State and local tax news for August 2025

Oregon court holds hedging transactions not included in sales factor

On July 21, 2025, in Chevron U.S.A., Inc. v. Department of Revenue, the Oregon Tax Court held that a petroleum business could not include gross receipts from hedging transactions in its sales factor for Oregon apportionment purposes for the 2011-2013 tax years. The hedging receipts were unable to be included in the sales factor because they were not from sales of tangible personal property, or sales of intangible property derived from the taxpayer’s primary business activity.

The taxpayer, Chevron, was engaged in a fully integrated petroleum business in Oregon and elsewhere, with upstream and downstream operations consisting of producing crude oil and natural gas, and refining crude oil into petroleum products. Because the petroleum industry is susceptible to volatile pricing risks, hedging instruments were used in Chevron’s risk management and trading activities to produce hedging receipts that included forwards, futures, swaps, and options.

After excluding the hedging receipts from the sales factor on its original returns, Chevron filed amended returns for the years at issue in which Chevron added the hedging receipts to the denominator of the sales factor. This change substantially reduced the percentage of Chevron’s overall business income that was apportioned to Oregon. The Oregon Department of Revenue first issued refunds based on the amended returns, but later rejected Chevron’s position and issued notices of assessment for the tax years at issue. After the Oregon Tax Court’s Magistrate Division denied relief, Chevron paid the taxes and filed a complaint with the Court’s Regular Division.

The Court’s Regular Division held that Chevron’s hedging receipts could not be included in the sales factor. Under Oregon law, to be included in the sales factor, the hedging receipts must either be sales of tangible personal property or, if they are from intangible property, be derived from a taxpayer’s primary business activity.

Chevron unsuccessfully argued that its hedging receipts were sales of tangible personal property based on the U.S. Supreme Court’s 1955 decision in Corn Products Refining Co. v. Commissioner. According to Chevron, the federal Corn Products doctrine, which requires hedging receipts to be treated as ordinary income like receipts from selling the commodity itself, also requires the hedging receipts to be treated as sales of tangible personal property for Oregon apportionment purposes. In rejecting Chevron’s argument, the court held that Corn Products was not binding authority that hedging receipts are treated as sales of tangible personal property for purposes of the sales factor. At issue in Corn Products was whether gains and losses from the taxpayer’s hedging transactions in corn commodity futures were to be treated as arising from the sale of capital assets and subject to the federal capital gains rules. The tax court concluded that Corn Products was not binding because Chevron’s federal taxable income was not in dispute and the capital gains rules do not affect the measurement of gross receipts. Furthermore, the court held that Corn Products was not persuasive authority because Oregon case law classifies hedging receipts as sales of intangible property.

The court also rejected Chevron’s second theory that the hedging receipts, although from intangibles, must be “reincluded” in the sales factor because they were derived from Chevron’s primary business activity. Chevron did present convincing evidence of strong business reasons for its practice of entering into hedging transactions in addition to transactions for the sale and purchase of tangible petroleum commodities. But the court noted that the “derived from” requirement, as construed by the Oregon Supreme Court in Tektronix, Inc. v. Department of Revenue in 2013, directs a court to identify the source of the particular gross receipts at issue. In the instant case, the source of the receipts was the sale or exchange of separate hedging contracts, despite Chevron’s argument that it would be unable to maintain its business without engaging in both hedging transactions and transactions for the sale of the tangible commodities. Because the court determined that the hedging receipts were not included in Chevron’s sales factor, the court granted the Department’s motion for partial summary judgment. The case is consistent with the recent trend of legislation and case law often reducing the impact of hedging transactions in the sales factor by either requiring net instead of gross inclusion of receipts from these transactions, or in some situations, requiring exclusion of these receipts altogether.

Rhode Island enacts legislation decoupling from OBBBA

Effective June 29, 2025, Rhode Island enacted budget legislation, H.B. 5076, without the signature of Governor Daniel McKee. The legislation expressly decouples from the federal One Big Beautiful Bill Act (OBBBA) that was enacted on July 4, 2025, and makes various amendments to income tax credits.

For the taxable year beginning on or before Jan. 1, 2025, the definition of “net income” is amended for business corporation tax and individual income tax purposes to include the amount of any income, deduction or allowance that would be subject to federal income tax but for the Congressional enactment of the OBBBA or any other similar Congressional enactment. In addition, the enactment of the OBBBA or any other similar Congressional enactment and any Internal Revenue Service changes to forms, regulations, and/or processing which go into effect during the current tax year or within six months of the beginning of the next tax year are considered to be grounds for the state to promulgate emergency rules and regulations to effectuate the purpose of preserving the Rhode Island tax base. Based on this statutory language, Rhode Island is the first state to clearly enact legislation that specifically addresses the OBBBA and decouples from the tax provisions contained in the OBBBA given the negative revenue effects that would result from a state tax perspective if Rhode Island did not act, and followed its rolling federal conformity policy.

In addition to the OBBBA provision, various amendments and sunset dates are enacted for several tax credits. The specialized investment tax credit that may be taken against corporation business tax and individual income tax for the rehabilitation and reconstruction costs of a certified building will not be allowed for tax years beginning in 2026 and thereafter. Credits allowed for tax years ending before 2026 may continue to be carried forward to later tax years, as provided under current law.

Sunset dates are enacted for certain research and development deductions and credits, as well as other incentive programs. For the elective deduction for new research and development facilities that may be taken for business corporation tax and individual income tax purposes, no deduction is allowed for tax years beginning in 2026 and thereafter. Similarly, for the credit for research and development property acquired, constructed, or reconstructed or erected after July 1, 1994, no credit is allowed for tax years beginning in 2026 and thereafter. Deductions and credits allowed for tax years ending before 2026 may continue to be carried forward to later tax years, as provided under current law.

For tax years beginning in 2026 and thereafter, the credit for qualified research expenses may not reduce the tax due for that year by more than 50% of the tax liability that is payable, and for corporations, to less than the corporate minimum tax. Unused credits may be carried forward for up to 15 years. Finally, the deduction for capital investment in a small business is not allowed for tax years beginning in 2026 and thereafter.

Washington court upholds drop shipment sourcing rule

On July 22, 2025, the Washington Court of Appeals held in Synnex Corp. v. Department of Revenue that the Washington Department of Revenue did not exceed its authority in promulgating its business and occupation (B&O) tax rule concerning the sourcing of drop shipments to the state. Under the relevant sections of the rule, Wash. Admin. Code Sec. 458-20-193, a drop shipment is sourced to Washington if the property is delivered to the retail seller’s customer in the state. As a result, the drop shipments delivered to customers in Washington were subject to B&O tax.

The taxpayer, Synnex, an out-of-state wholesale seller of information technology products, engaged in sales involving Washington customers. Synnex shipped its products from locations outside Washington and had no physical presence in the state. The transactions at issue were Synnex’s wholesale sales made as “drop shipments.” In this type of transaction, two sales occur. First, a customer (or retail purchaser) buys a product from a retail seller. Second, the retail seller (or wholesale purchaser) buys the product from a wholesale seller and directs it to deliver the product directly to the customer. Thus, the retail seller / wholesale purchaser never has the product.

In December 2021, the Department issued a notice of B&O tax due against Synnex for the period from July 1, 2015 to Sept. 30, 2019 for over $6 million. Synnex challenged the assessment and argued that the wholesale sales it made to non-Washington purchasers should be sourced to the purchasers’ locations outside Washington. The compliance division refused to adjust the assessment and explained that the drop shipments were properly sourced under the Department’s rule. Subsequently, the Department’s Administrative Review and Hearings Division denied Synnex’s petition and determined that Synnex was subject to B&O tax under the rule when it drop shipped products to customers in Washington. Synnex filed a petition for declaratory relief in superior court seeking a ruling that the drop shipment rules are invalid because they exceed the Department’s statutory authority and were promulgated in an arbitrary and capricious manner. After the superior court denied the petition, Synnex filed an appeal with the Washington Court of Appeals. 

The appellate court explained that Wash. Rev. Code Sec. 82.32.730(1) provides that when tangible personal property is received by the purchaser at the seller’s business location, the sale is sourced to that location. If the property is not received by the purchaser at the seller’s business location, the sale is sourced to the location where the property is received by the purchaser. If these provisions do not apply, the sale is sourced to the purchaser’s address that is available from the seller’s business records. The court noted that the statute does not define “purchaser.”

In 2015, the Department promulgated the current version of the drop shipment rule at issue. Synnex argued that the rule is invalid because it exceeds the Department’s statutory authority and conflicts with the statute discussed above. Specifically, Synnex challenged three provisions of Wash. Admin. Code Sec. 458-20-193: (i) subsection (301), which provides that “[t]he place of receipt in a drop shipment transaction is where the property is delivered (i.e., the seller’s customer’s location);” (ii) subsection (304), which requires the wholesale seller to pay B&O tax on the sale to a wholesale purchaser who does not have nexus with Washington when the goods are shipped to the state; and (iii) subsection (305), which requires the wholesale seller to pay B&O tax on the sale to a wholesale purchaser who has nexus with Washington.

The appellate court held that the Department did not exceed its statutory authority in promulgating the drop shipment sourcing rules. Assessing the validity of the rule depends on the interpretation of the sourcing statute, Wash. Rev. Code Sec. 82.32.730(1)(b), providing that tangible personal property not received at the seller’s business location is sourced to where the purchaser receives the property. The court noted that drop shipments involve two distinct sales and the sourcing statute applies separately to each sale. The sourcing statute does not define “purchaser,” but the court explained that application of the sourcing statute depends on the interpretation of this term. Synnex argued that “purchaser” includes only the wholesale purchaser, and the sourcing statute does not apply because the wholesale purchaser never receives the product. Under the default statutory sourcing provision, the sale is sourced to the wholesale purchaser’s location. The Department argued that “purchaser” is defined to include the wholesale purchaser’s customer in a drop shipment transaction. Under this interpretation, the general sourcing statute applies because that customer actually receives the product and the sale is sourced to the customer’s location. The court concluded that both interpretations of the term are reasonable and the meaning of “purchaser” in the sourcing statute is ambiguous.

In upholding the drop shipment sourcing rules, the court determined that these rules were reasonably consistent with the sourcing statute, and consistent with statements of the Washington Supreme Court regarding the purchaser in drop shipment transactions. Furthermore, the court held that the Department did not act arbitrarily or capriciously in promulgating the drop shipment rule. The Department explained that it adopted the drop shipment rule to reflect current law and clarify its examples of drop shipments. 

Colorado court holds streaming services subject to sales tax

On July 3, 2025, in Netflix, Inc. v. Department of Revenue, the Colorado Court of Appeals held that a major online streaming service’s sales of subscriptions constitute sales of tangible personal property at retail that are subject to state sales tax. In reversing the district court, the appellate court determined that the subscriptions are considered tangible personal property because they are “corporeal property” that is perceptible to the senses.    

Under Colo. Rev. Stat. Sec. 39-26-104(1)(a), the state has imposed sales tax since 1935 on “the purchase price paid or charged upon all sales and purchases of tangible personal property at retail.” Colo. Rev. Stat. Sec. 39-26-102(15)(a)(I) provides that tangible personal property means “corporeal personal property.” In 2021, the Colorado Department of Revenue promulgated a rule including an example that sales tax is due on online streaming subscription fees. Colorado amended the sales tax statute later that year to clarify that “[t]angible personal property includes digital goods” and that “[t]he method of delivery does not impact the taxability of a sale of tangible personal property.”

The taxpayer, Netflix, offers subscriptions to consumers that allow them to pay a flat monthly fee for online access to its online library of movies, television shows and games. Although some content may be downloaded and stored on devices for offline viewing, Netflix provides no physical equipment to its subscribers. When a subscriber selects content to view, Netflix transmits the data from its servers over the internet to the subscriber’s device.

In 2013, Netflix requested a private letter ruling from the Department that its sales of streaming subscriptions are not taxable as sales of tangible personal property. After declining to provide the requested ruling, the Department determined that Netflix owed millions in uncollected sales tax. However, the Department abated the assessment to provide the opportunity to address the issue through rulemaking. Following the promulgation of the rule and the statutory amendment discussed above, Netflix remitted the sales tax collected on the streaming subscriptions sold in three separate monthly tax periods in 2021, and then requested a refund of these amounts. Netflix appealed the Department’s subsequent denial of its refund request to the district court.

The district court granted Netflix’s motion for summary judgment after explaining that the “streaming service is not tangible personal property” because, “while capable of being seen, [it] is not capable of being touched and therefore is not taxable under [the sales tax statute].” The Department appealed this decision.