Mississippi Department of Revenue v. Pikco Finance, Inc.

Citations: 97 So. 3d 1203; 2012 WL 3031281; 2012 Miss. LEXIS 354Docket: No. 2011-CA-00842-SCT

Court: Mississippi Supreme Court; July 26, 2012; Mississippi; State Supreme Court

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The Mississippi Department of Revenue (MDOR) issued a subpoena to Pikco Finance, Inc. for documentation related to its nonpayment of finance company privilege taxes. Pikco, a subsidiary of Pike National Bank, challenged the subpoena, claiming that MDOR's authority was preempted by the National Bank Act. The circuit court agreed, quashing the subpoena and ruling that MDOR’s inspection did not qualify as an exception under federal law, although it acknowledged MDOR's right to enforce state laws through judicial actions.

MDOR appealed the decision, asserting that the circuit court's ruling was limited to the subpoena's enforcement, not the tax assessment. Consequently, MDOR assessed Pikco $322,287 for unpaid taxes from July 2005 to March 2011. Pikco then filed a Motion for Contempt against MDOR, alleging violation of the court's order, which remains pending.

The appellate court will review whether MDOR's subpoena power in administering the Finance Company Privilege Tax is preempted by federal law, requiring an initial determination of Pikco's liability under the state tax law. According to Mississippi Code Sections 27-21-1 to 27-21-19, the Finance Company Privilege Tax applies to entities engaged in lending, excluding banks. MDOR maintains that it has the authority to issue subpoenas as part of its enforcement duties under state law.

MDOR asserts that Pikco is liable for the Finance Company Privilege Tax and must comply with a subpoena issued to obtain documents regarding its tax noncompliance. Pikco contends it is not obligated to respond to the subpoena due to three main arguments: 1) the Finance Company Privilege Tax is preempted by the National Bank Act, 2) the subpoena constitutes an exercise of visitorial power, which is prohibited under the National Bank Act as Pikco is an operating subsidiary of a national bank under the exclusive oversight of the Office of the Comptroller of the Currency (OCC), and 3) Pikco is exempt from the tax under Mississippi Code Section 27-21-3. Each argument is addressed in detail.

Regarding the preemption claim, Pikco argues that the National Bank Act, which aims to create a national banking system free from state legislative limitations, preempts the Mississippi tax. However, the burden of proof for establishing preemption lies with Pikco. The court has ruled that federal law preempts state law only under three conditions: explicit preemption by Congress, total occupation of the field by federal law, or an actual conflict between federal and state law.

The court finds that Congress has not explicitly preempted state taxation under the National Bank Act. Though the Act restricts certain state regulations on national banks, it does not include state taxation among those restrictions. Specifically, 12 U.S.C. Section 548 states that national banks are treated as state-chartered banks for tax purposes, indicating that state tax laws apply. Additionally, the Code of Federal Regulations confirms that state tax laws can apply to national banks, provided they only incidentally affect the banks' powers.

Moreover, the National Bank Act does not occupy the entire field of regulation concerning national banks, allowing states to regulate areas that only incidentally impact national bank powers. Consequently, Congress has explicitly stated that national banks are subject to state taxation, thereby negating Pikco’s preemption argument.

Federal law does not preempt state law regarding the taxation of national banks, as there is no duplicative federal law governing the collection of Mississippi state finance taxes. National banks must adhere to state laws unless those laws are explicitly preempted by the National Bank Act. Since state taxation is exempt from federal regulation, there is no conflict between federal and state law in this context, allowing state tax laws, like the Finance Company Privilege Tax, to apply to national banks and their subsidiaries. Furthermore, Congress has not explicitly preempted state taxation laws, nor has it occupied the entire field, affirming that the National Bank Act does not interfere with state taxation authority.

Pikco contends that it is not required to comply with a subpoena from the Mississippi Department of Revenue (MDOR), arguing that the subpoena represents an exercise of visitorial power restricted by federal law. Under 12 U.S.C. § 484, national banks are protected from state visitorial powers unless authorized by federal law. This provision was designed to maintain bank independence, granting exclusive authority to the Office of the Comptroller of the Currency (OCC) for exercising visitorial powers over national banks. Although Pikco is not a national bank, it claims Section 484 protections apply to it through 12 C.F.R. § 7.4006, which previously allowed state laws to apply to national bank subsidiaries as they do to the parent bank.

Pikco heavily cites the Supreme Court case Watters v. Wachovia Bank, which held that state regulatory requirements on a national bank's operating subsidiary were preempted by the National Bank Act. However, this case is distinguishable from the current matter, as it involved federal regulation of real estate lending, a power explicitly governed by federal law, whereas taxation falls under state jurisdiction and is not regulated by the National Bank Act.

Pikco's argument that it qualifies for protections under Section 484 and 12 C.F.R. Section 7.4006, despite not being a national bank, is fundamentally flawed due to the principle that taxation falls under state law, not federal jurisdiction. The court referenced the Watters decision, emphasizing that state laws govern areas not addressed by the National Bank Act. Consequently, Pikco is not regarded the same as its parent national bank for state tax purposes, making Section 484's visitorial limitation inapplicable. Furthermore, the examination of tax records by state officials does not constitute an exercise of visitorial power that Section 484 prohibits, as defined by Supreme Court precedent. The Maryland Department of Revenue's (MDOR) issuance of a subpoena to enforce state tax laws does not reflect a supervisory authority over Pikco, and state taxation of national banks is permissible under both federal law and specific regulations. 

Regarding the Finance Company Privilege Tax, Pikco's claim for exemption under Mississippi law is invalid because it is not a state or national bank, despite its argument that it should be treated similarly to its parent bank. The MDOR asserts that exemptions from this tax can only arise from the Mississippi Legislature, not from federal law or regulations. Thus, Pikco remains subject to the Finance Company Privilege Tax under Mississippi Code Section 27-21-3.

The Court establishes that taxation is the default, with exemptions being exceptions that must be clearly justified by the claimant. The burden of proof for tax exemptions lies with the claimant, as seen in Miss. State Tax Comm’n v. Med. Devices, Inc. and U.S. v. State of Miss. Pikco's claim for exemption from the Finance Company Privilege Tax fails because it is not classified as a state or national bank. Its argument referencing 12 C.F.R. Section 7.4006 is deemed incorrect, as it misapplies federal and state law distinctions. The circuit court's ruling that Pikco, as an operating subsidiary, was not obligated to comply with the Mississippi Department of Revenue's (MDOR) subpoena is overturned because state law governs taxation, not federal law. Consequently, Pikco is liable for the Finance Company Privilege Tax, and MDOR has the authority to enforce state tax laws against it. The Court reverses the circuit court's judgment and remands the case for further proceedings. A secondary issue regarding MDOR's authority to issue tax assessments without a subpoena remains unaddressed due to the primary ruling. The excerpt also outlines the historical context of the National Bank Act's amendments, particularly the changes implemented by the Dodd-Frank Act, which adjusted the regulatory landscape and state taxation applicability for national banks, ending their immunity from state taxes established in earlier case law.

The amendment aimed to enhance equality in state taxation for state banks compared to national banks and non-bank corporations. Although Section 7.4009 was rescinded by the Dodd-Frank Act, 12 U.S.C. Section 548 remains effective, allowing state taxation of national banks. Under 12 C.F.R. 7.4000(a), only the Office of the Comptroller of the Currency (OCC) or its authorized representatives can exercise visitorial powers over national banks, which include examinations, inspections of records, and enforcement of compliance with federal and state laws, except under specific federal law exceptions. This exclusive authority was effective until July 21, 2011, with minimal changes post-Dodd-Frank. The Dodd-Frank Act also rescinded 12 C.F.R. Section 7.4006, altering the treatment of national bank operating subsidiaries, stating that no provision would preempt state law regarding any subsidiary, affiliate, or agent of a national bank (excluding those chartered as national banks). This shift overturned previous judicial rulings and eliminated the preemption of state law concerning national bank subsidiaries, agents, and affiliates.