FILED
December 17, 1999
Cecil Crowson, Jr.
Appellate Court Clerk
IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
J. C. PENNEY NATIONAL BANK, )
)
)
Plaintiff/Appellant, ) Davidson Chancery No. 96-276-I
)
VS. ) Appeal No. M1998-00497-COA-R3-CV
)
RUTH E. JOHNSON, Commissioner )
of Revenue, State of Tennessee, )
)
)
Defendant/Appellee. )
APPEAL FROM THE CHANCERY COURT OF DAVIDSON COUNTY
AT NASHVILLE, TENNESSEE
THE HONORABLE ERNEST PELLEGRIN, SPECIAL CHANCELLOR
MICHAEL D. SONTAG
BRYAN W. METCALF
BASS, BERRY & SIMS, PLC
Nashville, Tennessee
Attorneys for Appellant
PAUL G. SUMMERS
Attorney General & Reporter
MICHAEL E. MOORE
Solicitor General
JOE C. PEEL
Senior Counsel
Office of the Attorney General
Tax Division
Nashville, Tennessee
Attorneys for Appellee
JOSEPH W. GIBBS
Page 1
REBECCA C. BLAIR
BOULT, CUMMINGS, CONNERS & BERRY, PLC
Nashville, Tennessee
DIANN L. SMITH
Committee on State Taxation
Washington, D.C.
JEFFREY A. FRIEDMAN
WILLIAM D. PELTZ
BOBBY L. BURGNER
Committee on State Taxation
Washington, D.C.
Attorneys for Amicus Curiae Committee on State Taxation
JOHN ROBERT JACOBSON
BOWEN, RILEY, WARNOCK & JACOBSON
Nashville, Tennessee
LINDA ARNSBARGER
PAUL H. FRANKEL
NEIL I. POMERANTZ
THOMAS H. STEELE
MORRIS & FOERSTER, LLP
Washington, D.C.
Attorneys for Amicus Curiae VISA U.S.A. INC. and MASTERCARD
INTERNATIONAL, INC.
REVERSED AND DISMISSED
ALAN E. HIGHERS, J.
CONCUR:
DAVID R. FARMER, J.
Page 2
HOLLY KIRBY LILLARD, J.
The J.C. Penney National Bank appeals from the Chancery Court of Davidson
County, which upheld the imposition of franchise and excise taxes against the Bank by the
Tennessee Department of Revenue. For the reasons stated herein, we reverse the
decision of the trial court.
Facts and Procedural History
At all relevant times, the J.C. Penney National Bank 1 (“the National Bank” or “JCPNB”
) was a federally chartered national banking association incorporated under the laws of
Delaware with its principal place of business and commercial domicile in Harrington,
Delaware. Ruth E. Johnson (“Commissioner”) was the Commissioner of Revenue for the
State of Tennessee and was named in this case in her official capacity. The present appeal
arises from the Commissioner’s imposition of franchise and excise taxes against JCPNB
on income allegedly generated by JCPNB’s credit card activities in the State of Tennessee.
Page 3
In order to clarify the positions of the respective parties, we find it necessary briefly to
describe, perhaps to the point of oversimplification, the various entities and procedures
involved in JCPNB’s credit card business.
Through its Delaware offices, JCPNB offers consumer banking services such as
deposit accounts, home mortgage lending, general consumer loans, and automated teller
machine (“ATM”) services. In addition to the normal banking services which it provides,
JCPNB engages in credit card lending through the issuance of Visa and MasterCard credit
cards. 2 JCPNB has been issuing Visa credit cards since 1983, and MasterCard credit
cards since 1984.
JCPNB contracted with the J.C. Penney Company, its parent company, to perform
various marketing and processing services that were necessary to create and maintain
JCPNB’s credit card business. Under that contract, the J.C. Penney Company agreed to
provide services such as credit card solicitation, marketing, statement and payment
processing, customer service, and collection. The J.C. Penny Company, in turn, contracted
with other companies to provide many of these services.
The J.C. Penney Company contracted with Maryland Bank National Association (“
MBNA”), an unrelated corporation domiciled in Texas, to provide the data processing
related to the National Bank’s credit card business. MBNA is a company that offers credit
card processing services to a variety of banks. As transactions were received through the
Visa or MasterCard network, MBNA posted them to the appropriate cardholder account.
MBNA was also responsible for sending out account statements each month.
The J.C. Penney Company also contracted with Business Services, Inc. (“BSI”), a
wholly owned subsidiary, to provide general marketing and payment processing services. 3
Page 4
After MBNA sent monthly statements to the cardholders, the cardholders would send their
payments to a BSI payment processing center in San Antonio, Texas. Also, as part of its
marketing responsibilities, BSI solicited credit card accounts on behalf of JCPNB. These
solicitations were sent via U.S. Mail to potential customers throughout the United States,
including Tennessee. 4 As the first step in the solicitation process, BSI obtained the names
of possible customers. Some names were obtained from a list of people who had a prior
credit history with the J.C. Penney Company. BSI also obtained potential customer names
through the use of mailing lists from various credit bureaus. 5 BSI would then submit the list
of potential cardholders to a national credit bureau who would select those people having a
credit profile consistent with the criteria established by JCPNB. The selected people would
then receive an offer to apply for a credit account with the National Bank.
None of the activities described above occurred in the State of Tennessee, other
than the solicitations being mailed to Tennessee residents. Also, all of the entities involved
in the National Bank’s credit card operation were located outside the State of Tennessee. 6
JCPNB itself maintained no offices or places of business in Tennessee, nor did it have any
employees in the State.
The Visa and MasterCard credit cards issued by the National Bank were “universal
cards.” This name derives from the fact that these cards could be used to purchase goods
and services throughout the world from any retailer who displayed the Visa or MasterCard
logo. 7 A credit card purchase may be made in two ways. The most common transaction
occurs when the cardholder presents the card to a merchant and the merchant swipes the
card through a point of sale terminal. The terminal reads the magnetic strip on the back of
the card and transmits a request for authorization to the issuing bank. Another type of
transaction can occur when the cardholder provides a merchant with his or her account
number and expiration date, but does not physically present the card to the merchant. This
Page 5
type of transaction generally occurs when purchases are being made over the telephone or,
in today’s world, via the internet. In either case, a sales slip is generated which the
merchant submits to a merchant bank with whom the merchant has a contract. 8 The
merchant bank will then remit the transaction amount to the merchant minus a discount. The
merchant bank may be located inside or outside Tennessee.
The merchant bank records the information from the sales slip and transmits the
information to a VISA (USA) Inc. or MasterCard International, Inc. interchange center for the
purpose of obtaining payment of the face amount of the slip, less an interchange fee, from
the bank that issued the credit card, which, in this case, was JCPNB. Visa and MasterCard
regularly inform JCPNB of the amount owed by it with respect to sales slips which have
been submitted by all merchant banks. From Delaware, the National Bank transfers funds
to pay these amounts.
The J.C. Penney National Bank charged an annual fee on most Visa and
MasterCard credit card accounts, as well as interest and other fees in connection with the
account. The National Bank then paid an income tax to the State of Delaware based upon
100% of the National Bank’s net income. JCPNB had never filed a franchise or excise tax
return with the Tennessee Department of Revenue, nor had it ever paid any franchise or
excise taxes to the State of Tennessee. However, the Field Audit Division of the Tennessee
Department of Revenue audited JCPNB in 1995 for the period of February 1990 through
January 1994. On November 1, 1995, the Department of Revenue issued an assessment
to the National Bank in the amount of $178,314, which included: $111,725 in franchise and
excise taxes, $27,932 in penalties, and $38,657 in interest. The assessment was based on
the determination that JCPNB was a “financial institution” as defined in T.C.A. §
67-4-804(a)(8) and was subject to franchise and excise taxation under T.C.A. §§ 67-4-806
and 67-4-903. In calculating the taxes, the Department of Revenue applied the single-factor,
Page 6
gross receipts apportionment formula applicable to financial institutions found in T.C.A. §§
67-4-815 and 67-4-919.
In accordance with T.C.A. § 67-1-1801, the National Bank filed this action contesting
the assessment of the franchise and excise taxes on three grounds: (1) the assessment
violated the Commerce Clause of the United States Constitution; (2) the assessment
violated the Due Process Clause of the United States Constitution; and (3) basing the
assessment upon the single receipts factor apportionment formula violated the Due
Process Clause of the United States Constitution. The case was tried in the Chancery
Court of Davidson County on February 9 and 10, 1998. The chancellor issued a
memorandum opinion on October 16, 1998 upholding the assessment. The chancellor
concluded that the assessment was not violative of the requirements of the Due Process
Clause of the United States Constitution, and a sufficient nexus existed between the State of
Tennessee and JCPNB to satisfy the requirements of the Commerce Clause. The
Commissioner filed a motion to alter or amend the order because it did not provide for a
judgment against JCPNB for the disputed tax liability and did not provide for an award of
attorney’s fees and expenses pursuant to T.C.A. § 67-1-1803(d). The chancellor entered a
final order on December 7, 1998, awarding judgment in favor of the Commissioner in the
amount of $178,314, as well as awarding attorney’s fees and expenses to the
Commissioner as the prevailing party. This appeal followed.
On appeal, JCPNB presents a single question for review. That question is whether
JCPNB’s relationship with the State of Tennessee satisfies the “substantial nexus”
requirement of the Commerce Clause.
Law and Analysis
Page 7
Financial institutions “doing business” in the State of Tennessee are subject to
excise and franchise taxes pursuant to T.C.A. §§ 67-4-806(d)(2) 9 and 67-4-903(f)(2) 10. The
Commissioner contends that JCPNB’s credit card activities come within the terms of the
statutory provisions because JCPNB: (1) regularly solicits business from customers in
Tennessee; (2) provides credit card services to its customers; (3) engages in transactions
in which it extends credit to these customers; and (4) receives interest income and fee
income from these transactions and loans. Appellee’s Brief at p. 10. JCPNB, however,
does not challenge the statutes pursuant to which the taxes were imposed. Rather, JCPNB
contends that its contacts with the State of Tennessee, even if sufficient under the
Tennessee statutory scheme, do not provide a sufficient nexus under the Commerce Clause
of the United States Constitution to uphold the assessment.
I.
This case presents a question regarding the limits of Tennessee’s power to tax
out-of-state sellers. Constitutional limitations on this power are found in both the Due
Process Clause of the Fourteenth Amendment and the Commerce Clause of article 1, § 8.
In the trial court, JCPNB challenged the franchise and excise taxes as a violation of both
constitutional provisions. On this appeal, JCPNB has limited its question presented to
consideration of whether the taxes imposed by the State of Tennessee violates the
Commerce Clause. However, JCPNB also claims that the Commissioner has “blurred the
line” between Due Process and Commerce Clause analysis.
Some of the Commissioner’s arguments do, in fact, confuse the analysis between
the Commerce Clause and the Due Process Clause. For example, in arguing that JCPNB
has a substantial nexus with the State of Tennessee, the Appellee’s brief states: “[JCPNB]
is exercising the substantial privilege of doing business in Tennessee. On this basis,
Page 8
sufficient nexus exists and JCPNB is receiving the protections which establish a basis for
finding of nexus.” The Commissioner makes this statement after quoting a passage from
Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425, 100 S.Ct. 1223, 63
L.Ed.2d 510 (1980). 11 However, the phrase “substantial privilege of doing business” is
traditionally used in the area of due process. Additionally, the Mobil Oil case specifically
used the language which Appellee quotes in the context of a Due Process analysis. 12
Therefore, recognizing the confusion that may exist between the parties, we find it
necessary to clarify the specific limitations imposed by both Due Process and the
Commerce Clause.
In Quill Corp. v. North Dakota, the United States Supreme Court considered the
constitutional limitations on a state’s power to tax imposed by both the Due Process Clause
and the Commerce Clause. 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). The
Court began by noting that the “two claims are closely related.” Id. (quoting National Bellas
Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505
(1967)). However, the Court also pointed out that the two Clauses each pose distinct limits
on the taxing power of the States. Quill, 504 U.S. at 305. Therefore, a State’s power to tax
may be sustained under the Due Process Clause, but imposition of the tax may nonetheless
violate the Commerce Clause. 13 Id. (citing Tyler Pipe Indus., Inc. v. Washington State Dept.
of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987)).
II.
The due process analysis in the area of state taxation of interstate commerce
derives from the rules for in personam jurisdiction expressed in International Shoe Co. v.
Washington, and its progeny. 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945). International
Shoe, the seminal case in the modern due process era, allows a state to assert personal
Page 9
jurisdiction if the defendant has minimum contacts with the jurisdiction “such that the
maintenance of the suit does not offend ‘traditional notions of fair play and substantial
justice.’” International Shoe, 326 U.S. at 316 (quoting Milliken v. Meyer, 311 U.S. 457, 463,
61 S.Ct. 339, 343, 85 L.Ed. 278 (1940)). Subsequent cases made clear the point that
physical presence in the jurisdiction is not necessary for “minimum contacts” to exist. See,
e.g., Burger King Corp. v. Rudzewicz, 471 U.S. 462, 105 S.Ct. 2174, 85 L.Ed.2d 528
(1985).
In the context of state taxation, the Due Process Clause “requires some definite link,
some minimum connection, between a state and the person, property or transaction it seeks
to tax.” Quill, 504 U.S. at 306 (quoting Miller Brothers Co. v. Maryland, 347 U.S. 340,
344-345, 74 S.Ct. 535, 539, 98 L.Ed. 744 (1954)). Prior to the 1967 decision in National
Bellas Hess, Inc. v. Department of Revenue. of Ill., 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d
505 (1967), the Supreme Court had found that “definite link” to exist in several cases
involving state use taxes. However, the taxpayer in all those cases had some type of
physical presence in the taxing state. Quill 504 U.S. at 306. The Quill Court noted that the
Bellas Hess decision suggested that physical presence in the State was necessary to
sustain jurisdiction under the Due Process Clause. See Quill 504 U.S. at 306-307.
Applying the reasoning from the International Shoe and Burger King decisions, the Quill
court rejected the notion that due process mandated the physical presence of an
out-of-state seller before a state could tax that seller. The Court held that the Due Process
Clause does not operate to bar enforcement of a use tax against a mail-order house “that is
engaged in continuous and widespread solicitation of business within a state.” Quill, 504
U.S. at 308. In other words, if the contacts were sufficient to subject the corporation to
personal jurisdiction in the forum state, then imposition of a use tax on the corporation’s
business in the state would be sustained in the face of a Due Process challenge. Physical
presence in the state is not necessary. In so holding, the Quill Court noted the policy
Page 10
concerns that drive due process analysis. Specifically, the Court stated:
Due process centrally concerns the fundamental fairness of
governmental activity. Thus, at the most general level, the due
process nexus analysis requires that we ask whether an
individual's connections with a State are substantial enough to
legitimate the State's exercise of power over him. We have,
therefore, often identified "notice" or "fair warning" as the
analytic touchstone of due process nexus analysis.
Quill, 504 U.S. at 312.
In the present case, the National Bank’s relationship with the State of Tennessee was
such that the imposition of the franchise and excise taxes was not precluded by due process
considerations. The lack of a physical presence in Tennessee does not mandate a finding
to the contrary. The following passage from Burger King Corp. v. Rudzewicz, cited by the
Quill Court, is equally applicable in the present case:
Jurisdiction in these circumstances may not be avoided merely
because the defendant did not physically enter the forum State.
Although territorial presence frequently will enhance a potential
defendant’s affiliation with a State and reinforce the reasonable
foreseeability of suit there, it is an inescapable fact of modern
commercial life that a substantial amount of business is
transacted solely by mail and wire communications across state
lines, thus obviating the need for physical presence within a
State in which business is conducted. So long as a commercial
actor’s efforts are ‘purposefully directed’ toward residents of
another State, we have consistently rejected the notion that an
absence of physical contacts can defeat personal jurisdiction
there.
Burger King, 471 U.S. at 476. JCPNB has reached out to the citizens of the State of
Tennessee through the solicitations for credit cards that were sent on its behalf. Moreover,
JCPNB has purposefully availed itself of the substantial privilege of doing business in the
State of Tennessee. See id. Clearly, the franchise and excise taxes assessed against
JCPNB are not violative of the rights guaranteed under the Due Process Clause.
The Due Process Clause, however, is only the first consideration in determining
whether a state may tax an out-of-state seller. Having recognized that the Due Process
Page 11
Clause does not preclude imposition of the franchise and excise taxes on JCPNB, we must
consider the limitations imposed by the Commerce Clause.
III.
The Commerce Clause expressly authorizes Congress to “regulate Commerce with
foreign Nations, and among the several States.” U.S. Const. art. I, § 8, cl. 3. In addition to
this affirmative grant of power, the “negative” or “dormant” Commerce Clause also serves to
prohibit state actions that interfere with interstate commerce. See Quill, 504 U.S. at 309
(citing South Carolina State Highway Dept. v. Barnwell Bros., Inc. 303 U.S. 177, 185, 58
S.Ct. 510, 514, 82 L.Ed. 734 (1938)). Simply stated, the fact that the Commerce Clause
grants Congress the specific power to regulate interstate commerce necessarily carries the
negative implication that the states may not act to interfere with interstate commerce.
The earliest cases in this area strictly limited the state’s rights to tax interstate sales.
See, e.g., Leloup v. Port of Mobile, 127 U.S. 640, 648, 8 S.Ct. 1380, 1384, 32 L.Ed. 311
(1888)(“no state has the right to lay a tax on interstate commerce in any form”). Subsequent
decisions by the Court moved away from the absolute limits imposed on state taxation and
began to distinguish between “direct” and “indirect” burdens on interstate commerce. This
line of cases culminated with the decision in Freeman v. Hewit, 329 U.S. 249, 67 S.Ct. 274,
91 L.Ed.265 (1946), in which the Court formally embraced the distinction and struck down
an Indiana tax as a direct tax on interstate sales.
Dormant Commerce Clause jurisprudence in the area of state taxation changed
dramatically with the decision in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97
Page 12
S.Ct. 1076, 51 L.Ed.2d 326 (1977). The Complete Auto decision rejected the line of cases
which had held impermissible the direct taxation of interstate commerce by the states. 14
Complete Auto enunciated a four-part test, which provided that a state tax on an out-of-state
seller will be sustained so long as the “tax (1) is applied to an activity with a substantial
nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against
interstate commerce, and (4) is fairly related to the services provided by the state.”
Complete Auto Transit, Inc. 430 U.S. at 279.
The question in the present case is whether JCPNB’s relationship with the State of
Tennessee satisfies the “substantial nexus” requirement found in the first prong of the
Complete Auto test. That question, in turn, raises the question of what is meant by the term “
substantial nexus.” As an initial matter, we can say that substantial nexus under the
Commerce Clause is not the same as minimum contacts under the Due Process Clause.
See Quill, 504 U.S. at 313 (“Thus, the ‘substantial nexus’ requirement is not, like due
process’ ‘minimum contacts’ requirement, a proxy for notice, but rather a means for limiting
state burdens on interstate commerce”). Although stating that proposition in the abstract
seems to be simple enough, the actual analysis can be much more confusing. The problem
is that phrases such as “minimum contacts” and “substantial nexus” do not really mean
anything. There is no definitive line that marks a minimum contact, nor is there a specific
point at which a substantial nexus exists. The analysis in this area is necessarily done on a
case-by-case basis. However, we are guided by the recognition that the Commerce Clause
imposes a greater limitation on Tennessee’s right to tax JCPNB than does the Due Process
Clause. With the distinctions between the two clauses in mind, we turn to the question of
whether a substantial nexus exists to sustain the franchise and excise taxes imposed by the
Commissioner.
IV.
Page 13
We do not consider the fact that JCPNB was “doing business” in Tennessee to be
dispositive of the present issue. If that were the case, we would have obliterated the
distinction between the Due Process Clause and the Commerce Clause. Instead, we must
attempt to delineate that level of “presence” in the State of Tennessee that will justify the
imposition of the types of taxes that are the subject of this appeal. This “presence” must, in
order to satisfy the Commerce Clause, be more than merely “doing business” in the State of
Tennessee. JCPNB relies on Bellas Hess and Quill to argue that physical presence is
required. The Commissioner, on the other hand, argues that physical presence is not a
formal requirement and the validity of a state tax should be determined under the Complete
Auto test. The Commissioner refers to this as “contemporary Commerce Clause
jurisprudence.” The fundamental flaw in the Commissioner’s argument is that Complete
Auto does not set a different standard than that contemplated in Bellas Hess and Quill.
Rather, Bellas Hess and Quill specifically address the first prong, or the substantial nexus
requirement, of the Complete Auto test. See Quill, 504 U.S. 311. In that regard, the Bellas
Hess/Quill decisions are entirely consistent with the Complete Auto test. Both Bellas Hess
and Quill are clear in their holding that in the context of a use tax, physical presence is
required in order to satisfy the substantial nexus requirement of Complete Auto.
The only real issue is whether there is any reason to distinguish the present case
from Bellas Hess and Quill. The Commissioner argues that those cases are distinguishable
because they involved use taxes, whereas the present case involves franchise and excise
taxes. We must reject the Commissioner’s argument. While it is true that the Bellas Hess
and Quill decisions focused on use taxes, we find no basis for concluding that the analysis
should be different in the present case. In fact, the Commissioner is unable to provide any
authority as to why the analysis should be different for franchise and excise taxes. 15 It is
certainly true that the Quill Court expressed some reservations about the vitality of the Bellas
Page 14
Hess decision. See Quill, 504 U.S. at 311 (stating that the Bellas Hess decision might be
different were the issue to arise for the first time today). However, we are not in a position to
speculate as to how the Supreme Court might decide future cases. We are only able to rely
on past decisions. Any constitutional distinctions between the franchise and excise taxes
presented here and the use taxes contemplated in Bellas Hess and Quill are not within the
purview of this court to discern. As such, we feel that the outcome of this case is governed
by Bellas Hess and Quill, as those decisions interpret the first prong of the Complete Auto
test.
JCPNB argues that the present case is “almost identical” to the facts in Quill. In
many respects, that assertion is correct. JCPNB is a Delaware corporation with no offices
or agents in Tennessee, just as the taxpayer in Quill had no offices or employees in North
Dakota. See Quill, 504 U.S. at 302. Also, JCPNB did not physically engage in any activities
in Tennessee connected with its credit card business. Similarly, Quill solicited business in
North Dakota through catalogs, flyers, and other advertisements and delivered those goods
via mail or common-carrier, thereby having no physical presence in North Dakota. Id.
In response to JCPNB, the Commissioner asserts several arguments in support of
finding that JCPNB does, in fact, have a substantial nexus with Tennessee. First, she
argues that the credit cards which JCPNB issued were tangible physical property over
which JCPNB maintained ownership, thereby giving JCPNB a physical presence in
Tennessee through those cards. 16 Additionally, she argues that the presence of the J.C.
Penney retail stores in Tennessee provides the requisite substantial nexus. We will deal
with each of these arguments in turn.
During the tax years in question, JCPNB had between 11,000 and 17,000 accounts
with Tennessee residents. The chancellor found that the actual credit cards constituted “
Page 15
tangible property for substantial nexus purposes.” In reaching that decision, the chancellor
found it persuasive that the cards remained the property of JCPNB. While we agree that a
credit card is tangible in that it can be seen and touched, we do not agree that the presence
of the credit cards in Tennessee is constitutionally significant. Additionally, we do not find it
relevant that JCPNB retained ownership of the cards.
Credit cards, in and of themselves, are virtually worthless. The “value” of these cards
is found in the right which the card represents, namely the credit account. The card is
merely representative of the customer’s right to charge goods and services. The actual
card is not even necessary to the transaction. 17 It merely serves as a convenient article on
which to record the necessary information regarding the customer’s account. As the
chancellor correctly determined, the real asset is the intangible account which the card
represents. Those accounts were located, for tax purposes, in the State of Delaware and
not subject to a Tennessee tax. Therefore, we do not agree with the chancellor’s
determination that the physical presence of the JCPNB credit cards constituted a basis for
finding substantial nexus.18
The Commissioner also argues that JCPNB had a physical presence in Tennessee
by virtue of the fact the J.C. Penney Company, JCPNB’s parent, owned and operated the
J.C. Penney retail stores in Tennessee. This argument lacks merit because the retail stores
were not affiliated with JCPNB’s Visa and MasterCard credit card operations. 19 The retail
stores conducted no activities which assisted JCPNB in maintaining its credit card
business in Tennessee. The record shows that one could not apply for the JCPNB credit
cards at the J.C. Penney retail stores, nor could individuals make a payment on their Visa or
MasterCard account at the retail stores. Therefore, we reject the Commissioner’s
arguments which contend that a substantial nexus exists based on the presence of the J.C.
Penney retail stores in Tennessee.
Page 16
Finally, the chancellor concluded that a substantial nexus existed based on “the
activities of the affiliates and third parties working on JCPNB’s behalf.” In reaching this
conclusion, the chancellor relied on Tyler Pipe Indus. v. Washington State Dep’t of Rev., 483
U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987) and Scripto v. Carson, 362 U.S. 207, 80
S.Ct. 619, 4 L.Ed. 2d 660 (1960). We are unable to agree with the chancellor’s reasoning.
Both Tyler Pipe and Scripto involved one crucial element which is absent in the present
case. In those cases, activities were being conducted in the taxing state that substantially
contributed to the taxpayer’s ability to maintain operations in the taxing state. Simply put,
the taxpayer in those cases had a physical presence in the taxing state that is lacking in the
present case.
In Scripto, the Georgia taxpayer employed independent contractors who solicited
business in the State of Florida, the taxing state. See Scripto, 362 U.S. at 211 (“Each
salesman . . . is actively engaged in Florida as a representative of Scripto for the purpose of
attracting, soliciting and obtaining Florida customers”). The real issue in Scripto was
whether it made any constitutional difference that the individuals hired to solicit business
were employed as “independent contractors” rather than as regular employees. The court
refused to find any meaningful difference between the labels used to describe the
employees. See id. at 211 (holding the distinction between regular employees and
independent contractors to be without constitutional significance).
Similarly, in Tyler Pipe, the Supreme Court found that a substantial nexus existed to
justify the imposition of a business and occupation tax by the State of Washington. 20 In Tyler,
the solicitation was “directed by executives who maintain their offices out-of-state and by an
independent contractor located in Seattle .” Tyler Pipe, 483 U.S. at 249 (emphasis added).
The Court, agreeing with the Washington Supreme Court, found the crucial factor to be the
Page 17
fact that the activities which allowed the taxpayer to establish and maintain a market actually
took place in the State of Washington . Id. at 250 (emphasis added). The Court
concluded by stating, “the activities of Tyler’s sales representatives adequately support the
State’s jurisdiction to impose its wholesale tax on Tyler.” Id. at 251. Here, as in Scripto, the
distinguishing factor was the physical presence of the taxpayer in the taxing state.
A review of the facts of the present case convinces this court that JCPNB did not
have a physical presence in Tennessee through its affiliates. Neither BSI nor MBNA actually
performed any services on behalf of JCPNB in the State of Tennessee. The solicitation,
which was the most important function in allowing JCPNB to maintain its business, took
place through the U.S. Mail, which, under the holding in Quill, does not allow a finding of
substantial nexus. In short, the activities which allowed JCPNB to conduct its credit card
operation did not occur in the State of Tennessee. 21 As such, we believe the chancellor’s
reliance on Scripto and Tyler Pipe was misplaced as those cases are clearly
distinguishable.
It is not our purpose to decide whether “physical presence” is required under the
Commerce Clause. However, the Commissioner has pointed to no case in which the
Supreme Court of the United States has upheld a state tax where the out-of-state taxpayer
had absolutely no physical presence in the taxing state. The Commerce Clause requires a
greater relationship than does the Due Process Clause. If we were to uphold the tax
assessment against JCPNB, we believe that we would be unjustifiably overlapping the two
clauses. While we are confident that the tax assessment satisfies due process, we fail to
see the substantial nexus necessary to sustain the tax under the Commerce Clause.
Scripto, Inc. v. Carson, is, by the Supreme Court’s own words, the furthest extension of a
state’s right to tax an out-of-state seller. However, Scripto involved facts that are not present
in this case. Specifically, the Georgia company in Scripto employed individuals in the State
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of Florida, the taxing state, to solicit business. Therefore, if Scripto is the furthest reach of a
state’s power to tax, and there is even less of a relationship in this case than was present in
Scripto, we conclude that a substantial nexus is lacking to uphold the tax assessment
against JCPNB.
Conclusion
For the reasons stated herein, we reverse and dismiss the decision of the trial court,
which upheld the imposition of franchise and excise taxes against JCPNB. Costs of this
appeal are taxed to the appellee, Ruth E. Johnson, Commissioner of Revenue, State of
Tennessee, for which execution may issue if necessary.
HIGHERS, J.
CONCUR:
FARMER, J.
LILLARD, J.
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