with the Commonwealth and, there-
fore, the assessment of the FIET on the Capital
banks comported with the Federal commerce clause.

Decision of the Appellate Tax Board affirmed.

23a

APPENDIX B

Appellate Tax Board
Commonwealth of Massachusetts

CAPITAL ONE BANK
AND CAPITAL ONE F.S.B.

v.
COMMISSIONER OF REVENUE
Docket Nos. C262391 & C262598

June 22, 2007
FINDINGS OF FACT AND REPORT

In these appeals, the appellants, Capital One
Bank (“COB”) and Capital One F.S.B. (“FSB” and,
together with COB, the “Banks”), challenge the con-
stitutionality of the financial institution excise
(“FIET”)! and the determination of the appellee
Commissioner of Revenue (“Commissioner”) that the
Banks’ in-state activities constituted substantial

1 Both parties adopted the acronym “FIET” for the excise at
issue, based on their description of the excise as the “financial
institution excise tax.” The Board notes that G.L. c. 63, 2 im-
poses an excise, not a tax, on financial institutions. See P.
NICHOLS, TAXATION IN MASSACHUSETTS 16 (3rd ed.
1938). For consistency and ease of reference, however, the
Board also refers to the excise as the “FIET.”

24a

nexus with the Commonwealth of Massachusetts jus-
tifying the imposition of the FIET on them.

On the basis of the parties’ detailed Stipulation
of Facts, exhibits and the iestimony introduced at
the hearing of these appeals, the Appellate Tax
Board (“Board”) made the following findings of fact.

I. JURISDICTION

In response to a notification from the Commis-
sioner that they had not filed FIET returns for the
years at issue, the Banks provided the Commissioner
with apportionment and other relevant information
on or about February 28, 2000. The Commissioner
issued separate Notices of Intention to Assess to
COB and FSB on August 6, 2000. The Commissioner
then issued Notices of Assessment dated September
6, 2000 and September 12, 2000, to COB and FSB,
respectively. The amounts of the assessments at is-
sue in these appeals are $1,758,454.96 for COB and
$159,075 for FSB.

The Banks timely filed applications for abate-
ment of the FIET with the Commissioner on July 10,
2001, which he denied on July 20, 2001. The Banks
then timely filed their appeals with the Board on
September 17, 2001. On the basis of the foregoing,
the Board found and ruled that it had jurisdiction to
hear and decide these appeals.

Il. THE BANKS’ MASSACHUSETTS BUSINESS

At all material times,2 COB was a Virginia char-
tered credit card bank offering credit card products.

2 Unless explicitly stated otherwise, all factual findings relate
to the years at issue.

25a

It was established in 1994 as a wholly-owned sub-
sidiary of Capital One Financial Corporation
(“COFC”), which is a Delaware corporation. COB’s
commercial domicile was in Virginia, where credit
approval activity took place.

FSB was a federally chartered savings bank that
offered consumer lending and deposit products, in-
cluding secured and unsecured credit cards, to indi-
viduals and small businesses. FSB also made unse-
cured installment loans and had a consumer home
loan business. It was established in 1996 as a
wholly-owned subsidiary of COFC.

COFC was the owner of the trademark “Capital
One” and provided the trademark to the Banks,
without license or royalty, to appear on credit cards
which the Banks issued to customers in Massachu-
setts.

As credit card companies doing business in Mas-
sachusetts, the Banks were required to file quarterly
credit card issuer’s reports with the Massachusetts
Division of Banks.

During the years at issue, the Banks’ primary
assets consisted of consumer loans using Capital One
credit cards as the credit extension vehicle. The
Banks also issued certificates of deposit and accepted
secured credit card savings deposits. Both COB and
FSB generated interest and other income through
finance charges assessed on outstanding loan receiv-
ables, fees from credit card transactions described
below, and interest earned on investment securities
and money market investments.

Using a system called Information-Based Strat-
egy (“IBS”), which used statistical modeling tech-
niques that segment potential customer lists based
on credit scores, demographics, and other character-

26a

istics, the Banks targeted specific potential consum-
ers in Massachusetts. As a result of the Banks’ mar-
keting efforts in Massachusetts, the number of Mas-
sachusetts residents carrying COB credit cards rose
from slightly fewer than 200,000 to more than
460,000 during the years at issue and FSB’s Massa-
chusetts customers rose from less than 4,000 to more
than 7,000 during that period. The Banks acknowl-
edged spending between $50 and $100 per individual
cardholder on marketing; at more than 400,000
cardholders in Massachusetts, the Banks spent an
estimated $20 million-plus to acquire Massachusetts
residents as customers during the periods at issue.

The acquisition of Massachusetts customers has
resulted in millions of dollars in income to the
Banks; COB’s receivables related to Massachusetts
customers grew from $72,162,796 to $113,655,624
during the years at issue, while FSB’s receivables
from Massachusetts accounts grew from $11,457,826
to $16,588,914. COB’s income from Massachusetts
customers rose from $22,319,653 in 1995 to
$57,941,377 in 1998, while FSB’s Massachusetts in-
come rose from $1,534,525 in 1996 to more than
$3,000,000 in both 1997 and 1998.

The Banks entered into agreements with Massa-
chusetts residents for purposes of issuing “general
purpose” credit cards branded with the Capital One
trademark and the logo of either Visa or Master-
Card. Visa and MasterCard are associations whose
members issued credit cards with the association’s
logo, acquired merchants that accepted the associa-
tion’s credit cards, or both. Visa and MasterCard
provided services for their members, including the
authorization, settlement and clearance of transac-

tions.

27a

Under the credit card agreement, the Banks
agreed to advance funds on behalf of their customers
for transactions in which the customer used the
“Capital One” Visa-branded credit card or the “Capi-
tal One” MasterCard-branded credit card to make
purchases of goods and/or services from merchants or
other service providers nationwide. The Banks also
agreed to allow customers to obtain cash advances at
banks nationwide displaying the Visa or MasterCaz
logo or at. bank automated teller machines (“ATMs”)
displaying the Visa or MasterCard logo, or at ATMs
displaying the PLUS or CIRRUS logo, if the logo also
appeared on the card.?

The Banks were members of the Visa and
MasterCard associations and paid them fees relating
to credit card transactions nationwide, including
those relating to credit card transactions engaged in
by the Banks’ Massachusetts customers. As mem-
bers of the Visa and MasterCard associations, the
Banks received numerous benefits, including tech-
nology and equipment necessary to process credit
transactions. As members, the Banks were able to
tap into a nationwide interconnected infrastructure
that provided enormous value to their business and
their customers, who received a credit card that
could be used virtually anywhere, including within
the Commonwealth.

A typical credit card transaction proceeds as fol-
lows. When a cu

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_0307%3A1. Public record. Not legal advice.