Oregon Courts’ Recent Examination of UDITPA Provisions

By Mary Cho, CPA, Seattle; Nisha Mathew, CPA, Seattle; Jamie C. Yesnowitz, J.D., LL.M., Washington; Chuck Jones, J.D., CPA, Chicago; and Lori Stolly, CPA, Cincinnati

Editor: Greg A. Fairbanks, J.D., LL.M.

Uniformity in state income taxation has been an issue since at least 1957, when the Uniform Law Commission developed the Uniform Division of Income for Tax Purposes Act (UDITPA) to address how to appropriately divide the tax base among multiple states in which a taxpayer conducts business. Model statutes provided by UDITPA have been adopted by a majority of the states with a corporate income tax as well as into Article IV of the Multistate Tax Compact (MTC). The MTC, which is administered by the Multistate Tax Commission, became effective in 1967 and is charged with several tasks, including interpreting UDITPA statutes through proposed model uniform regulations. Oregon has been a compact member since 1967 and has historically adopted several Compact model statutes and regulations (former Or. Rev. Stat. §305.655, enacted by Ch. 242, Laws 1967).

Over the past year, both the Oregon Supreme Court and the Oregon Tax Court have issued important state income tax decisions in which language suggested by UDITPA and adopted by Oregon played a crucial role. Specifically, the Oregon Tax Court applied Oregon's business income determination rules to a broadcasting company and considered the availability of an apportionment factor election to a service company. The Oregon Supreme Court applied cost-of-performance (COP) sales factor statutes to a communications company and determined how a utility company should source its electricity sales. All of these decisions may have potential application within and outside Oregon.

Business/Nonbusiness Income Determination

In Fisher Broadcasting Co. v. Department of Revenue, No. TC 5167 (Or. Tax Ct. 4/29/15), the Oregon Tax Court ruled that the gain from the sale of stock in an unrelated business by a non-Oregon communications company met the functional test to qualify as business income and was properly subject to Oregon corporation excise (income) tax as apportionable income. In its determination, the Tax Court looked to the controlling Oregon allocation and apportionment provisions derived from UDITPA, which apply to businesses other than financial organizations and public utilities (Or. Rev. Stat. §§314.605-314.675). The Tax Court relied also on Oregon's statutory definitions of "business income" and "nonbusiness income," derived from UDITPA, as well as regulatory interpretations of these terms, in its analysis (Or. Rev. Stat. §§314.610(1) and (5); Or. Admin. R.150-314.610(1)-(B)).

In Willamette Industries, Inc. v. Department of Revenue, 15 P.3d 18 (Or. 2000), the Oregon Supreme Court had explained that the statutory definition of "business income" derived from UDITPA is met if either a "transactional test" or a "functional test" is satisfied. Thus, the Tax Court focused on determining whether the taxpayer's stock served an operational or investment function for the unitary business of the taxpayer. Specifically, the court found that the functional test was met and concluded that the gain was apportionable business income.

Sales Factor Cost-of-Performance Analysis

The Oregon Supreme Court similarly relied upon UDITPA language adopted by Oregon to inform its decision addressing the apportionment methodology for a communications company. In AT&T Corp. v. Department of Revenue, No. SC S060150 (Or. 9/11/15), the Supreme Court held that a taxpayer's sales of services should be sourced using a transactional rather than an operational approach under the COP method for sourcing sales other than sales of tangible personal property. In affirming the Oregon Tax Court, the Supreme Court held that the definition of "income-producing activity" as it applies to a COP analysis relates to individual sales to customers. As a result, only direct costs associated with the individual transactions should be considered. Central to this analysis were the UDITPA-based precise meanings of "income-producing activity" and "costs of performance." In its decision, the court also considered an Oregon administrative rule based on a model regulation promulgated by the Multistate Tax Commission (Or. Admin. R. 150-314.665(4)).

Notably, other states have reached different results on this issue. For example, in a case involving the same taxpayer, Commissioner of Revenue v. AT&T Corp., 970 N.E.2d 814 (Mass. App. Ct. 2012), the Massachusetts Appeals Court affirmed a decision of the Massachusetts Appellate Tax Board and held that an operational approach should be used. The Massachusetts Department of Revenue subsequently issued guidance concerning the implications of this case (see Massachusetts Dep't of Rev.,Technical Information Release 13-12 (Aug. 20, 2013)). The conflicting approaches make it practically impossible for multistate companies to use a consistent approach in states that still use COP sourcing, and this problem may have critical implications in determining the overall level of taxability in these states.

Definition of Tangible Personal Property for Sales Factor Purposes

In Powerex Corp. v. Department of Revenue, No. SC S060859 (Or. 3/26/15), the Oregon Supreme Court focused again on Oregon's UDITPA-modeled text, as well as the context and history of its adoption of the tangible personal property sales factor sourcing statute, to hold 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.In making this determination, the 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 COP.

The court acknowledged that uniformity does not exist in this area of the law because other state courts have held that electricity is tangible personal property (see Exelon v. Department of Revenue, 917 N.E.2d 899, (Ill. 2009); Tucson Electric Power Co. v. Arizona Department of Revenue, 822 P.2d 498 (Ariz. Ct. App. 1991)). For example, two administrative decisions in other states that interpreted similar statutes ruled that electricity is not tangible personal property (see In re Appeal of PacifiCorp, No. 2002-SBE-005 (Cal. State Bd. of Equalization 9/12/02); EUA Ocean State Corp. v. Commissioner of Revenue, No. C258405-406 (Mass. App. Tax Bd. 4/24/06)). The taxpayer unsuccessfully argued that the Oregon Supreme Court should change its conclusion based on the UDITPA goal of uniformity among states. Based on Atlantic Richfield Co. v. Department of Revenue, 717 P.2d 613 (Or. 1986), a previous Oregon decision, the weight that the Oregon Supreme Court awarded the uniform application of UDITPA was determined by a function of two variables: (1) the degree of certainty regarding the meaning of the statute that the court is interpreting; and (2) the degree of consensus that other states considering the same issue have reached. The court was not swayed by these variables in this case, continuing to hold that electricity is tangible personal property.


Finally, in Health Net, Inc. v. Department of Revenue, No. TC 5127 (Or. Tax Ct. 9/9/15), the Oregon Tax Court granted the Oregon Department of Revenue's motion for summary judgment and denied a taxpayer's election to use the equally weighted three-factor apportionment formula provided by the MTC. Under Article III of the MTC, taxpayers in member states, including Oregon, have historically been afforded the ability to elect an equally weighted three-factor formula to apportion an income tax. The disparity between this available election and legislative changes, such as Oregon's adoption of the single sales factor described above, have resulted in numerous taxpayer challenges in Compact member states, including Oregon.

Although the state of Oregon was a full member of the Compact for the 2005-2007 corporate excise (income) tax years at issue, the state enacted legislation in 1993 directing that inconsistencies between the MTC provisions and the Oregon apportionment statutes be construed in favor of the Oregon statutes. The court determined that the 1993 legislation was enacted for the purpose of disabling the Compact election and did not violate the U.S. or Oregon Constitutions or federal statutory law. As a result, the taxpayer could not make the apportionment election under the Compact. Note that Oregon repealed the entirety of the Compact in 2013 and simultaneously reenacted a substantially similar statute, exclusive of Articles III and IV of the MTC (Ch. 407 (S.B. 307), Laws 2013, effective Oct. 7, 2013). This case is likely to be appealed to and considered by the Oregon Supreme Court.


With Compact membership currently standing at 16 states and several nonmember states having adopted similar apportionment statutes, the analysis in these decisions highlights the current lack of clarity evident in some of the widely adopted UDITPA language and provides a degree of instruction regarding its potential application. Notably, the commission itself has acknowledged some of these challenges, which have become increasingly evident with the evolution of the economy from production based in 1957 to service based today.

At its 2014 annual meeting, the commission approved amendments to key provisions of Article IV of the MTC to address various facets of the topics at issue, including apportionment factor weighting, the definition of business income, the adoption of market-based sourcing, the definition of sales, and alternative apportionment. While the commission's actions may ultimately result in states' adoption of statutes with greater clarity in these areas, the commission lacks the authority to impose legislative change in any jurisdiction. In the absence of legislative change, the Oregon decisions issued by the Tax Court and the Supreme Court in 2015 provide a thorough analysis and interpretation of some commonly used statutory provisions designed to appropriately divide income among the states.


Greg Fairbanks is a tax managing director with Grant Thornton LLP in Washington.

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or greg.fairbanks@us.gt.com.

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.