Capital One Auto Finance, Inc. v. Dept. of Rev. , 22 Or. Tax 326 ( 2016 )

326 December 23, 2016 No. 35
35
Capital One Auto Finance, Inc. v. Dept. of Rev. 22 OTR
December 23, 2016
IN THE OREGON TAX COURT
REGULAR DIVISION
CAPITAL ONE AUTO FINANCE, INC.,
Plaintiff,
v.
DEPARTMENT OF REVENUE,
Defendant.
(TC 5197)
Plaintiff (taxpayer) initially appealed from a conference decision letter
and notice of deficiency of Defendant Department of Revenue (the department).
Subsequently, taxpayer filed a petition for special designation, which was granted
and the case transferred to the Regular Division of the Tax Court. Taxpayer
argued that it was not subject to taxation in Oregon under either the corporate
excise tax or the corporate income tax laws for the income earned from the lend-
ing or depositing activities of its banks with respect to Oregon customers, arguing
that banks must have a physical presence in Oregon to be subject to taxation, and
taxpayer’s banks did not have such physical presence. Taxpayer also argued that
even if it was subject to taxation under Oregon law, the commerce clause of the
federal constitution prohibited the state from imposing such taxes on the banks
absent some physical presence. The department argued that taxation of income
earned from sources within Oregon is based not on property rights or the phys-
ical presence of a taxpayer, but upon the substantial economic benefit conferred
on a taxpayer in the conduct of its business. Granting the department’s cross-
motion and denying taxpayer’s motion, the court ruled that no physical presence
was required to subject out-of-state companies to the corporate income tax, and
that due to the character, number, and purposefulness of the transactions, the
amount of income earned from lending money to, and collecting fees from, an
extended network of Oregon customers and vendors, and the usage of the debt
enforcement mechanisms and the marketplace provided by Oregon, all led to the
conclusion that taxpayer had significant business activity in Oregon, and that
the income at issue had its point of origin in Oregon, from the Oregon resident
customers and merchants. Therefore, the income of taxpayer’s banks from their
lending activities to Oregon customers was subject to taxation in Oregon.
Oral argument on cross-motions for partial summary
judgment was held April 4, 2016, in the courtroom of the
Oregon Tax Court, Salem.
Gregg D. Barton, Perkins Coie LLP, Seattle, filed the
motion and argued the cause for Plaintiff (taxpayer).
Melisse S. Cunningham, Senior Assistant Attorney
General, Department of Justice, Salem, filed the cross-
motion and argued the cause for Defendant Department of
Revenue (the department).
Cite as 22 OTR 326 (2016) 327
Decision for Defendant rendered December 23, 2016.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This matter is before the court on cross-motions
for partial summary judgment and stipulated facts.1 This
order addresses whether the corporate excise tax or the cor-
porate income tax may be imposed on purely economic activ-
ity in the state without any physical presence by Plaintiff
(taxpayer). See ORS 317.070; ORS 318.020.2 The tax years
at issue are 2006, 2007, and 2008. There are other issues
before the court not addressed in this order.3
II. STIPULATED FACTS
During the tax years at issue, Capital One Financial
Corporation (COFC) was the parent company of an affiliated
group that filed a consolidated federal return. COFC and
its subsidiaries, which were wholly-owned by COFC, were
corporations incorporated, headquartered, and domiciled
outside of Oregon.
One of COFC’s subsidiaries, Capital One Auto
Finance (taxpayer), “was authorized to conduct, and con-
ducted, business in Oregon and other states.” It offered
“automobile and other motor vehicle financing products to
consumers primarily through auto dealerships.”
Taxpayer filed consolidated Oregon excise tax
returns for tax years 2006, 2007, and 2008. The returns
included taxpayer as well as Capital One Bank (COB),4
1
Some facts were stipulated only for the limited purposes of these motions.
2
Unless otherwise stated, the court’s references to the Oregon Revised
Statues (ORS) are to the 2009 edition. This is because tax years 2006, 2007, and
2008 were open to audit or examination and were audited by the department in
2011. Under Oregon Laws 2009, chapter 403, section 8, the 2009 amendments to
ORS 314.280, 314.610, 314.615, 317.010, 317.070, and 317.090 apply prospectively
and to any periods open to audit for the entities listed in amended ORS 314.610(4)
(a) through (i). The entities at issue here are financial institutions as listed in
ORS 314.610(4)(a) through (i).
3
The parties agreed to stay discovery and argument on these issues pending
the outcome of this decision.
4
In 2006 and 2007, COB was a state-chartered credit card bank. In 2008,
COB became a nationally-chartered bank renamed Capital One Bank (USA), N.A.
328 Capital One Auto Finance, Inc. v. Dept. of Rev.
Capital One FSB (FSB),5 and Capital One Services, Inc., all
of which were subsidiaries of COFC. In those returns, tax-
payer excluded from the numerator of the sales apportion-
ment factor the gross receipts of COB and FSB (collectively
referred to as “the Banks”).6
The Banks did not obtain authorization to conduct
business in Oregon. The Banks had no real or tangible per-
sonal property, offices, or employees in Oregon. In addition,
at oral argument, Defendant Department of Revenue (the
department) conceded, for purposes of these motions, that
the receivables of the Banks are not located in Oregon.
COB “offered credit card products, other consumer
loans, and deposit products to customers throughout the
United States, including Oregon, and in certain inter-
national markets.” FSB “accepted deposit products and
engaged in consumer and small business lending to custom-
ers in Oregon and other states.” These activities “were all
from [their] offices outside of Oregon.”
The Banks offered their products to Oregon cus-
tomers primarily through direct mail solicitations that orig-
inated from locations outside of Oregon. These solicitations
were designed to be sent to and received by customers and
potential customers in Oregon. The Banks sent approxi-
mately 24,600,000 solicitations to Oregon customers over
the course of 2007 and 2008. The number of solicitations
sent in 2006 is unknown, but it is accepted by both parties
to be materially the same.
The Banks had approximately 536,000 Oregon cus-
tomers in 2007 and approximately 495,000 Oregon custom-
ers in 2008. The number of Oregon customers is not known
for 2006, but it is accepted by both parties to be materi-
ally the same. The Banks sent monthly statements to their
Oregon customers with outstanding credit card balances,
and initiated lawsuits in Oregon in aid of collection against
delinquent accounts in Oregon. The number of lawsuits in
5
On June 30, 2007, Capital One FSB ceased doing business and merged into
Capital One National Association.
6
The motions do not address the propriety of any apportionment of gross
receipts.
Cite as 22 OTR 326 (2016) 329
Oregon initiated by or for the Banks was equal to 2,502 in
2006; 9,824 in 2007; and 9,071 in 2008.
The Banks earned revenue from or related to trans-
actions in which its customers used Capital One-branded
credit cards in Oregon or engaged in other types of con-
sumer lending in Oregon. These transactions included cash
advances from Automatic Teller Machines (ATMs) located
in Oregon but neither owned nor operated by the Banks (or
any related Capital One entity), as well as purchases at ven-
dors in Oregon. The types of fees that the Banks charged
included finance charges, late fees, overlimit fees, annual
membership fees, and interchange fees.7 The amount of fees
charged by the Banks totaled nearly $150,000,000 in each
year for 2007 and 2008. The amount of fees charged by the
Banks in 2006 is unknown, but it is accepted by both parties
to be materially the same.
In 2011, the department audited taxpayer’s corpo-
rate excise returns for tax years 2006, 2007, and 2008. The
department determined that the Banks were subject to the
corporate excise tax by reason of their lending and deposit-
ing activities and issued notices of deficiency. After holding
a conference with taxpayer, the department issued notices of
assessment including tax, penalty, and interest.8
Taxpayer appealed the notices of assessment to this
court.
III. ISSUES
There are two issues before the court. The first
issue is whether the Banks are subject to taxation in
Oregon under either the corporate excise tax or the corpo-
rate income tax by reason of their economic activities with
respect to Oregon customers.9 The second issue is whether
7
An interchange fee is the fee that is charged by the credit card company to
the vendor for purchases made by the customer from a vendor.
8
The amounts stated in the notices of deficiency assessment were based on
adjustments to the sales factor numerator, “along with several unrelated adjust-
ments, including federal RAR adjustments and the addback for other state taxes.”
Taxpayer has since amended its returns for 2007 and 2008 with additional RAR
adjustments, but those returns have not been processed by the department.
9
The court uses the term “economic activities” as a shorthand way to iden-
tify the various lending and depositing activities of the Banks with respect to
330 Capital One Auto Finance, Inc. v. Dept. of Rev.
the economic activities of the Banks created substantial
nexus for purposes of the Commerce Clause of the United
States Constitution so as to permit taxation of the Banks in
Oregon.
IV. ANALYSIS
Taxpayer argues that it is not subject to taxation in
Oregon for the income earned from the lending or deposit-
ing activities of the Banks with respect to Oregon custom-
ers. Although taxpayer makes arguments under state and
federal law, it essentially makes only one challenge to the
tax imposed. That challenge is that the Banks must have
a physical presence in Oregon to be subject to taxation.10
Under Oregon’s “first things first” doctrine, this court exam-
ines first the state law claims before addressing any federal
law claims. Hughes v. State of Oregon, 314 Or 1, 12, 838 P2d
1018 (1992).
A. State Law Claims
1. Determining the tax regimes at issue
A preliminary question that must be addressed
is what tax regimes are at issue. In its motion for partial
summary judgment, taxpayer argued that the corporate
excise tax in ORS chapter 317 does not reach to taxpayers
who have no physical presence in Oregon. The department
responded in two ways. First, it argued that the lending and
depositing activities of the Banks do subject them to the cor-
porate excise tax, regardless of the lack of physical presence
in the state. Second, it argued that, even if the Banks are
not subject to the excise tax, they are subject to the corpo-
rate income tax in ORS chapter 318.
In turn, taxpayer argues that it was not given
proper notice that the department was asserting the cor-
porate income tax as a basis for taxation. See ORS 305.885
(communication of basis for deficiency). However, after the
their Oregon customers when there was, for purposes of these motions, conced-
edly no property, employees, or agents of the Banks in Oregon. The term “eco-
nomic activities” is used to distinguish the facts of this case from one in which a
taxpayer does have property, employees, or agents in Oregon.
10
In other words, the Banks must have some physical presence of property,
employees, or agents in Oregon.
Cite as 22 OTR 326 (2016) 331
notice of deficiency, the department is allowed to assert
alternative grounds under ORS 305.575. The statutory pro-
visions of ORS 305.575 authorize the departure from pre-
viously communicated reasons under ORS 305.885, so long
as certain conditions are met. ORS 305.575 provides that
this court may consider such alternative grounds if they
are raised “before or at the hearing or any rehearing of the
case.” It also provides that the taxpayer is given additional
time to amend or otherwise plead to the alternative grounds
asserted. Taxpayer here did not request such additional
time, and in fact argued in its response to the department’s
motion as to why it thinks that the corporate income tax
does not reach to the activities of the Banks.
This court will consider the imposition of both tax
regimes.
2. Determining the scope of the tax regimes at issue
Oregon’s corporate excise tax is “a tax measured by
or according to net income * * * for the privilege of carry-
ing on or doing business in this state.” ORS 317.010(5). It
is imposed on financial institutions “doing business” in this
state by ORS 317.070. “Doing business” is defined as “any
transaction or transactions in the course of its activities con-
ducted within the state by a national banking association,
or any other corporation * * *.” ORS 317.010(4).
Oregon’s corporate income tax is also a tax measured
by or according to net income. Subject to certain exemp-
tions,11 it is imposed on corporations that have “Oregon
taxable income derived from sources within this state.”
ORS 318.020(1) (emphasis supplied). “Income derived from
sources within this state” is broadly defined, and includes
“income from tangible or intangible property located or
having a situs in this state and income from any activities
carried on in this state, regardless of whether carried on in
intrastate, interstate or foreign commerce.”
ORS 318.020(2). Although ORS 318.020(2) includes exam-
ples of income from sources within Oregon, those examples
11
ORS 318.040 provides that certain corporations are exempt from the cor-
porate income tax.
332 Capital One Auto Finance, Inc. v. Dept. of Rev.
are not exclusive. The term “source” is not defined by statute,
but it is defined as “a point of origin” or “a point of emana-
tion.” Webster’s Third New Int’l Dictionary 2177 (unabridged
ed 2002). The income at issue in this case has its point of
origin or point of emanation in Oregon, namely, the Oregon
resident customers and merchants.
Despite being contained in separate chapters, the
corporate excise and corporate income tax regimes were
intended to operate as one cohesive tax regime. See Cal-Roof
Wholesale v. Tax Com., 242 Or 435, 441, 444, 410 P2d 233(1966) (explaining that the corporate income tax “plugged
the loophole” created by the highly formalistic decision,
since abandoned, in Spector Motor Service v. O’Connor, 340
US 602, 71 S Ct 508, 95 L Ed 573 (1951)). Indeed, the corpo-
rate income tax only reaches to income not already subject
to the corporate excise tax, and it taxes such income at the
same tax rate. ORS 318.020(1) (referring to ORS 317.061).
Further, ORS chapter 317 is incorporated in its entirety into
ORS chapter 318, and both taxes are to be “administered as
uniformly as possible.” ORS 318.031.
Taxpayer argues that the Banks are not “doing
business” in Oregon for purposes of the excise tax because
they do not have a physical presence in Oregon, such as prop-
erty, employees, or agents in the state. This court doubts
that there is a physical presence requirement for purposes
of the corporate excise tax.12 However, even if there were
12
There is no physical presence requirement appearing in the definition of
doing business, the definition of the excise tax, or in the imposition of the excise
tax on these corporations. See ORS 317.010(4), (5); ORS 317.070. Moreover, the
Supreme Court has stated that the legislature intended the words “doing busi-
ness” to have their usual meaning, which is “the engaging in activities in the pur-
suit of gain.” Welch Holding Co. v. Galloway, 161 Or 515, 527, 89 P2d 559 (1939);
see also John I. Haas, Inc. v. Tax Com., 227 Or 170, 184, 361 P2d 820 (1961). The
court focused on activities, not presence. It would seem to matter little whether
a taxpayer has a physical presence in the state if that taxpayer is nevertheless
engaged in activities in the pursuit of gain in the state.
In addition, this court has stated that the excise tax reaches to the federal
constitutional limits, which, as will be seen, encompasses business activities con-
ducted within the state without any physical presence of the taxpayer. Ann Sacks
Tile & Stone, Inc. v. Dept. of Rev., 20 OTR 377, 380-81 (2011). That statement was
based in part upon the language contained in ORS 317.018. That statute provides
that the intent of the legislature is
“[t]o make the Oregon corporate excise tax law, insofar as it relates to the
measurement of taxable income, identical to the provisions of the federal
Cite as 22 OTR 326 (2016) 333
such a requirement, the income generated from Oregon cus-
tomers by the Banks from their economic activities directed
to Oregon is subject to the corporate income tax as “income
derived from sources within the state.”
With respect to the corporate income tax, taxpayer
argues that the Banks possessed no property in Oregon, had
no employees or agents in Oregon, conducted no physical
activities in Oregon, and therefore earned no income from
sources in Oregon. See ORS 318.020(2). Taxpayer essen-
tially argues that the reach of ORS chapter 318 is short of
the federal constitutional limits. That argument is counter
to Oregon law.
The Oregon Supreme Court has indicated that
ORS chapter 318 reaches to the federal constitutional limit.
Amer. Refrig. Transit Co. v. Tax Com., 238 Or 340, 346, 395
P2d 127 (1964). This court reaches that conclusion with the
following observations.
First, this court in American Refrigerator Transit so
stated. Amer. Refrig. Transit Co. v. Commission, 1 OTR 429,
434-35 (1963) (stating that the corporate income tax reaches
“to the full extent permitted by the federal Constitution,”
such that “constitutionality and proper statutory construc-
tion are really one issue, turning upon the application of
constitutional limitations upon state taxation of interstate
commerce”). Second, the Oregon Supreme Court in no way
questioned this court’s conclusion as to the reach of ORS
chapter 318. Indeed, the Supreme Court addressed only
the federal constitutional limit in its opinion reversing this
Internal Revenue Code, as in effect and applicable for the tax year of the
taxpayer, to the end that taxable income of a corporation for Oregon purposes
is the same as it is for federal income tax purposes, subject to Oregon’s juris-
diction to tax, and subject to the additions, subtractions, adjustments and
modifications contained in this chapter.”
ORS 317.018(1) (2011) (emphasis added). ORS 317.018 indicates that the leg-
islature intends both that Oregon taxable income is to be based upon federal
taxable income (with certain additions and subtractions) and that Oregon will
tax all such income over which it has jurisdiction. There being no limitation in
the Oregon constitution limiting the reach of the tax statutes at issue here, the
phrase “subject to Oregon’s jurisdiction to tax” indicates that the legislature
intended to extend the reach of the corporate excise tax to the limits of federal
law. The federal limit is important because, as a sovereign state, Oregon may
exercise its inherent authority to tax however it chooses, unless its jurisdiction to
do so is limited by the federal constitution or valid federal legislation.
334 Capital One Auto Finance, Inc. v. Dept. of Rev.
court. It follows that the Supreme Court implicitly accepted
this court’s conclusion as to the statutory reach of ORS chap-
ter 318.
Taxpayer attempts to distinguish American
Refrigerator Transit because the taxpayer in that case at
least had some tangible property in the state, even if tempo-
rarily and not under the taxpayer’s direct control. However,
the language of the Supreme Court is inescapable. “[N]exus
[to tax] exists whenever the corporation takes advantage
of the economic milieu within the state to realize a profit.”
238 Or at 346. “To establish nexus it is necessary to show
that the taxpayer has, in the conduct of his business, taken
advantage of the economy of the taxing state to produce the
income which is subjected to tax.” Id. at 347. And, because
“constitutionality and proper statutory construction [of the
corporate income tax] are really one issue,” 1 OTR at 435, if
no physical presence is required for purposes of the federal
constitution, then no physical presence is required to subject
out-of-state companies to the corporate income tax.
Here, the department has effectively conceded that
the Banks have no property in Oregon.13 However, taxation
of income earned from sources within the state is based
not on property rights or the physical presence of the tax-
payer, but upon the substantial economic benefit conferred
on a taxpayer in the conduct of its business. Once again,
the Supreme Court’s language is clear that physical pres-
ence is not required under Oregon law. “[A]part from federal
legislation, it would seem to us that income derived from
the sale of goods in Oregon by a nonresident corporation
relying entirely upon radio or television advertising would
be taxable in this state.” 238 Or at 347 (footnotes omitted).
Taxpayers are subject to the corporate income tax based on
their economic activities in the state.
3. Activities of the banks in Oregon
The Banks engaged in numerous activities
with respect to Oregon customers, including marketing,
13
By stipulation, the parties agreed for the limited purposes of these motions
that the Banks had no real or tangible personal property, offices, or employees in
Oregon. During oral argument, the department conceded for the limited purposes
of these motions that the receivables of the Banks are not located in Oregon.
Cite as 22 OTR 326 (2016) 335
solicitation, acquisition, billing and collecting, and retention
of Oregon customers. The Banks directed their activities
to attract and retain customers in Oregon to earn revenue
either directly or indirectly from Oregon customers.
The Banks engaged in marketing and solicited
business in Oregon. The Banks directly and systematically
sent into Oregon approximately 24,600,000 solicitations
between 2007 and 2008. These solicitations were designed
to stimulate demand in Oregon for the lending and credit
capability of the Banks. The Banks supplied this demand
to Oregon by extending credit and lending money to Oregon
customers. The Banks extended credit or lent money to hun-
dreds of thousands of customers in Oregon in 2006, 2007,
and 2008.
The Banks earned money directly from Oregon
customers. The Banks collected fees from hundreds of thou-
sands of customers in Oregon, including finance charges,
late fees, overlimit fees, and annual membership fees. These
fees were the direct or indirect result of transactions entered
into by Oregon customers while using Capital One branded
credit cards and other financing products. These fees were
billed to and paid by customers in Oregon. In addition, in
circumstances where Oregon customers failed to pay, the
Banks used the debt enforcement mechanisms provided by
Oregon, including the courts, thousands of times each year
to collect unpaid debts.
The Banks also earned money indirectly from their
customers through their purchases in Oregon. When cus-
tomers of the Banks purchased goods and services from
Oregon vendors, the Banks earned revenue from inter-
change fees imposed on those transactions. These fees were
the direct result of transactions entered into by Capital One
customers while using Capital One branded credit cards to
pay Oregon vendors.
4. Effect of the activities of the banks
Either the excise tax, the income tax, or both apply
to taxpayer’s income and activities. Taxpayer is subject to
assessment for the income earned by the Banks from their
lending activities to Oregon customers.
336 Capital One Auto Finance, Inc. v. Dept. of Rev.
The Banks did business in Oregon in the years
in question, and a lot of it. They engaged in lending and
other financial activities with respect to their customers in
Oregon in the pursuit of earning income through interest
and fee charges. They were able to do business in Oregon
without a physical presence, but they were still doing busi-
ness in Oregon.
However, even if the Banks were not doing busi-
ness in Oregon for purposes of the excise tax, they were,
under any definition, earning income from “sources within
the state” for purposes of the corporate income tax. By
lending money and charging fees to Oregon customers and
vendors, the Banks extracted upwards of $150,000,000 in
fees from Oregon each year in 2007 and 2008.14 Those fees
emanated from Oregon and originated from Oregon custom-
ers and vendors, regardless of the physical presence of the
Banks. Dollars paid to the Banks by their Oregon custom-
ers, whether cardholders or vendors, have their source in
Oregon.
The character, number, and purposefulness of these
transactions; the amount of income earned from lending
money to, and collecting fees from, an extended network of
Oregon customers and vendors; and the usage of the debt
enforcement mechanisms and the marketplace provided by
Oregon all lead to one conclusion. Whether “doing business”
in Oregon for purposes of the Oregon excise tax or earning
income “derived from sources within this state” for purposes
of the Oregon income tax, the Banks directed their activ-
ities to access and extract economic benefits from Oregon
persons. The income of the Banks for their lending activities
to Oregon customers is subject to taxation in Oregon.
B. Federal Law Claims
Because taxpayer is subject to state taxation in
Oregon by reason of the economic activities of the Banks,
the only question that remains for purposes of this order
is whether the economic nexus of the Banks is suffi-
cient for purposes of the Commerce Clause of the federal
14
The amount of fees earned in 2006 is unknown, but it is accepted by the
parties to be materially the same.
Cite as 22 OTR 326 (2016) 337
constitution.15 Taxpayer argues that economic activity alone
is not sufficient to satisfy the substantial nexus requirement
of the Commerce Clause and therefore the Banks do not
have substantial nexus with Oregon.
Without question, “the [Supreme] Court consistently
has indicated that ‘interstate commerce may be made to pay
its way,’ and has moved toward a standard of permissibility
of state taxation based upon its actual effect rather than its
legal terminology.” Complete Auto Transit, Inc. v. Brady, 430
US 274, 281, 97 S Ct 1076, 51 L Ed 2d 326 (1977). Moreover,
where a state has “provided benefits and protections” for a
taxpayer’s business activities in the state, the state “is jus-
tified in asking [for] a fair and reasonable return” in the
form of a “nondiscriminatory properly apportioned state cor-
porate tax[ ].” Id. at 287. State taxation is permissible for
purposes of the Commerce Clause if the tax is “applied to an
activity with a substantial nexus with the taxing State, is
fairly apportioned, does not discriminate against interstate
commerce, and is fairly related to the services provided by
the State.” Id. at 279. The state must have “a connection to
the activity itself, rather than a connection only to the actor
the State seeks to tax.” Allied-Signal, Inc. v. Director, Tax
Div., 504 US 768, 778, 112 S Ct 2251, 119 L Ed 2d 533 (1992).
The principal case relied upon by taxpayer is Quill
Corporation v. North Dakota, 504 US 298, 112 S Ct 1904, 119
L Ed 2d 91 (1992). In that case, the United States Supreme
Court held that physical presence is required to establish
Commerce Clause substantial nexus where a duty to collect
sales or use taxes is at issue. Id. at 317-19. However, in doing
so, the Court overruled in part its prior decision in National
Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 US
753, 87 S Ct 1389, 18 L Ed 2d 505 (1967). In Bellas Hess, the
Court held that a physical presence was required to satisfy
both the Due Process and Commerce Clauses. For purposes
of the Due Process Clause, the Quill Court held that a cor-
poration that “purposefully avails itself of the benefits of
an economic market in the forum State”—i.e., a corporation
that “purposefully direct[s] its activities” to “residents” of
15
Taxpayer makes no argument that state taxation of solely economic activ-
ity is invalid under the Due Process Clause.
338 Capital One Auto Finance, Inc. v. Dept. of Rev.
the state—may be subjected to taxation in that state with-
out violation of the Due Process Clause. Quill, 504 US at
307-08.
In arguing that physical presence is required for
purposes of the Commerce Clause in respect of the need
to pay income taxes, taxpayer relies upon a questionable
standard of constitutional law. In 2015, Justice Kennedy
called for the legal community to find an appropriate case
for the Court to reexamine its holdings in Quill and Bellas
Hess. Direct Marketing Ass’n v. Brohl, 575 US 1, 135 S Ct
1124, 1135, 191 L Ed 2d 97 (2015) (Kennedy, J., concurring).
However, until the Supreme Court overrules or modifies its
holding in Quill, this court is bound by it.
Regardless, nothing in Quill imposes a physical
presence standard for Commerce Clause nexus outside the
realm of collection obligations for sales or use taxes. The
Court noted the “magnitude” of Quill’s contacts with the
state—all without a physical presence—for purposes of the
Due Process nexus standard, id. at 308, but nevertheless
found that physical presence was necessary to impose a sales
or use tax collection obligation. The Court in Quill rested
that opinion on two bases. The first basis is that imposing
sales or use taxes on out-of-state taxpayers with no physical
presence in the state creates an undue burden. The second
basis is that there are settled expectations with respect to
a physical presence standard in the realm of sales or use
taxes.
1. Oregon has not imposed an undue burden on inter-
state commerce
The Commerce Clause nexus requirement is
intended to “limit the reach of state taxing authority so as
to ensure that state taxation does not unduly burden inter-
state commerce.” Quill, 504 US at 313. In its assessment
of the burdens of a sales or use tax collection obligation
on out-of-state taxpayers, the Court was aware that there
were over six thousand sales or use tax jurisdictions. Id. at
313 n 6. In each one of those jurisdictions, a taxpayer could
be charged with both collecting and remitting tax in often
substantially different tax regimes. Id. The Court had pre-
viously stated in Bellas Hess that the “many variations in
Cite as 22 OTR 326 (2016) 339
rates of tax, in allowable exemptions, and in administrative
and recordkeeping requirements could entangle [an out-of-
state vendor] in a virtual welter of complicated obligations.”
386 US at 759-60 (footnotes omitted; emphasis added). The
Court in Quill appears to have adopted this finding. 504 US
at 313 n 6.
Beyond asserting that the corporate excise or
income tax regimes create an undue burden as applied to
the Banks, taxpayer does not seriously advance the argu-
ment. Taxpayer has introduced no evidence of a “welter” of
obligations arising from states requiring an out-of-state
taxpayer to pay a tax based upon net income for the income
earned in the state. Nor does it seem likely that it could.
The department argues—and taxpayer does not appear to
dispute—that the burdens associated with excise or income
tax regimes are much less onerous than sales or use tax
regimes. This court agrees.
Simply put, the record does not support a finding
that there are thousands of income or excise tax regimes
with which a taxpayer must comply. Perhaps more impor-
tantly, with respect to income or excise taxes, there is no
burden of collecting the tax from third parties. The scope
of that burden in the sales or use tax context looms large.
A taxpayer must ensure that the appropriate amount (and
not more or less) is collected from the customer and directed
to the appropriate taxing authority within the appropriate
time. In the case of the collection of sales or use taxes, all
of these obligations must be determined before a taxpayer
makes its first sale into a jurisdiction. Otherwise, the tax-
payer will likely fail in collecting and remitting the appro-
priate sales or use tax.
While collection and remittance of sales or use
taxes is not an undue burden in and of itself, it can become
one if the seller does not reasonably know whether it will
have substantial nexus with the taxing state, or has mini-
mal sales in a number of taxing jurisdictions. No such argu-
ment can be made with respect to Oregon’s corporate excise
or income taxes. Those taxes do not have a requirement of
collection from third parties, and are paid based upon the
income earned in the state as determined at the end of a
340 Capital One Auto Finance, Inc. v. Dept. of Rev.
tax period and not at the beginning. This court concludes
that imposition of the corporate excise and income taxes on
economic activity does not constitute an undue burden on
interstate commerce.
2. There are no “settled expectations” to upset with
respect to income taxes
The other basis for the Quill Court’s physical pres-
ence nexus standard was settled expectations. That basis
was composed of two components. First, the Court consid-
ered the benefit of the “settled expectations” of taxpayers
that result from a bright-line rule. Quill, 504 US at 316. The
rise of, and investment in, the mail-order industry was, at
least arguably, in part related to the bright-line physical
presence standard announced in Bellas Hess. Id.
Second, the Court considered the “settled expec-
tations” resulting from the doctrine of stare decisis, noting
that the physical presence rule in Bellas Hess had “engen-
dered substantial reliance and has become part of the basic
framework of a sizable industry.” Id. at 317. Where industry
had extensively relied on that rule, and Congress had the
power to displace it,16 the Court refused to “renounce the
bright-line test of Bellas Hess.” Id. at 318.
Curiously, taxpayer’s argument regarding set-
tled expectations proceeds under neither the necessity of a
bright-line rule nor the role of stare decisis. Taxpayer has
not argued, or shown, that the rise or prominence of the
financial services industry was dependent on a bright-line
physical presence requirement with respect to income or
excise taxes. Nor has taxpayer argued, or shown, that there
16
As to this point, the Court stated:
“No matter how we evaluate the burdens that use taxes impose on interstate
commerce, Congress remains free to disagree with our conclusions. Indeed,
in recent years Congress has considered legislation that would ‘overrule’
the Bellas Hess rule. Its decision not to take action in this direction may, of
course, have been dictated by respect for our holding in Bellas Hess that the
Due Process Clause prohibits States from imposing such taxes, but today we
have put that problem to rest. Accordingly, Congress is now free to decide
whether, when, and to what extent the States may burden interstate mail-
order concerns with a duty to collect use taxes.”
Quill, 504 US at 318 (citation and footnote omitted).
Cite as 22 OTR 326 (2016) 341
is or was a uniform body of law on this issue upon which it
relied.17
Taxpayer proceeds under what might be termed an
estoppel argument—which is not favored—based on action
(or inaction) by the department and the State of Oregon.18
That action (or inaction) includes: (1) the department previ-
ously audited taxpayer, but did not subject the Banks to the
excise tax; (2) the department indicated in survey responses
that soliciting and issuing credit cards does not create nexus;
(3) the department unsuccessfully petitioned the legislature
to adopt a statutory factor presence nexus statute; (4) the
department advised the legislature that making, purchas-
ing, and holding unsecured and secured debt in Oregon did
not create nexus in Oregon; (5) the department’s internal
policy in 2006 stated that issuing credit cards alone did not
create nexus in Oregon; (6) there was no statute or rule that
clearly stated that economic presence is sufficient; (7) the
department in 2007 said that any rule addressing economic
nexus would be applied prospectively; and (8) the depart-
ment had not previously asserted its taxation authority
against a taxpayer based on economic nexus alone.
According to taxpayer, the department’s pronounce-
ments regarding nexus were “so predominate, [they] took on
the effect of unwritten rules upon which taxpayers relied
as if written.” Taxpayer also argues that any “contrary
interpretation” by the department would be akin to “ad hoc
decision-making in violation of Article I, section 20[,] of the
Oregon Constitution” (Oregon’s privileges and immunities
clause). However, the department’s pronouncements do not
serve as a basis for estoppel.
17
It could not. For example, in 2006 the Supreme Court of Appeals of West
Virginia held that the physical presence requirement only applied to sales and
use taxes. See Tax Comm’r v. MBNA Am Bank, NA, 640 SE2d 226 (W Va 2006).
The Supreme Court denied certiorari. 551 US 1141 (2007). Taxpayer has state
cases in support of its position too, which were also denied certiorari by the
Supreme Court, but that only exemplifies the lack of clarity or “settled expecta-
tions” in the law.
18
In Johnson v. Tax Commission, the Oregon Supreme Court held that estop-
pel could apply to tax collectors. 248 Or 460, 463, 435 P2d 302 (1967). However,
“[t]he policy of efficient and effective tax collection makes the doctrine of rare
application.” Id. at 463.
342 Capital One Auto Finance, Inc. v. Dept. of Rev.
Estoppel only applies if three elements are satis-
fied. First, there must be “proof positive that the collector
has misinformed the individual taxpayer.” Johnson v. Tax
Commission, 248 Or 460, 463, 435 P2d 302 (1967). Second,
the taxpayer must have a “particularly valid reason for rely-
ing on the misinformation.” Id. at 463-64. Third, it must
be “inequitable to a high degree to compel the taxpayer to
conform to the true requirement.” Id. at 464. These elements
have been generalized in recent years as “(1) misleading
conduct on the part of the department; (2) taxpayer’s good
faith, reasonable reliance on that conduct; and (3) injury to
taxpayer.” Webb v. Dept. of Rev., 18 OTR 381, 383 (2005),
citing Society of St. Vincent DePaul v. Dept. of Rev., 14 OTR
47, 50 (1996).
The record is devoid of evidence that either this tax-
payer or taxpayers generally relied on case law or any of the
statements of the department in entering into or continu-
ing business operations in Oregon. Moreover, any reliance
on such statements is not reasonable given the language
of the Oregon Supreme Court in American Refrigerator
Transit, and the adoption of the department’s substantial
nexus guidelines in Oregon Administrative Rule (OAR)
150-317-0020. This is so even as to the department’s state-
ment, during notice and comment prior to final promulga-
tion, that the substantial nexus rule would only be applied
prospectively.
First, the rule as published was not so limited, and
there was clear Oregon Supreme Court precedent hold-
ing that a rule not so limited applies to any periods open
to examination. U.S. Bancorp v. Dept. of Rev., 337 Or 625,
639, 103 P3d 85 (2004); see OAR 150-305-0014 (formerly
OAR 150-305.100-(B)). Second, even if the rule did not apply
retroactively to open periods, any reliance on department
statements contrary to the broad language in American
Refrigerator Transit cannot be viewed as reasonable. Indeed,
the department stated during notice and comment that it
did not believe it was “extending” Oregon law, but rather
was attempting to provide “clarity” on that law.
Taxpayer’s estoppel claim fails. Even if taxpayer
could show that its employees actually read any of materials
Cite as 22 OTR 326 (2016) 343
upon which it now relies—and nothing in the record sup-
ports that conclusion—such reliance would not have been
reasonable.
Finally, this court notes that what appears to be an
estoppel argument by this taxpayer is not the type of reli-
ance or “settled expectations” discussed in Quill. The Court
in Quill addressed expectations that were settled and led to
initiating or continuing economic contact with a state. There
is nothing in the record that supports any argument that
this taxpayer entered into or continued its business contacts
in Oregon in reliance on any court decision or action of the
department. An appropriate analysis of settled expectations
under Quill does not support restricting the application of
the corporate excise and income tax regimes only to taxpay-
ers with a physical presence in Oregon.
Consideration of the importance of a bright-line
rule, when concerning settled expectations, parallels the
considerations discussed above with respect to undue bur-
dens. For sales and use taxes, a corporation would here
again need to know at the first sale what its obligations are
and whether it would have substantial nexus with the state
such that it would need to collect and remit the tax to the
state. The benefit of a bright-line physical presence rule is
clear.
For excise or income taxes, however, the corporation
can periodically evaluate whether its activities have created
or will create substantial nexus such that it needs to pay tax
based on its income in the state. Notably, there is no collec-
tion of tax from customers that must occur. The burden on
the taxpayer is much less onerous than a sales or use tax.
Accordingly, the benefit of, and need for, a bright-line physi-
cal presence rule is diminished.
Next, as to consideration of the role of stare decisis,
there is no clear Supreme Court precedent with respect to
income or excise taxes that requires a physical presence for
such taxes. This is markedly different from the situation
that existed under Bellas Hess in respect of obligations to
collect sales or use taxes. Indeed, the question in this case
has been litigated across the country by taxpayers and
344 Capital One Auto Finance, Inc. v. Dept. of Rev.
taxing authorities with varying degrees of success on both
sides.19
3. Substantial nexus may be established by sufficient
economic presence
The Court in Quill rejected a physical presence stan-
dard in lieu of an economic nexus standard for purposes of
the Due Process Clause because the Court understood that
“modern commercial life” does not require physical presence
in a state to attract business.20 See 504 US at 308 (stating
“it matters little that such solicitation is accomplished by
a deluge of catalogs rather than a phalanx of drummers”).
If there are sufficient economic contacts with the state, an
out-of-state business “may be made to pay its way.” Complete
Auto Transit, Inc., 430 US at 281.
The only two reasons the Quill Court gave for
departing from its Due Process economic nexus analysis to
impose a physical presence standard for Commerce Clause
nexus for the collection of sales or use taxes were consid-
erations of undue burden and settled expectations. As dis-
cussed, neither of these bases require or even suggest that
courts should adopt a physical presence requirement under
the Commerce Clause for taxes imposed upon or measured
by net income. There are no special circumstances—such as
a collection requirement or six thousand tax jurisdictions—
that would run counter to the conclusion that a state can
exact a reasonable tribute for the economic marketplace it
has helped maintain in Oregon. As the Supreme Court has
repeatedly recognized, “the State’s power to tax an individ-
ual’s or corporation’s activities is justified by the ‘protection,
19
Compare those cases cited by taxpayer in support, Scioto Ins. Co. v. Okla.
Tax Comm., 279 P3d 782 (Okla 2012); Rylander v. Bandag Licensing Corp., 18
SW3d 296 (Tex App 2000); J.C. Penney Nat’l Bank v. Johnson, 19 SW3d 831 (Tenn
Ct App 1999), with those cases cited by the department in support, Capital One
Bank v. Comm’n of Revenue, 899 NE2d 76 (Mass 2009); Geoffrey, Inc v. Comm’r of
Rev, 899 NE2d 87 (Mass 2009); MBNA Am Bank, NA & Affiliates v. Indiana Dept.
of State Revenue, 895 NE2d 140 (Ind Tax 2008); Bridges v. Geoffrey, Inc., 984 So
2d 115 (La App 2008); MBNA Am Bank, NA, 640 SE2d 226. Recently, the Ohio
Supreme Court held that physical presence is not required under the Commerce
Clause to subject an out-of-state taxpayer to a business privilege tax. Crutchfield
Corp. v. Testa, 88 NE3d 900 (Ohio Nov 17, 2016) (Slip Op No. 2016-Ohio-7760) WL
6775765.
20
The Banks here are a case in point.
Cite as 22 OTR 326 (2016) 345
opportunities and benefits’ the State confers on those activi-
ties.”21 Allied-Signal, Inc., 504 US at 778 (quoting Wisconsin
v. J.C. Penney Co., 311 US 435, 444 (1940)).
4. The banks have substantial nexus in Oregon
The court must now consider whether the economic
presence of the Banks in Oregon rises to the level of sub-
stantial nexus.
Substantial nexus is a requirement designed to
“limit[ ] state burdens on interstate commerce.” Quill, 504
US at 313. There must be, outside any connection with cus-
tomers via common carriers, more than a “ ‘slightest pres-
ence’ ” to satisfy the nexus requirement. Id. at 315 n 8 (citing
Nat’l Geographic Soc. v. California Bd. of Equalization, 430
US 551, 556 (1977)).
The activities of the Banks created substantial eco-
nomic nexus in Oregon. The Banks repeatedly extended
credit, loaned money, pursued collection, and earned reve-
nue in Oregon. This is not a case of a taxpayer having only
a “slightest presence” in Oregon. Quill, 504 US at 315 n 8.
There was extensive contact in the state of Oregon by the
Banks.
The Banks sent approximately 24,600,000 solicita-
tions into Oregon between 2007 and 2008 for the purpose
of obtaining and retaining customers.22 In part because
of those solicitations, the Banks had 536,000 Oregon cus-
tomers in 2007 and 495,000 Oregon customers in 2008.23
To those customers, the Banks engaged in a variety of
types of consumer lending or depositing activities. From
those lending or depositing activities, the Banks charged
nearly $150,000,000 in fees in each year for 2007 and
21
Recall, however, that the power to tax is not without limit. A tax must also
be fairly apportioned, nondiscriminatory, and “fairly related to the services pro-
vided by the State.” Complete Auto Transit, Inc., 430 US at 279; see Stonebridge
Life Ins. Co. I v. Dept. of Rev., 18 OTR 423 (2006) (holding that the imposition of
the insurance excise tax was unconstitutional as to apportionment).
22
The number of solicitations sent in 2006 is unknown, but it is accepted by
the parties to be materially the same.
23
The number of Oregon customers in 2006 is unknown, but it is accepted by
the parties to be materially the same.
346 Capital One Auto Finance, Inc. v. Dept. of Rev.
2008.24 To collect amounts due, the Banks routinely sent
statements to their Oregon customers with their current
balances. When Oregon customers failed to pay the fees or
balances due, the Banks initiated collection lawsuits against
them in Oregon. The number of collection lawsuits initiated
by or for the Banks was 2,502 in 2006, 9,824 in 2007, and
9,071 in 2008. The Banks had more than a mere “slightest
presence” in Oregon.
If the Banks were unable to lend money to or accept
deposits from Oregon customers, they could not charge fees.
And even if they could charge such fees, the Banks would not
be as successful in their business if they could not resort to
debt enforcement mechanisms to collect these fees. Oregon
has created a marketplace and business atmosphere, an “eco-
nomic mileu” in the terms of American Refrigerator Transit,
which makes consumer lending possible and profitable. The
Banks have taken advantage of that “economic mileu”—the
“protection, opportunities and benefits” afforded by Oregon.
Wisconsin v. J.C. Penney Co., 311 US at 444. They “may be
made to pay [their] way.” Complete Auto Transit, Inc., 430
US at 281 (internal quotation marks omitted). The Banks
had substantial nexus with Oregon in 2006, 2007, and 2008.
V. CONCLUSION
The 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 activi-
ties in Oregon. Such taxation is permissible without violat-
ing the Commerce Clause if there is also substantial nexus
with the taxpayer. Substantial nexus can be established by
economic presence alone. Taxpayer’s significant economic
activities in Oregon established substantial nexus with
Oregon. Now, therefore,
IT IS ORDERED that Plaintiff’s motion for partial
summary judgment is denied; and
IT IS FURTHER ORDERED that Defendant’s
motion for partial summary judgment is granted.
24
The amount of fees earned in 2006 is unknown, but it is accepted by the
parties to be materially the same.