Corporate Close-Up: $300 Million in Income Means Economic Presents for Oregon


Is it possible to owe state corporate income tax without having any offices, employees, or property there? Yes, if you make enough profit from customers located in the state, according to the Oregon Tax Court. Thirty-four other states currently apply an economic presence nexus test to determine liability for state income and franchise taxes. In this case, the amount of income was paramount in the Court’s decision. It was enough for Oregon to get some presents in the form of tax revenue.

In Capital One Auto Finance Inc. v. Oregon Dept. of Rev., Oregon announced that two banks in the Capital One Financial Corporation had established economic nexus for purposes of the state excise and income taxes when they “extended credit, loaned money, pursued collection and earned revenue” in Oregon from 2006 to 2008. Neither bank has any real or tangible property, offices or employees in Oregon.

“In Capital One, the Tax Court applied a common-sense test in an area that generally is gray,” said Robert Manicke, Partner at Stoel Rives, LLP, and co-author of the Bloomberg BNA Oregon Corporate Income Tax Navigator. “The Tax Court’s opinion suggests that a taxpayer that regularly and systematically derives substantial revenue from Oregon customers will find it very difficult to prove lack of nexus.”

How much is enough for Oregon income tax nexus? Here are the statistics that the Court cited in its decision that the two Capital One banks had nexus for the years in question:

  • 24,600,000: number of solicitations the two banks sent into Oregon for the purpose of obtaining and retaining customers

  • 1,031,000: number of the two banks’ customers in Oregon

  • $300 million: amount the two banks charged Oregon customers in fees

  • 21,397: number of collection lawsuits initiated by or for the banks in Oregon when Oregon customers failed to pay said fees or balances due

Manicke continued, “While the Court stopped just short of deciding whether physical presence is required for a taxpayer to be engaged in business or subject to the corporation excise tax, the court emphasized that the sheer number of solicitations and transactions, along with the amount of fees earned, made it easy to decide that the taxpayer was subject to both the excise tax and the income tax even without a physical presence in Oregon.” 

In holding that “substantial economic benefit” is enough to impose excise and income taxes, the Tax Court stated, “[t]he corporate excise tax and corporate income tax regimes operate as one cohesive tax scheme. Between the two taxes, Oregon taxes the income from economic activities in Oregon. Taxpayer earned income from economic activities in Oregon. Such taxation is permissible without violating the Commerce Clause if there is also substantial nexus with the taxpayer. Substantial nexus can be established by economic presence alone.”

“The court’s decision is reminiscent of Justice Scalia’s remark in Wrigley* to the effect that ‘several thousand dollars per year… is a lot of chewing gum,’” Manicke told Bloomberg BNA. Watch this space for updates on the fate of physical presence nexus for state corporate income taxes.

* Wisconsin DOR v. William Wrigley Co., 505 US 214 (1992).

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should banks be required to have a physical presence in a state to create substantial nexus under the Commerce Clause and therefore be subject to state tax?

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