State tax on interstate commerce (West Virginia)

West Virginia Supreme Court Reports

TAX COM. OF STATE OF W.V. v. MBNA AMERICA BANK, 33049 (W.V.
11-21-2006) TAX COMMISSIONER OF THE STATE OF WEST VIRGINIA,
Petitioner Below, Appellee, v. MBNA AMERICA BANK, N.A.,
Respondent Below, Appellant. No. 33049 Supreme Court of
Appeals of West Virginia, September 2006 Term. Submitted:
September 19, 2006 Filed: November 21, 2006 Dissenting
Opinion Added January 2, 2007 Concurring Opinion Added
January 8, 2007

Appeal from the Circuit Court of Kanawha County, Honorable
Louis H. Bloom, Judge, Civil Action No. 04-AA-157.

AFFIRMED.

SYLLABUS BY THE COURT

1. “A state tax on interstate commerce will not be
sustained unless it: `(1) has a substantial nexus with the
State; (2) is fairly apportioned; (3) does not
discriminate; and (4) is fairly related to the services
provided by the State.’ Maryland v. Louisiana, [451] U.S.
[725], [754], 101 S.Ct. 2114, 2133, 68 L.Ed.2d 576 (1981).”
Syllabus Point 1, Western Maryland Ry. Co. v. Goodwin, 167
W. Va. 804, 282 S.E.2d 240 (1981).

2. The United States Supreme Court’s determination in
Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904,
119 L.Ed.2d 91 (1992), that an entity’s physical presence in
a state is required to meet the “substantial nexus” prong
of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97
S.Ct. 1076, 51 L.Ed.2d 326 (1977), applies only to state
sales and use taxes and not to state business franchise and
corporation net income taxes.

Darrell V. McGraw, Jr., Esq., Attorney General, Barbara H.
Allen, Esq., Managing Deputy Attorney General, Katherine A.
Schultz, Esq., Senior Deputy Attorney General, A.M.
“Fenway” Pollack, Esq., Assistant Attorney General,
Charleston, West Virginia, Attorneys for the Tax
Commissioner.

G. Thomas Battle, Esq., Craig A. Griffith, Esq., Spilman,
Thomas & Battle, Charleston, West Virginia and Arthur R.
Rosen, Esq. (Pro Hac Vice), Donald M. Griswold, Esq. (Pro
Hac Vice), McDermott, Will & Emery, New York, New York,
Attorneys for MBNA America Bank.

JUSTICE MAYNARD delivered the Opinion of the Court.

CHIEF JUSTICE DAVIS concurs and reserves the right to file
a concurring opinion.

JUSTICE BENJAMIN dissents and reserves the right to file a
dissenting opinion.

MAYNARD, Justice:

Appellant MBNA America Bank appeals the June 27, 2005,
order of the Circuit Court of Kanawha County that ruled
that imposition of West Virginia’s business franchise tax
and corporation net income tax on MBNA, a Delaware
Corporation, for tax years 1998 and 1999, does not violate
the Commerce Clause. For the reasons that follow, we affirm
the circuit court.

I.

FACTS

Appellant MBNA America Bank is a foreign corporation which
has its principal place of business and commercial domicile
in Wilmington, Delaware. During the two years in question,
1998 and 1999, MBNA had no real or tangible personal
property and no employees located in West Virginia. The
principal business of MBNA at the relevant times in this
case was issuing and servicing VISA and MasterCard credit
cards. This business included the extension of unsecured
credit to customers who use these credit cards. MBNA
promoted its business in West Virginia via mail and
telephone solicitation.

As noted above, the two tax years at issue are 1998 and
1999. In 1998, MBNA’s gross receipts attributable to West
Virginia customers amounted to $8,419,431.00, and in 1999,
its gross receipts amounted to $10,163,788.00. For tax year
1998, MBNA paid a West Virginia Business Franchise Tax[fn1]
of $32,010.00 and a West Virginia Corporation Net Income
tax[fn2] of $168,034.00. For tax year 1999, MBNA paid a
Business Franchise Tax in the amount of $42,339.00 and a
Corporation Net Income Tax in the amount of $220,897.00.

Thereafter, MBNA filed refund claims with the State Tax
Commissioner seeking the return of the business franchise
and corporation net income taxes paid for 1998 and 1999, on
the basis that the Tax Commissioner lacked jurisdiction
over MBNA. The Commissioner denied the refunds based on its
finding that MBNA regularly engaged in business in West
Virginia under the applicable statutes.[fn3]

MBNA subsequently filed an appeal from the Tax
Commissioner’s decision with the Office of Tax Appeals
(hereafter “OTA”). By decision dated October 22, 2004, the
Chief Administrative Law Judge (hereafter “ALJ”) of the OTA
ruled in favor of MBNA and authorized refunds to MBNA of
its 1998 and 1999 franchise and corporation net income
taxes. The ALJ reasoned that under the Commerce Clause, a
state may not subject an activity to a tax unless that
activity has a “substantial nexus” with the taxing state.
The ALJ further reasoned that a substantial nexus requires
a finding that the putative taxpayer has a physical presence
in the taxing state, and mere economic exploitation of the
market is not sufficient. Because it was agreed that MBNA
does not have a physical presence in West Virginia, the ALJ
concluded that the State’s business franchise and
corporation net income taxes could not be imposed on MBNA’s
activity within the State.

The Tax Commissioner appealed the ALJ’s decision to the
Circuit Court of Kanawha County. The circuit court reversed
the decision of the ALJ. According to the circuit court,
physical presence is not necessary in order to show a
substantial nexus for purposes of state taxation of foreign
corporations. Rather, the circuit court found that MBNA’s
significant business in the state is sufficient to meet the
substantial nexus standard. Therefore, concluded the
circuit court, MBNA had a substantial nexus with West
Virginia during the tax years in question so that
imposition of the State’s business franchise and corporate
net income taxes on MBNA did not violate the Commerce
Clause. MBNA now appeals the circuit court’s order.

II.

STANDARD OF REVIEW

The Court has previously recognized that a lower court’s
determination of whether a state tax violates the Commerce
Clause is reviewed de novo. See Hartley Marine Corp. v.
Mierke, 196 W. Va. 669, 474 S.E.2d 599 (1996) (explaining
that review of lower court judgment on whether state
legislation interferes with free flow of interstate
commerce is de novo).

III.

DISCUSSION

The single issue[fn4] raised in this appeal is whether
application of West Virginia’s business franchise and
corporation net income taxes to MBNA, a business with no
physical presence in this state, violates the Commerce
Clause of the United States Constitution.[fn5] In Article
1, § 8 of the United States Constitution, Congress
is expressly granted the authority “[t]o regulate Commerce
with foreign Nations, and among the several States.”[fn6]
The Supreme Court has determined that the Commerce Clause,
in addition to being a positive grant of power to Congress,
also acts to prevent certain state regulation that
interferes with interstate commerce. See South Carolina
State Highway Dept. v. Barnwell Bros., Inc., 303 U.S. 177,
58 S.Ct. 510, 82 L.Ed. 734 (1938). This prohibition on state
action is known as the “negative” or “dormant” Commerce
Clause.

The Supreme Court’s interpretation of the dormant Commerce
Clause “has evolved substantially over the years,
particularly as that Clause concerns limitations on state
taxation powers.” Quill Corp. v. North Dakota, 504 U.S.
298, 309, 112 S.Ct. 1904, 1911, 119 L.Ed.2d 91 (1992)
(citation omitted). In tracing this evolution, the Court
has explained:

Our early cases, beginning with Brown v. Maryland, 12
Wheat. 419, 6 L.Ed. 678 (1827), swept broadly, and in
Leloup v. Port of Mobile, 127 U.S. 640, 648, 8 S.Ct. 1380,
1384, 32 L.Ed. 311 (1888), we declared that “no State has
the right to lay a tax on interstate commerce in any
form.” We later narrowed that rule and distinguished
between direct burdens on interstate commerce, which were
prohibited, and indirect burdens, which generally were
not. See, e.g., Sanford v. Poe, 69 F. 546 (CA 6 1895),
aff’d sub. nom., Adams Express Co. v. Ohio State Auditor,
165 U.S. 194, 220 (1897). Western Live Stock v. Bureau of
Revenue, 303 U.S. 250, 256-258, 58 S.Ct. 546, 549-550, 82
L.Ed. 823 (1938), and subsequent decisions rejected this
formal, categorical analysis and adopted a
“multiple-taxation doctrine” that focused not on whether a
tax was “direct” or “indirect” but rather on whether a tax
subjected interstate commerce to a risk of multiple
taxation. However, in Freeman v. Hewit, 329 U.S. 249,
256, 67 S.Ct. 274, 278, 91 L.Ed. 265 (1946), we embraced
again the formal distinction between direct and indirect
taxation, invalidating Indiana’s imposition of a gross
receipts tax on a particular transaction because that
application would “impos[e] a direct tax on interstate
sales.”

Quill, 504 U.S. at 309-310, 112 S.Ct. at 1911. The Court
subsequently abandoned formal distinctions in favor of
looking at the practical effects of state taxing statutes.
In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97
S.Ct. 1076, 51 L.Ed.2d 326 (1977), the Court set forth the
current test for determining whether a state tax violated
the Commerce Clause. This Court recognized the Complete
Auto test in Syllabus Point 1 of Western Maryland Ry. Co.
v. Goodwin, 167 W. Va. 804, 282 S.E.2d 240 (1981), where we
held that,

A state tax on interstate commerce will not be sustained
unless it: “(1) has a substantial nexus with the State;
(2) is fairly apportioned; (3) does not discriminate; and
(4) is fairly related to the services provided by the
State.” Maryland v. Louisiana, [451] U.S. [725], [754],
101 S.Ct. 2114, 2133, 68 L.Ed.2d 576 (1981).[fn7]
(Footnote added).

The current issue deals solely with the “substantial
nexus” prong of the Complete Auto test. Specifically, we
are asked to decide whether the substantial nexus standard
can only be met by showing that the putative taxpayer has
an actual physical presence in the taxing state. In
answering this question, we must consider the Supreme
Court’s decisions in National Bellas Hess, Inc. v.
Department of Revenue, 386 U.S. 753, 87 S.Ct. 1389, 18
L.Ed.2d 505 (1967), overruled, in part, Quill supra,[fn8]
and Quill, the Court’s most recent pronouncement on state
tax jurisdiction.

Bellas Hess involved an attempt by Illinois to require a
mail-order business to collect and pay use taxes on goods
purchased within the state. National Bellas Hess
(hereinafter “National”) was incorporated in Delaware and
had its principal place of business in Missouri. It had
neither outlets nor employees in Illinois. Twice a year,
National mailed catalogues to the company’s customers in
Illinois. Orders for merchandise were mailed by customers
to National’s Missouri plant, and the ordered items were
mailed to the customers either by mail or common carrier.
National challenged the Illinois use tax levied against it
on the basis, inter alia, that it created an
unconstitutional burden on interstate commerce. The Supreme
Court held that Illinois had no power to impose the use tax
on National. The Court based its decision in part on the
undue burden placed on interstate commerce by compliance
with a host of administrative regulations governing the
collection of sales and use taxes.

In 1992, the Supreme Court reaffirmed in Quill its Bellas
Hess holding to the extent that Bellas Hess held that a
showing of the taxpayer’s physical presence in the taxing
state was necessary to sustain a sales and use tax against
a challenge under the Commerce Clause.[fn9] Quill was a
Delaware corporation with offices and warehouses in
Illinois, California, and Georgia. It sold office equipment
and supplies, and solicited business through catalogs,
flyers, advertisements in national periodicals, and
telephone calls. Customers received their ordered
merchandise from Quill through mail or common carrier.
Despite the fact that Quill had no employees in North
Dakota, and that its tangible property in North Dakota was
“either insignificant or nonexistent,” 504 U.S. at 302,
112 S.Ct. at 1907, Quill was required to collect a use and
sales tax from its North Dakota customers and remit it to
the state. Quill challenged imposition of the tax on the
ground that North Dakota did not have the power to compel
it to collect a use tax from its North Dakota customers.

In addressing this issue, the Supreme Court first
indicated that in determining the propriety of a state use
tax on an out-of-state corporation “the nexus requirements
of the Due Process and Commerce Clauses are not identical.”
504 U.S. at 312, 112 S.Ct. at 1913.[fn10] The analysis
under the Due Process Clause, explained the Court, is
comparable to that used in determining whether a State can
exercise personal jurisdiction over a person. Specifically,
there must be “some definite link, some minimum connection,
between a state and the person, property, or transaction it
seeks to tax.” 504 U.S. at 306, 112 S.Ct. at 1909 (quoting
Miller Brothers Co. v. Maryland, 347 U.S. 340, 344-345, 74
S.Ct. 535, 539, 98 L.Ed. 744 (1954)). This is in order to
ensure that imposition of a duty to collect a use tax on an
out-of-state corporation does not offend traditional
notions of fairness. Further, the Court found that the
minimum connection is satisfied where the business “is
engaged in continuous and widespread solicitation of
business within a State[] [because] [s]uch a corporation
clearly has fair warning that [its] activity may subject
[it] to the jurisdiction of the foreign sovereign.” 504
U.S. at 308, 112 S.Ct. at 1911 (internal quotation marks
and citations omitted). The Court concluded that the Due
Process Clause does not require physical presence in a
State for the imposition of a duty to collect a use tax.

The Commerce Clause and its nexus requirement, in
contrast, explained the Court, “are informed not so much by
concerns about fairness for the individual defendant as by
structural concerns about the effects of state regulation
on the national economy. . . . Accordingly, we have ruled
that [the Commerce] Clause . . . bars state regulations
that unduly burden interstate commerce.” 504 U.S. at 312,
112 S.Ct. at 1913. (Citations omitted). “Thus, `the
substantial nexus’ requirement is . . . a means for
limiting state burdens on interstate conference.” 504 U.S.
at 313, 112 S.Ct. at 1913. The Quill Court ultimately
concluded that for purposes of imposing on an out-of-state
business the duty of collecting use and sales taxes on
in-state customers, the Complete Auto substantial nexus
prong would best be determined by application of a
“bright-line, physical-presence requirement.” 504 U.S. at
317, 112 S.Ct. at 1916.

The major question left open by the Supreme Court’s opinion
in Quill is the one that now confronts us: Does the
physical presence requirement applicable to determining
the constitutionality of requiring out-of-state mail-order
houses to collect use taxes on in-state sales under the
Commerce Clause extend to other types of state taxes?
MBNA’s position is that Quill extends to the business
franchise and corporation net income taxes at issue. The
Tax Commissioner posits, on the other hand, that physical
presence is not a requirement of the substantial nexus
standard in regards to the taxes at issue.[fn11]

After careful consideration of the parties’ arguments, the
relevant legal authority, and the Court’s reasoning in
Quill, we conclude that Quill’s physical-presence
requirement for showing a substantial Commerce Clause nexus
applies only to use and sales taxes and not to business
franchise and corporation net income taxes. There are
several reasons for our conclusion. First, we agree with
the Tax Commissioner that a close reading of Quill
indicates that its reaffirmation of the Bellas Hess
physical-presence test for use and sales taxes under the
Commerce Clause is grounded primarily on stare decisis. For
example, the Court in Quill notes that “[w]hile
contemporary Commerce Clause jurisprudence might not
dictate the same result were the issue to arise for the
first time today, Bellas Hess is not inconsistent with
Complete Auto and our recent cases.” Quill, 504 U.S. at
311, 112 S.Ct. at 1912. The Court further indicated that
“the Bellas Hess rule has engendered substantial reliance
and has become part of the basic framework of a sizable
industry. The interest in stability and orderly development
of the law that undergirds the doctrine of stare decisis
therefore counsels adherence to settled precedent.” Id.,
504 U.S. at 317, 112 S.Ct. at 1916 (internal quotations and
citation omitted). Finally, the Court concluded that “the
continuing value of a bright-line rule in this area and the
doctrine and principles of stare decisis indicate that the
Bellas Hess rule remains good law.” Id.

This reasoning is supported by several legal commentators.
See John A. Swain, State Income Tax Jurisdiction: A
Jurisprudential and Policy Perspective, 45 Wm. & Mary L.Rev.
319 (October 2003) (arguing that the Quill Court relied on
stare decisis rather than defending the physical presence
test on the merits); Richard D. Pomp & Michael J. McIntyre,
State Taxation of Mail-Order Sales of Computers After
Quill: An Evaluation of MTC Bulletin 95-1, 11 State Tax
Notes 177, 179-80 (July 15, 1996) (maintaining that Quill
is essentially a political decision responding to concerns
about retroactivity and the practical consequences of
overruling Bellas Hess); Michael T. Fatale, State Tax
Jurisdiction and the Mythical “Physical Presence”
Constitutional Standard, 54 Tax Lawyer 105, 113 (Fall,
2000) (opining that “[a] primary basis for the [Quill]
holding was the Court’s conclusion that the mail order
industry had grown in large part in reliance on Bellas
Hess[,] [and] [b]ecause the Bellas Hess rule had become the
`basic framework’ of a sizable industry) (footnotes
omitted). Thus, because Quill’s physical-presence test for
sales and use taxes was based in large part on the mail
order industry’s reliance on Bellas Hess, we are not
compelled to apply Quill’s physical presence standard to
the present circumstances.

Second, the Supreme Court appears to have expressly
limited Quill’s scope to sales and use taxes. First, the
Quill Court noted that “[a]lthough we have not, in our
review of other types of taxes, articulated the same
physical-presence requirement that Bellas Hess established
for sales and use taxes, that silence does not imply
repudiation of the Bellas Hess rule.” Quill, 504 U.S. at
314, 112 S.Ct. at 1914. Also, the Court commented that
“although in our cases subsequent to Bellas Hess and
concerning other types of taxes we have not adopted a
similar bright-line, physical-presence requirement, our
reasoning in those cases does not compel that we now reject
the rule that Bellas Hess established in the area of sales
and use taxes.” Id., 504 U.S. at 317, 112 S.Ct. at 1916. We
believe that a reasonable construction of this language
clearly implies that Quill applies only to sales and use
taxes and not to other types of state taxes.[fn12]

Third, the Bellas Hess and Quill courts based their
decisions in part on the fact that compliance with
administrative regulations in the collection of sales and
use taxes places an undue burden on interstate commerce.
Specifically, the Bellas Hess Court explained:

In order to uphold the power of Illinois to impose use
tax burdens on National in this case, we would have to
repudiate totally the sharp distinction . . . between mail
order sellers with retail outlets, solicitors, or property
within a State, and those who do no more than communicate
with customers in the State by mail or common carrier as
part of a general interstate business. But this basic
distinction, which until now has been generally recognized
by the state taxing authorities, is a valid one, and we
decline to obliterate it.

. . . For if Illinois can impose such burdens, 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. The many variations in rates of tax,
in allowable exemptions, and in administrative and
record-keeping requirements could entangle National’s
interstate business in a virtual welter of complicated
obligations to local jurisdictions with no legitimate
claim to impose a fair share of the cost of the local
government.

The very purpose of the Commerce Clause was to ensure a
national economy free from such unjustifiable local
entanglements. Under the Constitution, this is a domain
where Congress alone has the power of regulation and
control.

Bellas Hess, 386 U.S. at 758-760, 87 S.Ct. at 1392-1393
(internal quotation marks and footnotes omitted). According
to the Court, at the time Bellas Hess was decided, local
sales taxes were imposed by over 2,300 localities, many of
them accompanied by a use tax, utilizing several different
rates. Id., 386 U.S. at 759 fn. 12 and fn. 13, 87 S.Ct. at
1393 fn. 12 and fn. 13.[fn13]

The Quill Court likewise recognized the potential burden
on interstate commerce posed by North Dakota’s sales and
use taxes.

North Dakota’s use tax illustrates well how a state tax
might unduly burden interstate commerce. On its face,
North Dakota law imposes a collection duty on every vendor
who advertises in the State three times in a single year.
Thus, absent the Bellas Hess rule, a publisher who
included a subscription card in three issues of its
magazine, a vendor whose radio advertisements were heard
in North Dakota on three occasions, and a corporation
whose telephone sales force made three calls into the
State, all would be subject to the collection duty. What
is more significant, similar obligations might be imposed
by the Nation’s 6,000-plus taxing jurisdictions.

Quill, 504 U.S. at 313 fn. 6, 112 S.Ct. at 1913 fn. 6,
citing Bellas Hess, 386 U.S. at 759-760, 87 S.Ct. at 1393
(noting that the “many variations in rates of tax, in
allowable exemptions, and in administrative and
record-keeping requirements could entangle [a mail-order
house] in a virtual welter of complicated obligations”)
(additional citation omitted).

In contrast to the sales and use taxes described in Bellas
Hess and Quill, the franchise and income taxes at issue in
this case do not appear to cause the same degree of
compliance burdens. As noted above, the task of collecting
taxes and remitting them to the government demands
knowledge of a multitude of administrative regulations,
including various deductions and tax rates, as well as
record-keeping requirements. Also, as a general matter,
sales and use taxes must be remitted to the government on a
more frequent basis than income and franchise taxes. For
example, in West Virginia vendors are charged with the duty
of collecting from purchasers the consumer sales and
service tax and paying the tax to the Tax Commissioner on a
monthly basis. This entails making out and mailing to the
Commissioner a return for the preceding month on a
prescribed form showing the total gross proceeds of the
vendor’s business during that time, the gross proceeds of
the vendor’s business upon which the tax is based, the
amount of the tax for which the vendor is liable, and any
further information necessary in the computation and
collection of the tax which the Commissioner may require.
See W. Va. Code § 11-15-16 (2003). In contrast,
income and franchise taxes are paid by the business entity
itself so that no collection duties are involved. Also,
income and franchise taxes are generally paid annually. See
e.g., W. Va. Code § 11-23-9 (1996) (persons subject
to business franchise tax shall make and file an annual
return) and W. Va. Code § 11-24-13 (1993)[fn14]
(requiring annual filing of corporation net income tax
return).[fn15]

Finally, we believe that the Bellas Hess physical-presence
test, articulated in 1967, makes little sense in today’s
world. In the previous almost forty years, business
practices have changed dramatically. When Bellas Hess was
decided, it was generally necessary that an entity have a
physical presence of some sort, such as a warehouse,
office, or salesperson, in a state in order to generate
substantial business in that state. This is no longer true.
The development and proliferation of communication
technology exhibited, for example, by the growth of
electronic commerce now makes it possible for an entity to
have a significant economic presence in a state absent any
physical presence there. For this reason, we believe that
the mechanical application of a physical-presence standard
to franchise and income taxes is a poor measuring stick of
an entity’s true nexus with a state.

Accordingly, we now hold that the United States Supreme
Court’s determination in Quill Corp. v. North Dakota, 504
U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), that an
entity’s physical presence in a state is required to meet
the “substantial nexus” prong of Complete Auto Transit,
Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326
(1977), applies only to state sales and use taxes and not
to state business franchise and corporation net income
taxes.

Rather than a physical presence standard, this Court
believes that a significant economic presence test is a
better indicator of whether substantial nexus exists for
Commerce Clause purposes. At least one legal commentator
has suggested such a test and to some degree defined its
parameters. See Edson, 49 Tax Lawyer at 943. According to
this commentator, a substantial economic presence standard”
incorporates due process `purposeful direction’ towards a
state while examining the degree to which a company has
exploited a local market.” Id. Further, “[a] substantial
economic presence analysis involves an examination of both
the quality and quantity of the company’s economic
presence.” Id., 49 Tax Law. at 944. Finally, under this
test, “[p]urposeful direction towards a state is analyzed
as it is for Due Process Clause purposes,” and the Commerce
Clause analysis requires the additional examination of “the
frequency, quantity and systematic nature of a taxpayer’s
economic contacts with a state.” Id., 49 Tax Law. at 945.
We find this rationale persuasive and will apply it in
determining the constitutionality of the taxes at issue.

First, however, we must address several objections
proffered by MBNA to the application of any standard other
than physical presence. Initially, MBNA contends that a
greater nexus requirement should be applied to the
imposition of direct taxes such as those at issue because
such taxes are actually more burdensome. This is because
sales and use taxes merely require an entity to collect the
tax from consumers and remit the tax money to the
government, thus suffering the administrative complications
and inconvenience but not the cost of the tax. In sharp
contrast, says MBNA, franchise and income taxes not only
have compliance burdens but also must be paid from the
entity’s own pocket. For support, MBNA cites National
Geographic Society v. California Bd. of Equalization, 430
U.S. 551, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977), in which
the Supreme Court distinguished between a use tax and a
direct tax and implied that a higher Commerce Clause
standard would be required to support the imposition of a
direct tax.[fn16]

We do not agree with MBNA’s argument on this issue.
Notably, the Supreme Court’s comment in National Geographic
Society was dicta in that it was not necessary to the
decision in that case. In contrast, the Bellas Hess and
Quill Courts placed significant weight on the fact that
there are substantial compliance burdens attached to the
collection of sales and use taxes. Therefore, we reject
MBNA’s claim that the imposition of direct taxes is a
greater burden than the duty to collect taxes so that the
Bellas Hess/Quill physical-presence test should also apply
to the imposition of the direct taxes at issue.[fn17]

MBNA also argues that adoption of any substantial nexus
requirement short of showing actual physical presence is in
fact simply applying a Due Process minimum contacts
standard in violation of Quill which expressly held that
the Due Process and Commerce Clause analyses are separate.
We disagree. The Due Process Clause requires merely some
minimum connection between a state and the person, property
or transaction it seeks to tax. In contrast, a substantial
nexus under the Commerce Clause requires that an entity’s
contacts with the taxing state be more frequent and
systematic in nature. Additionally, an entity’s
exploitation of the market must be greater in degree than
under the Due Process standard so that its economic
presence can be characterized as significant or
substantial. In sum, although a substantial economic
presence standard is by nature more elastic than the
bright-line physical presence test, we are convinced that
when properly applied, a greater nexus is required under
the substantial economic presence standard that under the
minimum contacts analysis.

Finally, MBNA avers that the only case from a foreign
jurisdiction that is factually on point with the instant
case is J.C. Penney Nat’l Bank v. Johnson, 19 S.W.3d 831
(Tenn.Ct.App. 1999), in which the Tennessee appellate court
applied the physical-presence test to Tennessee’s attempted
imposition of income taxes on an out-of-state credit card
company. While we acknowledge that J.C. Penney is factually
on point and addresses the same issue as the one before us,
for the reasons set forth above we reject the reasoning in
J.C. Penney, and decline to apply it to the instant
case.[fn18]

We now turn our attention to the facts of the instant case
to determine whether MBNA had a substantial nexus with this
State during the time period in question. The record shows
that MBNA continuously and systematically engaged in direct
mail and telephone solicitation and promotion in West
Virginia. Further, in tax year 1998, MBNA had significant
gross receipts attributable to West Virginia customers in
the amount of $8,419,431.00, and in tax year 1999, MBNA had
significant gross receipts attributable to its West
Virginia customers in the amount of $10,163,788.00. In
light of these facts, this Court has no trouble concluding
that MBNA’s systematic and continuous business activity in
this State produced significant gross receipts attributable
to its West Virginia customers which indicate a significant
economic presence sufficient to meet the substantial nexus
prong of Complete Auto.[fn19]

Finally, prior to concluding, we simply wish to acknowledge
the great challenge in applying the Commerce Clause to the
ever-evolving practices of the marketplace. James Madison,
Benjamin Franklin, and the other Framers at the
Constitutional Convention who adopted the Commerce Clause
lived in a world that is impossible for people living today
to imagine. The Framers’ concept of commerce consisted of
goods transported in horse-drawn, wooden-wheeled wagons or
ships with sails. They lived in a world with no
electricity, no indoor plumbing, no automobiles, no paved
roads, no airplanes, no telephones, no televisions, no
computers, no plastic credit cards, no recorded music, and
no iPods. Likewise, it would have been impossible for the
Framers to imagine our world. When they fashioned the
Commerce Clause, they could not possibly have foreseen the
complex and varied ways that commerce is conducted today,
especially via the internet and electronic commerce. It
would be nonsense to suggest that they could foresee or
fathom a time in which a person’s telephone call to his or
her local credit card company would be routinely answered
by a person in Bombay, India, or that a consumer could
purchase virtually any product on a computer with the click
of a mouse without leaving home. This recognition of the
staggering evolution in commerce from the Framers’ time up
through today suggests to this Court that in applying the
Commerce Clause we must eschew rigid and mechanical legal
formulas in favor of a fresh application of Commerce Clause
principles tempered with healthy doses of fairness and
common sense. This is what we have attempted to do herein.

IV.

CONCLUSION

In conclusion, for the reasons set forth above, we affirm
the June 27, 2005, order of the Circuit Court of Kanawha
County and conclude that West Virginia’s imposition of its
business franchise and corporation net income taxes on MBNA
for the tax years 1998 and 1999, did not violate the
Commerce Clause.

Affirmed.