Oregon Supreme Court Holds Electricity Is Tangible Personal Property For Apportionment Purposes

The Oregon Supreme Court has held that the sale of electricity constituted the sale of tangible personal property for Oregon corporation income tax apportionment purposes and should be sourced to the ultimate destination.1 In making this determination, the Supreme Court reversed and remanded the Oregon Tax Court's holding that the sale of electricity constituted the sale of an intangible that should be sourced using costs of performance (COP). However, the Supreme Court affirmed the Tax Court's holding that the sale of natural gas (which was considered to be tangible personal property) was appropriately sourced based on the ultimate destination. Because the taxpayer delivered the natural gas to a "hub" in Oregon from which another company transported the gas to the purchaser's out-of-state location, the natural gas sales were not sourced to Oregon.

Background

The taxpayer was a Canadian company that engaged in the business of selling natural gas and electricity at wholesale to purchasers throughout the western part of North America. The natural gas and electricity were initially delivered to hubs in Oregon but most of the electricity and all of the natural gas were ultimately destined to customers located outside the state. A majority of the COP associated with the electricity sales were incurred in Canada. For tax years ending March 31, 2002 through March 31, 2004, the taxpayer argued that the sales did not occur in Oregon for apportionment purposes, but the Oregon Department of Revenue argued that the sales should be sourced to Oregon.

In the Oregon Tax Court, the taxpayer and the Department agreed that natural gas is tangible personal property. However, they disagreed whether the taxpayer shipped or delivered natural gas to purchasers within Oregon. The Tax Court found that the taxpayer shipped gas to purchasers in other states through a hub in Oregon where two pipelines intersected. As a result, the Tax Court concluded that the taxpayer had not shipped or delivered gas to purchasers within Oregon. The taxpayer and the Department disagreed whether electricity is tangible personal property. After determining that electricity is not tangible personal property, the Tax Court ruled that the electricity sales should not be sourced to Oregon because the greater part of the income-producing activity occurred in Canada. Thus, the Tax Court ruled that neither the taxpayer's sales of electricity nor its sales of natural gas occurred in Oregon. The Department challenged both rulings on appeal.

Sourcing of Sales

In 1965, Oregon adopted the Uniform Division of Income for Tax Purposes Act (UDITPA) to apportion income between states.2 For purposes of the sales factor, the percentage of a multistate company's sales within Oregon is used to determine the portion of the company's business income that Oregon may tax.3 The rules for sourcing sales differ depending on the type of sale.4 Sales of tangible personal property are in Oregon if the property is "delivered or shipped" to a purchaser within Oregon without regard to the free on board (f.o.b.) location or other conditions of the sale.5 Sales, other than sales of tangible personal property, are sourced to Oregon if: (i) the income-producing activity is performed in Oregon; or (ii) the income-producing activity is performed both within and outside Oregon and the greater proportion of the income-producing activity is performed in Oregon than in any other state, based on COP.6

Natural Gas Sales Sourced to Ultimate Destination

The Oregon Supreme Court agreed with the Tax Court that natural gas constituted tangible personal property that should be sourced to the ultimate destination. Although the taxpayer delivered the natural gas to a hub in Oregon, the natural gas sales were not sourced to Oregon because the ultimate destination of the natural gas was to purchasers located outside the state. The Tax Court had determined that the gas was being transmitted through pipelines that functioned as common carriers. Because the ultimate destination...