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Oregon Supreme Court denies use of apportionment formula

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On April 12, 2018, the Oregon Supreme Court denied a taxpayer’s election to use the equally-weighted three-factor apportionment formula provided by the Multistate Tax Compact.1 In doing so, the decision by the Court aligns Oregon with the numerous other state courts that have addressed the issue and effectively forecloses future taxpayer challenges on this matter.

BackgroundIn 1957, the National Conference of Commissioners on Uniform State Laws promulgated the Uniform Distribution of Income for Tax Purposes Act (UDITPA) which established an equally weighted three-factor apportionment formula to fairly apportion business income earned by multistate businesses. UDITPA paved the way for the creation of the Compact which incorporates the UDITPA apportionment formulas in Article IV and allows a multistate business to elect either the apportionment formulas set out in Article IV or a state’s apportionment formulas.

In 1965, Oregon adopted UDITPA and two years later, in 1967, Oregon enacted the Compact. Oregon codified the Compact’s apportionment provisions in Ore. Rev. Stat. Sec. 305.655. Because Article IV of the Compact incorporates Oregon’s UDITPA statute, the Compact’s Article III election originally yielded a choice between two Oregon statutes that contained the same apportionment formula. However, in 1989, Oregon started moving towards single sales factor apportionment with a full phase-in of this formula by 2005, giving taxpayers a choice between two distinct apportionment formulas. In 1993, the Oregon legislature enacted a measure (1993 law) that precluded a multistate business from making the Compact election to use the equally-weighted three-factor apportionment formula and instead required the use of the single sales factor apportionment formula contained in Oregon’s version of UDITPA.

Health Net, a Delaware corporation headquartered in California, sought a refund for the 2005-2007 tax years, arguing that Oregon’s codification of the Compact in Ore. Rev. Stat. Sec. 305.655 created contractual obligations, which were impaired in violation of the state and federal contract clauses by the 1993 law. Specifically, Health Net argued that, by codifying the Compact in Ore. Rev. Stat. Sec. 305.655 in 1967, the Oregon legislature entered into a contract with other states that enacted the Compact. Under the terms of the Compact, the legislature could not eliminate a taxpayer’s right granted by Article III to elect the apportionment formulas set out in Article IV unless Oregon withdrew from the contract, which Oregon had not done. Health Net argued that, as a result, the Oregon Department of Revenue had breached the contractual obligations created by Article III when it failed to honor its election.

On appeal, the Oregon Tax Court rejected these arguments and held that Ore. Rev. Stat. Sec. 305.655 did not create any contractual obligations but instead created only statutory rights, which the legislature was free to modify.

Creation of a binding contractThe core issue in the case2 centered on whether the 1967 Oregon legislature, when codifying the provisions of Compact in Ore. Rev. Stat. Sec. 305.655, intended to go beyond establishing a statute designed promote the uniform taxation of multistate businesses and instead enter into a binding contract, which was impaired in violation of the state and federal contract clauses by the subsequent enactment of the 1993 law that eliminated a business’s right under Article III to elect the apportionment formulas in Article IV. The Court explained that the resolution of this issue turned on the initial question of whether or not a contract was created by Ore. Rev. Stat. Sec. 305.655. In upholding the decision of the Oregon Tax Court and finding that Ore. Rev. Stat. Sec. 305.655 did not create any contractual obligations but instead created only statutory rights, the Court undertook an analysis that looked both to state and federal case law treatment of this issue as well as the legislative history surrounding the codification of the Compact in Ore. Rev. Stat. Sec. 305.655.

Case Law

The Court identified three decisions bearing on the issue of whether the enactment of the Compact creates statutory rights or contractual obligations.3 Turning first to the U.S. Supreme Court’s decision in U.S. Steel Corp. v. Multistate Tax Commission4, the Court noted that U.S. Steel describes the rights and obligations created by the Compact as resembling a uniform law rather than a binding contract among the states. The Court explained that, while the decision does not specifically address the issue of whether states that enact the Compact enter into a binding contract with each other, it does lay “the groundwork for much of the analysis” that follows in the later state cases addressing the state-law contract question. With respect to these state court decisions, the Court explained that both the California Supreme Court in Gillette and the Minnesota Supreme Court in Kimberly-Clark ultimately concluded that the creation of the Compact did not create contractual obligations.

Oregon law

Having addressed the treatment of this issue by other courts, the Court turned to the question of whether, as a matter of state law, the Oregon legislature entered into a contract with other Compact states when it enacted Ore. Rev. Stat. Sec. 305.655. The Court explained that the applicable standard driving its inquiry requires that it “treat a statute as a contractual promise only if the legislature has clearly and unmistakably expressed its intent to create a contract.”5 Under this standard, the intent to create a contract will be inferred from the “text, context, and legislative history, as long as those sources, considered together, demonstrate a clear and unmistakable intent to impose contractual obligations on the state.”6

The Court concluded that the text, context, and legislative history of Ore. Rev. Stat. Sec. 305.655 failed to “clearly and unmistakably” show that the Oregon legislature intended to enter into a binding contract. The Court explained that Ore. Rev. Stat. Sec. 305.655 contradicts itself with the preface and Article X containing terms that suggest that the legislature intended to enter into a compact or agreement, while functionally, containing terms that bear little resemblance to a contract. The context is also consistent with the adoption of a uniform act and an interstate compact. Finally, while there is legislative history to support the proposition that the Oregon legislature understood it was entering into an interstate compact, the same history also supports the proposition that the legislature understood that the compact would require congressional approval before the compact would go “in[to] operation.” Based on these findings, the Court concluded that the text, context, and legislative history did not reflect a clear and unmistakable intent to enter to an agreement that would bind the states in the absence of congressional consent.

CommentaryThe decision by the Oregon Supreme Court essentially marks the end of the battle that has been playing out in state courts over the ability of taxpayers to utilize the Compact’s equally-weighted three-factor apportionment formula. As noted by the Court, this issue has been litigated in many states7 with each court concluding that the taxpayers do not have the ability to make the Compact election. The Oregon Supreme Court’s decision adds little to the already well-settled landscape with respect to this issue. As the Court itself stated, its decision aligns “Oregon with all the state courts” that have considered this issue. In some sense, from a policy standpoint, and with the benefit of a series of carefully crafted opinions to bolster this view, a finding that the Compact is a binding contract among states seems unlikely in hindsight. As this Court’s opinion emphasized, the goal of enacting the Compact was, in part, to “ward off further federal intervention in state taxation.” The issue that this begets was previously noted by the Multistate Tax Commission in a supporting brief in the Texas Compact election litigation, which is whether states would have traded federal intervention in state tax policy by entering into a binding contract with other states that would have impeded these same freedoms but from another source.8


 
1 Health Net, Inc. v. Department of Revenue, Oregon Supreme Court, No. SC S063625, April 12, 2018.
2 The Court was also faced with the issue of whether the 1993 legislation impliedly repealing part of Ore. Rev. Stat. § 305.655 violated Article IV, Section 22, the Full Text Provision, of the Oregon Constitution. This section provides that “[n]o act shall ever be revised, or amended by mere reference to its title, but the act revised, or section amended shall be set forth, and published at full length.” The provision was designed to prevent the practice of amending a statute with “additions or other alterations” that were “usually unintelligible” because they did not have the original law text included. The Court rejected this argument, finding that the 1993 Act did not run afoul of this provision because it “reflects a ‘complete and perfect’ legislative choice to replace one set of apportionment formulas with another.”
3 While numerous state courts have addressed this issue, the Court focused on the two that most closely aligned with the issue in this case. See Graphic Packaging Corp. v. Hegar, 538 S.W.3d 89 (Tex. 2017); Kimberly-Clark Corp. v. Comm’r of Revenue, 880 N.W.2d 844 (Minn.), cert. denied, 137 S. Ct. 598 (2016); Gillette Co. v. Franchise Tax Bd., 363 P.3d 94 (Cal. 2015), cert. denied, 137 S. Ct. 294 (2016); Gillette Commercial Operations N. Am. & Subsidiaries v. Dep’t of Treasury, 878 N.W.2d 891 (Mich. Ct. App. 2015), appeal denied, 880 N.W.2d 230 (Mich. 2016), cert denied, 137 S. Ct. 2157 (2017).
4 434 U.S. 452 (1978).
5 Citing Moro v. State of Oregon, 351 P.3d 1 (2015).
6 Id.
7 For a discussion of this issue in other states, see GT SALT Alert: SALT Top Stories of 2015; GT SALT Alert: SALT Top Stories of 2016; GT SALT Alert: Minnesota Supreme Court Denies Use of Multistate Tax Compact’s Equally-Weighted Three-Factor Apportionment Election; GT SALT Alert: California Supreme Court Denies Use of Multistate Tax Compact’s Equally-Weighted Three-Factor Apportionment Election; and GT SALT Alert: Texas Supreme Court Denies Use of Compact’s Three-Factor Formula for Determining Franchise Tax Apportionment;
8 See Brief of Amicus Curiae, Graphic Packaging Corp. v. Hegar, Multistate Tax Commission, Multistate Tax Commission, Aug. 30, 2017. “Graphic Packaging fails to come to grips with the logical flaw in its argument that the states intended to fend off federal preemption of their taxing sovereignty by voluntarily surrendering that taxing sovereignty to a state collective, especially a state collective unequipped to deal with the delegation of that sovereign authority.”




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