W.Va. sets precedent in annals of tax lunacy

December 20, 2006|By JAY HANCOCK

Maryland is looking at the same old ideas to overhaul its revenue system. Raise the sales tax. Change the income tax.

Snore. It ought to pursue the bold, innovative course taken by West Virginia: Start taxing stuff in other places.

Last month West Virginia's Supreme Court of Appeals ruled that MBNA, the credit-card company, must pay West Virginia's corporate income tax for 1998 and 1999 even though MBNA had no operations there.

All of MBNA's employees, buildings and other assets were in Delaware, Maryland and elsewhere. Tough, said the court. MBNA had West Virginia credit-card customers, and that was enough.

"This is a big deal," says Stuart Levine, a Baltimore tax attorney and author of a business law blog.

It may be the first time a high state court has blessed an income tax on a corporation with so little in-state presence, say tax lawyers. The Nov. 21 ruling clashes with common sense and precedent, but those are details. It also seems to set West Virginia up for undreamt-of revenue opportunities.

To create a national economy, America's founders wisely prohibited states from levying import tariffs on each other or otherwise meddling in interstate commerce.

West Virginia's cross-border profit tax, which MBNA challenged a few years ago, seems to fall well within the no-no zone. By what justification should West Virginia be able to tax profits recorded in Wilmington, Del., and Hunt Valley when the "taxpayer" had no physical presence in West Virginia?

But the state won't be hostage to old-fashioned thinking.

For America's founders, the "concept of commerce consisted of goods transported in horse-drawn, wooden-wheeled wagons or ships with sails," the court said in its opinion. "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."

If it can't be found at the pewter monger's shoppe in Colonial Williamsburg, the court seemed to say, go ahead and tax the heck out of it.

Bank of America, MBNA's owner since January, may appeal the decision to the U.S. Supreme Court. (A spokesman says it hasn't decided.)

Tax lawyer Levine believes the federal court wants to see the out-of-state corporate income tax problem argued in more jurisdictions before it decides to address it.

If so, that's a green light to West Virginia.

"If the Supremes decide not to hear it, there'll probably be a lot more litigation" seeking income tax from other out-of-state companies, says Jan Mudrinich, a lawyer with the West Virginia tax department.

West Virginia law allows an income tax - based on a formula tied to revenue - on any out-of-state "financial organization" with even a few customers in the state. So don't be surprised to see distant mortgage companies, mutual-fund firms and others feel the long arm of West Virginia Tax Commissioner Virgil T. Helton.

But why stop there? Now that the principle is established, West Virginia could charge corporate income tax to any company anywhere with a whisper of a connection.

Slap an income tax on every company that sends trucks through on Interstate 70 and I-77. Tax profits from planes and satellites using West Virginia's airspace. Don't just levy a West Virginia sales tax on goods from Amazon.com and other mail-order outfits, as many states justifiably want to do. Tax their income, too.

And while you're at it, tax the income of every outside architecture firm designing West Virginia buildings, every outside consultant working for West Virginia clients and every overseas hotel keeping West Virginia tourists. Sen. Robert C. Byrd probably brings in plenty of out-of-state contractors by virtue of all the federal pork he brings to West Virginia. Find and tax them, too.

Given $1.5 trillion in U.S. corporate profits and West Virginia's 9 percent corporate income tax, the possibilities are endless.

Maryland, you're just not being creative enough. The best thing about taxing people outside your state is it's hard for them to complain. And there are a lot more things to tax. Almost heaven is just a couple of General Assembly bills away.


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