Oregon Supreme Court affirms substantial nexus and subscriber-based sourcing provisions


Nisha Mathew
T+1 206 398 2445

Patrick Shine
T+1 206 398 2485

Jamie C. Yesnowitz
Washington, DC
T+1 202 521 1504

Chuck Jones
T+1 312 602 8517

Lori Stolly
T+1 513 345 4540

The Oregon Supreme Court recently affirmed two significant Tax Court decisions affecting corporate taxpayers. First, the court held that two out-of-state financial institutions had substantial nexus in Oregon and were subject to the state’s corporate income tax based on the economic activities of the financial institutions within the state.1 Second, the court affirmed a decision holding that an out-of-state cable television service provider was required to apportion all of its revenue using an audience or subscriber factor in accordance with the state’s specific broadcaster apportionment statutes, rather than bifurcating its revenue streams for state apportionment purposes.2

Capital One Auto Finance, Inc. v. Department of Revenue

The taxpayer, which was subject to Oregon taxation as a provider of automobile and motor vehicle financing, was a member of an affiliated group of subsidiaries wholly owned by a common parent. The taxpayer and its affiliates were all incorporated, headquartered, and domiciled outside Oregon. During the 2006-2008 tax years at issue, the taxpayer filed consolidated Oregon excise tax returns which included the affiliates, but excluded the gross receipts of two bank affiliates from the Oregon sales factor numerator. The bank affiliates offered services to customers throughout the country, including Oregon.

In 2011, the Oregon Department of Revenue determined that the bank affiliates were subject to the corporate excise tax by reason of their lending and depository activities with Oregon customers and issued a notice of deficiency for the tax years at issue. The taxpayer appealed to the Oregon Tax Court, which found that the bank affiliates were subject to the corporate income tax rather than excise tax.3 The taxpayer appealed the decision to the Oregon Supreme Court.

Oregon corporate tax regime

Oregon’s corporate excise tax is measured by net income and imposed on financial institutions “doing business” in the state.4 Similarly, Oregon’s corporate income tax is also measured by net income, and imposed on corporations that have “Oregon taxable income derived from sources within this State.”5 Despite being contained in separate chapters, the corporate excise tax and the corporate income tax were intended to operate as one cohesive tax regime, and the income tax only reaches income not already subject to the corporate excise tax.

Oregon Supreme Court decision

In its appeal, the taxpayer presented three issues to the court: (i) whether the Department raised the corporate income tax alternative basis in a procedurally timely manner; (ii) if so, whether the income tax applies to the bank affiliates based upon their activities in Oregon; and (iii) whether the corporate excise tax would apply to the bank affiliates on the undisputed facts.

The court first examined the procedural rules related to the notice and timeliness of the Department’s assertion of the corporate income tax as an alternative basis for taxation. It concluded that the Department was permitted to raise the corporate income tax issue before the Tax court, even though the original notice of deficiency had only asserted the corporate excise tax basis.

The court then turned to the substantive issue of whether the bank affiliates had income “derived from sources within the state” for purposes of Oregon’s corporate income tax. The court determined that the terms in the phrase should be given their ordinary dictionary meaning, stating: “We see no need to belabor the ordinary meaning of the phrase. A ‘source’ can be an ‘individual, company, or corporation initiating a payment.’ Webster's New Int'l Dictionary 2405 (2d ed. unabridged 1961). If customers located in Oregon are paying money to a taxpayer, then taxpayer would appear to have ‘income derived from sources within this state,’ within the ordinary sense of those words.”

Based on the activities of the bank affiliates with respect to Oregon customers, the court held that the bank affiliates derived income from sources within the state and therefore, the corporate income tax applied. Since the court concluded that the bank affiliates were subject to the corporate income tax, it did not address whether the corporate excise tax would apply to the bank affiliates.6

Comcast Corp. v. Department of Revenue

The taxpayer, a major cable television service provider, derived revenue from providing transmissions of cable television, Internet and voice over Internet protocol services to subscribers within and outside Oregon. The taxpayer also earned revenue from sales of advertising time, commissions and fees related to cable operations, and franchise and license fees. For the 2007-2009 tax years, the taxpayer sought to bifurcate its revenue streams, with one-way transmission-related revenue apportioned under the state’s broadcaster statutes, and all other revenue apportioned under the state’s cost of performance (COP) method. The Oregon Department of Revenue asserted that all of the taxpayer’s receipts were gross receipts from broadcasting, and as such, were subject to apportionment under the state’s broadcaster statutes. Both the department and the taxpayer filed motions for partial summary judgment with the Tax Court, which held that all of the taxpayer’s receipts were subject to the broadcaster apportionment statutes. The taxpayer appealed the decision to the Oregon Supreme Court.

Oregon apportionment methods

Oregon uses a single sales factor to apportion income to the state.7 In general, gross receipts from services are sourced to Oregon if a greater proportion of the income producing activity is performed in the state based on costs of performance.8 However, interstate broadcasters are subject to special apportionment provisions.9 For the relevant tax years, an interstate broadcaster’s gross receipts from broadcasting were apportioned based on the ratio that its audience or subscribers located in Oregon bears to its total audience or subscribers located both within and outside the state.10 The availability and scope of this special method of apportionment turns on the terms “interstate broadcaster,” “broadcasting” and “gross receipts from broadcasting.” Oregon Supreme Court decision

On appeal to the Oregon Supreme Court, the taxpayer renewed its argument that only its receipts from one-way transmissions qualify as “gross receipts from broadcasting” for purposes of determining its sales factor. The court reviewed the plain language of the broadcaster statutes and noted that the definition of “gross receipts from broadcasting” expressly excludes receipts from sales of real or tangible personal property. Accordingly, if the taxpayer were correct that “gross receipts from broadcasting” only included receipts from the activity of transmitting a one-way electronic signal, then it would have been unnecessary for the legislature to expressly exclude receipts from the selling of property. Furthermore, under the taxpayer’s interpretation, the court noted that “the resulting sales factor would undoubtedly alter the taxpayer's tax-apportionment formula in a way that the legislature did not intend.” The court also rejected the taxpayer’s contention that the Tax Court’s broad construction of “gross receipts from broadcasting” would lead to absurd results.

Therefore, the Court upheld the Tax Court’s decision that, in calculating the sales factor by which an interstate broadcaster's receipts are attributed to Oregon, “all gross receipts of [the broadcaster] from transactions and activities in the regular course of its trade or business—not solely receipts from ‘broadcasting’ activities—are included in the numerator of the sales factor in the ratio that the broadcaster's Oregon audience bears to its total audience.”

CommentaryThe U.S. Supreme Court’s recent decision in South Dakota v. Wayfair, Inc.11 overruled the physical presence nexus requirement and affirmed the concept of economic nexus for sales tax purposes, and implied that such standard would be acceptable for income tax nexus as well. As a result of this decision and the Capital One Auto Finance, Inc. ruling, financial institutions with Oregon markets should consider whether they may be subject to taxation in Oregon, regardless of physical presence.

With respect to the Comcast Corp. decision, it is important to note that for tax years beginning on or after Jan. 1, 2018, Oregon has adopted a market-based apportionment method.12 Although Oregon still maintains separate apportionment rules applicable to broadcasters, it has significantly modified those statutes, so that separate sets of rules are applicable to: (i) tax years before 2014, (ii) 2014-2016 tax years, and (iii) tax years beginning in 2017 and thereafter. The definition of “gross receipts from broadcasting” applicable to the 2014-2016 tax years was specifically revised to include revenue from advertising and licensing programming.13 In addition, the definition of “interstate broadcaster” was changed for the 2014-2016 tax years to require that in addition to meeting the substantive business test, the taxpayer would have been subject to the broadcaster apportionment provisions as in effect in pre-2014 tax years.14 However, these revised definitions no longer apply for tax years beginning in 2017 and thereafter, as the state is reverting back to pre-2014 definitions.15 Taxpayers should also note that the special apportionment methodology for broadcasters as outlined in the decision does not apply to the 2014-2016 tax years. For these tax years, interstate broadcasters must apportion gross receipts to Oregon if the commercial domicile of the customer is in the state or, in the case of an individual, if the customer is a resident of the state.16 For tax years beginning in 2017 and thereafter, the original special apportionment methodology again applies to interstate broadcasters.17

1 Capital One Auto Finance, Inc. v. Department of Revenue, Oregon Supreme Court, No. SC S064803, Aug. 9, 2018, aff’g Oregon Tax Court, No. 5197, Dec. 23, 2016.
2 Comcast Corp. v. Department of Revenue, Oregon Supreme Court, No. SC S064698, Aug. 16, 2018, aff’g Oregon Tax Court, No. 5265, Oct. 11, 2016.
3 Specifically, the court determined that physical presence is not required to create excise or income tax nexus, as Oregon’s excise and income tax laws did not put an undue burden on interstate commerce and pre-existing law did not give rise to settled expectations that physical presence was required for income tax nexus.
4 OR. REV. STAT. § 317.010(5).
5 OR. REV. STAT. § 318.020(1) (emphasis added).
6 Notably, the Oregon Supreme Court did not consider whether the corporate income tax as applied to the taxpayer is constitutional, because the taxpayer did not renew that issue before the Supreme Court. As a result, the Supreme Court did not address the Tax Court’s suggestion that the corporate income tax reaches the full extent of the state’s constitutional power to tax.
7 OR. REV. STAT. § 314.650.
8 OR. REV. STAT. § 314.665(4). For tax years beginning on or after Jan. 1, 2018, Oregon is replacing its COP apportionment method with a market-based apportionment method. OR. REV. STAT. § 314.0435.
9 OR. REV. STAT. § 314.682.
10 OR. REV. STAT. § 314.684(4).
11 138 S. Ct. 2080 (2018). See GT SALT Alert: Wayfair ruling overturns Quill physical presence requirement.
12 OR. REV. STAT. § 314.0435.
13 OR. REV. STAT. § 314.680(4) (effective for tax years beginning in 2014-2016).
14 OR. REV. STAT. § 314.680(5) (effective for tax years beginning in 2014-2016).
15 OR. REV. STAT. § 314.680(2), (3) (effective for tax years beginning on or after Jan. 1, 2017).
16 OR. REV. STAT. § 314.684(4) (effective for tax years beginning in 2014-2016).
17 OR. REV. STAT. § 314.684(4) (effective for tax years beginning on or after Jan. 1, 2017).

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.