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Economic presence meets taxing requirement

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In a matter of first impression, the Indiana Tax Court has ruled that a bank didn't need to have a physical presence in the state to be subject to Indiana's Financial Institutions Tax.

In MBNA America Bank, N.A. & Affiliates v. Indiana Department of State Revenue, No. 49T10-0506-TA-53, MBNA America Bank appealed the Department of State Revenue's denial of its claims for a refund of the Indiana Financial Institutions Tax (FIT) it paid during the 1992-98 tax years. MBNA argued because its principal place of business is in Delaware and it doesn't have a place of business here nor did any of its employees come here on business, it wasn't subject to the FIT.

The bank believed under the Commerce Clause, which prohibits states from charging taxes on an out-of-state business unless it has a "substantial nexus" with the taxing state, a company has to have a physical presence in Indiana in order to be charged the FIT. The department moved for summary judgment on the issue.

Indiana Tax Judge Thomas Fisher determined the U.S. Supreme Court holdings in National Bellas Hess v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992), don't control in the instant case because the U.S. Supreme Court didn't extend the physical presence requirement beyond sales and use taxes.

Because those cases don't control, it becomes a matter of first impression for the tax court to determine whether an economic presence can satisfy the "substantial nexus" requirement for purposes of the FIT. Judge Fisher relied on a Supreme Court of West Virginia case on the issue, adopted its reasoning in Tax Commissioner of West Virginia v. MBNA American Bank, 640 S.E.2d 226 (W. Va. 2006), and held an economic presence is sufficient to meet the substantial nexus requirement.

Based on the facts in the instant case, MBNA had an economic presence in Indiana and thus had a substantial nexus with Indiana for purposes of the FIT. Judge Fisher granted the department's motion for summary judgment.

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