In the past few years, increasing numbers of states have succeeded in imposing income-related taxes on companies that lack any kind of physical presence within their borders. They’ve successfully argued that a significant economic presence — for example, revenue derived from use of intangible property within the state — can be enough to establish nexus.

Hopes for a rollback of states’ application of economic nexus took a hit yesterday when the U.S. Supreme Court decided not to review two key cases from the Massachusetts Supreme Court.

At issue in Capital One Bank v. Commissioner of Revenue was an excise tax imposed by Massachusetts on all financial institutions doing business in the state above certain thresholds; for example, banks with more than 100 Massachusetts customers are required to pay the tax. Capital One had offered credit card services to Massachusetts residents, but had no payroll or property in the state apart from its logo on the credit cards. In January, the state’s Supreme Court tossed out the bank’s argument that it shouldn’t have to pay the tax because it had no physical presence in the state. The court ruled that while physical presence is a well-established test for the imposition of sales and use taxes, it’s not required for income-based taxes.

The court gave equally short shrift to the physical presence argument when advanced by Geoffrey Inc., a holding company set up by Toys R Us, which failed to file returns for another excise tax, this one aimed at out-of-state corporations that lease or consign property to companies in the state. That includes intangible property such as trademarks, the court ruled, and it applies even when the lessor has no offices or employees in Massachusetts.

The U.S. Supreme Court’s refusal to take on these cases is hardly a surprise; it’s in line with its past silence on the issues. But it’s definitely not good news for any organization that does business across state lines. It leaves such companies vulnerable to states’ increasingly aggressive assertion of economic nexus; it virtually guarantees ongoing confusion over the requirements of various jurisdictions; and it leaves untouched a growing obstacle to interstate commerce. ###