Up in New Hampshire, retailers are beginning to worry if they’re going to have to ask all their customers for proof of residency – or at least proof that they’re not from Massachusetts. Because if those consumers hail from the Bay State, the Commonwealth’s revenuers want Granite State merchants to collect Massachusetts sales tax.
It’s all in a case revolving around tire sales. Massachusetts officials say that when customers drive in to a New Hampshire Town Fair Tire store, and their cars have Massachusetts license plates, the tire jockey’s ought to know their patrons are trying to dodge Massachusetts sales tax.
Town Fair Tire takes exception that their employees ought to be tax detectives, and they’re arguing in court that the Commonwealth’s stance is in violation of the Commerce Clause of the U.S. Constitution. The states can’t unduly interfere with interstate commerce, and Town Fair Tire says that’s what’s happening here.
Town Fair Tire is probably going to lose. Just ask Capital One.
Massachusetts essentially turned Capital One’s tag line – “What’s in your wallet” – around, asking the credit card and banking company to pony up some green under the state’s financial institution’s excise tax. Capital One, based in Virginia, argued that it didn’t owe any tax in Massachusetts. The levy is supposed to affect banks and other financial companies that are in Massachusetts, not just ones that might have made a loan here. Capital One is not located here, it doesn’t have any branches here, it doesn’t have any salespeople here.
A fat lot of good the Commerce Clause did Capital One.
The bank asserted that the Commerce Clause ties the hands of the Massachusetts Department of Revenue. The DOR disagreed, and the case made its way to the highest court in the state. The justices there had no problem affirming the tax board’s stand.
The question of whether this, or any state, has a right to impose local taxes on companies in other states hinges on two words: “substantial nexus.” And in the end, it really comes down to just one of those words, and that’s “substantial.” Capital One thought it knew what that word meant. It meant actually being in the state.
It turns out that in the eyes of the court, “substantial” actually means “being really interested in doing business with people who live here.”
At issue are the tax years of 1996 through 1998. Over those three years, Capital One did a masterful marketing job. By advertising, a lot, it grew its Massachusetts cardholder base from about 200,000 people to nearly a half million. Its total income from Massachusetts card holders over those same three years grew from about $24 million to about $60 million.
That was good enough for our Supreme Judicial Court. Even though Capital One never set foot here during that time, the court concurred with the tax board that the lender had a “substantial nexus” here because it advertised in Massachusetts, because it used the Massachusetts court system to collect on bad debt here, and because it filed reports with the state Division of Banks, as it was required to do.
The ruling creates a strong likelihood that companies across the world whose ad might appeal to a Massachusetts consumer are liable for Massachusetts taxes. It certainly sends a signal that if out-of-state companies actually comply with Massachusetts reporting requirements, they run a grave risk of subjecting themselves to onerous tax burdens.
What’s in Capital One’s wallet? A hefty bill from the Commonwealth of Massachusetts. None of those barbarian marauders who populate Capital One’s commercials could fight off the Bay State’s expansive need for cash. So what chance does a tire company have?
