Magazine article American Banker

State Tax Codes Present Stumbling Blocks and Ways to Rack Up Points in Branching

Magazine article American Banker

State Tax Codes Present Stumbling Blocks and Ways to Rack Up Points in Branching

Article excerpt

With the enactment of the Interstate Banking and Branching Efficiency Act last year, financial institutions will finally be able to operate across state lines without having to do so through bank or "nonbank" subsidiaries.

Although the act changes the way banks may operate in interstate commerce, state taxing authority is not affected. The status quo of nonuniform state tax rules remain.

In addition, as implementation of the act is largely left up to state legislation, states have the option of accelerating, accepting, or rejecting interstate banking. That means adoption of the act will not be consistent or uniform in each state.

As a result, any bank's exposure to nonuniform state taxation and its state tax liabilities may increase.

However, when a community bank consolidates multistate affiliates or expands into new markets, state tax opportunities are presented. With proper planning tailored to the business purpose of the consolidation or expansion, community banks have a unique opportunity to strengthen market competitiveness, return capital to the bottom line, and enhance shareholder

value.

The most significant state and local tax opportunities for banks relate

to income and franchise taxes.

When a bank acquires or establishes a branch in a new state, it will have "nexus" and become subject to the new state's income or franchise tax.

An institution contemplating a branch expansion or acquisition should carefully consider whether alternative structures would provide greater benefits under the new state's income tax system, including its apportionment regime, filing options, and the calculation of its income tax

base.

Nexus is the level of activity conducted by a bank in a state that subjects the bank to that state's filing requirements. More states subject

banks to tax based on nexus theories that are grounded on the economic exploitation of a market, including making loans, or having credit card customers or depositors in a state. …

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