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.

From a state's perspective, nexus may not necessarily cease when a bank consolidates operations. In fact, Indiana, Massachusetts, Minnesota, Pennsylvania, Tennessee, and West Virginia have enacted so-called "expanded nexus" statutes that aggressively target a bank's income producing activities.

Community banks should be mindful of the apportionment implications on a consolidation or an expansion. Conflicting rules between "market states" and "money-center states" may have a major effect on multistate operations. Without careful planning, the bank may be required to report more than 100% of its income to the jurisdictions in which it is taxable.

Interstate branching also presents real and personal property tax consequences for banks. For instance, an interstate merger or consolidation could trigger property tax reassessments for a bank's real estate portfolio based on changes in ownership. Or it may prompt real estate transfer taxes or taxes on transfers of economic interests in real estate, bringing added costs.

As banks expand, their portfolio of real estate assets will become more geographically dispersed. Because property taxes are largely administered locally, the number of jurisdictions that must be dealt with will increase exponentially.

This presents both issues and opportunities. Recent experience demonstrates that significant savings opportunities are presented by real estate portfolios, as well as by bank branch locations and personal property, such as business equipment, whose value has declined due to economic or technological factors.

Mr. Engel is partner and banking service leader for KPMG Peat Marwick's state and local tax practice.

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