Potential New State Tax Liabilities for Financial Institutions

By Charles Marston

A recent decision by the United States Supreme Court not to hear a case previously decided by the State of West Virginia could have a significant impact on the state tax liabilities of financial institutions with activity in multiple states. By refusing to rule on the decision made in MBNA America Bank v Tax Commissioner of West Virginia, 06-1228, the U.S. Supreme Court has allowed a state to impose its income tax on an out-of-state corporation using a standard of “significant economic presence” in place of the previous, long-standing standard of a physical presence requirement. Despite the fact that the U.S. Supreme Court’s inaction specifically affects only West Virginia, the effect on the overall state tax environment is one that financial institutions will need to be aware of.

While the immediate impact is unclear, in the current environment, where states appear willing to fight for every possible tax dollar, states looking to increase their tax revenues by taxing businesses with no actual physical presence in the state now have a clear path to do so.

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