The U.S. Supreme Court declined to grant certiorari on Monday on the petitions of Lanco and FIA Card Services N.A. (formerly MBNA) despite the growing divide among the states regarding the standard for “substantial nexus” and whether physical presence stands as a constitutional prerequisite to state income and franchise taxation. FIA Card Services N.A. v. West Virginia Tax Commissioner, U.S., No. 06-1228, cert. denied (June 18, 2007), Lanco Inc. v. Director, New Jersey Division of Taxation, U.S., No. 06-1236, cert. denied (June 18, 2007). Many had hoped the High Court would rule definitively on this issue given the uncertainty faced by taxpayers, taxing authorities, and investors.

The Lanco and FIA Card Services cases presented interesting questions for the Court. In Lanco, a case involving an intangible property holding company, New Jersey stipulated at trial that the fact that the licensor and licensee of the intangibles were related entities was irrelevant to whether New Jersey could tax the out-of-state licensor on its royalty income. In FIA Card Services (MBNA v. West Virginia), a case involving an out-of-state financial institution that issued credit cards to West Virginia residents, the West Virginia Supreme Court adopted its own standard for “substantial nexus,” which it referred to as “significant economic presence.” Regrettably, the Court declined to explore either fact pattern.

Some states may be emboldened by the Court’s denial of certiorari in Lanco and FIA Card Services similar to the reaction of some states following the South Carolina Supreme Court’s holding in Geoffrey, Inc. v. S.C. Tax Comm’n, 437 S.E.2d 13 (S.C. 1993) (holding no physical presence required), cert. denied, 510 U.S. 992 (1992). Nevertheless, states must also weigh the fact that the Court similarly denied certiorari in a case concluding that physical presence is necessary to establish income tax nexus. See J.C. Penney Nat’l Bank v. Johnson, 19 S.W.3d 831, 839 (Tenn. Ct. App. 1999) (holding physical presence required for income taxation in context of Delaware banking corporation with credit card activity in Tennessee), cert. denied, 531 U.S. 927 (2000).

Unfortunately, the only clear message following the Court’s certiorari denials on Monday is that the uncertainty involving the physical presence principle in nexus disputes will continue. This result will also likely prompt additional focus on legislative action to address the void left open by the Court. In light of this disappointing result, companies will need to continue to monitor and evaluate their potential exposure on this issue for SFAS 109 and FIN 48 purposes.

For further information, please contact any of the following lawyers:

Alan Horowitz, ahorowitz@milchev.com, 202-626-5839

Michael Lloyd*

Kimberly Majure*

*Former Miller & Chevalier attorney

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.