United States

Oregon: State Supreme Court Holds that Electricity is Tangible Personal Property; Addresses Application of Ultimate Destination Test

Apr 20, 2015
From KPMG TaxWatch

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The Oregon Supreme Court recently reviewed a tax court decision addressing whether certain sales of electricity and natural gas were considered Oregon sales for purposes of the sales factor numerator. The taxpayer, a British Columbia company, sold electricity and natural gas to certain U.S. customers. The litigation arose because the taxpayer and the Department of Revenue disagreed as to whether certain of the taxpayer’s sales should be included in the Oregon sales factor numerator. In a 2012 opinion, the tax court concluded that the sale of electricity should be treated as the sale of other than tangible personal property. Because a greater proportion of the taxpayer’s income-producing activity related to the sales of electricity occurred in Canada, none of the taxpayer’s receipts from sales of electricity to Oregon customers were sourced to Oregon. The tax court also ruled that the taxpayer’s sales of natural gas (which all the parties agreed was tangible personal property) should be sourced to the state of ultimate destination. The Department subsequently appealed both holdings to the Oregon Supreme Court.

The state’s high court first addressed the Department’s position that sales of natural gas traveling in a pipeline through Oregon en route to California should be treated as Oregon sales when title to the natural gas passed to the purchaser at a designated contractual delivery point in Oregon. In the instant case, the natural gas entered Oregon in one pipeline and was then transported to a pipeline hub.  At that point, title transferred to the ultimate consumer and the gas was routed to another pipeline for delivery to its ultimate destination in California. Under Oregon law, which incorporates UDITPA, sales of tangible personal property are attributed to Oregon if the property is shipped or delivered to a purchaser in Oregon, regardless of the f.o.b. point or other conditions of the sale. After reviewing various authorities, the court concluded that determining the location where property is delivered or shipped to the purchaser should not turn on legal technicalities, such as the f.o.b. point or the designated point of delivery in the contract, which it determined was akin to an “other condition of the sale” that UDIPTA (and Oregon’s statute) mandated be disregarded. Rather, the ultimate destination of the property should govern. Thus, although title passed at the contractual point of delivery (the pipeline hub) in Oregon, the court concluded that delivery to the purchaser did not occur in Oregon. In reaching this conclusion, the court likened the pipeline system to a common carrier and noted it was unaware of any decision holding that property is delivered when switched from one common carrier to another. Although urged by the parties, the court declined to rule on the outcome when property is picked up by the purchaser in one state and then transported to an ultimate destination in another state.

The court next addressed the tax court’s determination that the sale of electricity was not a sale of tangible personal property for apportionment purposes. Before the tax court, both parties had experts testify as to the characteristics of electricity and whether it was or was not tangible personal property. The court reviewed the testimony, various definitions of tangible and intangible property, and the history of UDITPA, and concluded that the experts’ testimony was not particularly useful in light of the question at hand. In the court’s view, it was more relevant from a tax perspective to consider two types of property–tangible and intangible. Although electricity did not fall neatly into either category, faced with a choice the court concluded that electricity—for purchases of the apportionment statute—was tangible personal property. Electricity is perceptible to the senses and can be physically located within a state and shipped from one state to another. Furthermore, the court noted that the physical properties of electricity are what make it valuable to a purchaser, unlike intangible property, the value of which derives from the obligations and rights that the intangible property represents. Having made this conclusion, the court nevertheless considered—and rejected—a number of arguments made by the taxpayer that sales of electricity should be treated sales of other than tangible personal property. One argument made by the taxpayer was that the court should adopt its interpretation to foster uniformity among the states. The court, however, noted there was no real consensus among states and that it felt comfortable with its treatment of electricity as tangible personal property for apportionment purposes. The case was subsequently remanded back to the tax court for the court to address how the tangible personal property sourcing rules applied to the taxpayer’s sales. For additional questions on Powerex, Corp. v. Oregon Dep’t of Revenue, please contact Rob Passmore at 503-820-6844.

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.