Capital One Auto Finance’s Virginia-based affiliate banks must pay taxes on income earned from consumers in Oregon, despite not having a physical presence in the state, according to a decision made by Oregon’s Supreme Court this week.
After being audited by the state tax court for not sourcing revenue to the state despite advertising and providing services to Oregon residents, Capital One challenged the audit — arguing that these out of state banks did not have nexus in Oregon.
“Capital One took the position that the two banks in Virginia had no connection to Oregon since it is not selling a product to the state,” Mary Bernard, director of income and franchise tax at Ryan LLC, told Auto Finance News. “But because it’s not a tangible product, its a service. Services are not exempt from income tax just because [the bank] doesn’t have a physical store. And the supreme court decided that the state was right.”
Additionally, the ruling from the state tax court found that Oregon state law plainly illustrates that income tax applies to any business that earned in Oregon, regardless of any physical offices. The Department of Revenue asserted that the banks derived income from the state through finance charges, late fees, and over-the-limit fees charged to residents in the amount of $150 million per year.
Though Bernard did not know the exact amount of money Capital One may have to owe the state, there’s an assumption that the main reason the state was fighting Capital One is that the bank’s tax was going to go up.
“[Capital One] was going to owe more tax if they included this additional income to their tax liabilities to the state,” Bernard said. “I’d have to assume that this will cost Capital One some money.”
The court case is timely in light of the May 2018 Supreme Court decision in South Dakota v. Wayfair, which the court held that states may charge tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state.
This is alarming because “states are getting aggressive,” Bernard said. As the auto industry moves more digital, it’s increasingly likely that financial services will sell products or services to a state where there may not be a physical location. If more states implement income taxes for out-of-state sellers, that could trickle down with increased taxes that financial services must charge consumers.