If states can no longer legally bar interstate banking, there is at least one consolation: they can make banks pay for it.

As banks consolidate and move many operations to one location in an effort to reduce costs, states are devising taxes that will keep revenues intact.

Foremost is the increasingly common -- but hotly debated -- practice of taxing financial institutions with no physical presence in state.

Minnesota, Tennessee, West Virginia, and Indiana are among the states now taxing financial institutions without physical presence, or "nexus" in legal jargon.

No lawsuits have been filed by banks challenging the practice.

But in 1992, the Supreme Court ruled in Quill v. North Dakota that a state could not tax a company without nexus.

The court said to subject Quill, a mail-order company in Chicago, to state taxes outside Illinois would be an undue burden on interstate commerce.

Undaunted, the states are increasingly taxing out-of-state financial institutions.

The most immediate implications are for credit card companies that solicit customers nationally. "If this were to be something that every state were to do and it passed constitutional muster, the credit card companies in single states would be subject to national taxes in every place they do business, as well as banks," said Laura A. Kulwicki, a lawyer with Jones, Day, Reavis & Pogue in Cleveland. "It would open up a can of worms."

States argue that if a company earns a profit on its residents, then the company should be taxed.

But as banks move toward interstate branchless systems, the tax implications are downright scary. If left unchecked, a bank need only have customers in a given state, and not a sales force or branches, to be taxed, Ms. Kulwicki said.

In the foreseeable future as fewer and fewer customers use branches and instead bank electronically, the issue of nexus and taxes could emerge as a major headache for expanding banks.

Also on the radar screen for tax-hungry states are banks' nonbanking units, said John P. Duncan, also a lawyer with Jones, Day, based in Chicago.

"States have become increasingly aware of people coming in with credit cards and other services, and some states have been trying to lock them out, or conversely tax it," he said.

Already, California, Texas, Pennsylvania, Tennessee, and Minnesota have begun taxing banks' nonbank units, he said.

Here the issue is if a bank does have a physical presence in a state, but offers other services -- like mortgages or mutual funds -- from another state, who gets the tax revenue? And because the interstate law does not address the status of nonbank financials, presumably states may be able to obstruct the expansion of these units, Mr. Duncan warned.

Banks will have to proceed state by state, he said, and conform to the host of regulations in each locale.

Jones, Day sells very thick regulatory guidebooks that track each financial services industry, like credit cards, and the relevant regulations in each state. But be warned, taxes could be a better bet: the books sell for about $30,000 apiece!

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