Corporate Close-Up: No Property, No Payroll, No Problem for the Oregon Department of Revenue


The Oregon Supreme Court (“the Supreme Court”) has ruled that out-of-state banks derived income from sources in Oregon despite the absence of property or payroll in the state, and as a result, were subject to Oregon corporate income tax. The Supreme Court also upheld the Oregon Department of Revenue’s assertion of corporate income tax liability at trial, despite having issued a notice of deficiency for corporate excise tax and raising liability for corporate income tax as an alternative in a motion before the Oregon Tax Court (“the Tax Court”). The decision demonstrates that taxpayers filing consolidated returns can be subject to Oregon’s corporate income tax on Oregon source income of members of the consolidated group that do not have any physical presence in Oregon.

The case, which was appealed from the Tax Court, involves Capital One Auto Finance Inc. (“Capital One”), which provided automobile and motor vehicle financing in Oregon from 2006 to 2008 and was subject to tax in-state. Capital One also had two affiliate banks based in Virginia that were included in Capital One’s Oregon consolidated corporate excise tax return.

Neither affiliate banks had any property, offices, or employees in Oregon, nor were they registered with the Oregon Secretary of State to conduct business in-state. However, the affiliate banks had income from Oregon sources based on providing credit cards, consumer loans, and other consumer finance products to Oregon residents. Capital One did not include this income from the affiliate banks when it filed its Oregon consolidated corporate excise tax return for tax years 2006 through 2008.

The Tax Court found in favor of the Department of Revenue, rejecting Capital One’s claims that the corporate income tax and corporate excise tax required physical presence in Oregon, and that the Department could not raise liability under the Oregon corporate income tax because it hadn’t asserted liability under it in its deficiency notices.

The Supreme Court upheld the Tax Court’s ruling, reasoning that under Oregon law, the court could determine the correct amount of any deficiency, even if based on different grounds than those asserted by the Department. Capital One argued that under Oregon Rev. Stat. § 305.265, any deficiency must state the reason and authority for each adjustment and be certified to be made in good faith, and that the Department could not assert any new grounds for taxation that it did not include in the notice of deficiency. However, the Supreme Court found that Oregon Rev. Stat. § 305.265 does not control what occurs later in the litigation process.

Instead, the Supreme Court looked to Oregon Rev. Stat. § 305.575, interpreting the statute to allow the Tax Court to impose the correct amount of tax, even if determined upon grounds other or different than from those asserted by the Department, provided that the opposing party has no less than 10 days to amend its pleading. On this issue, because the Department raised the issue of corporate income tax liability in its motion, and because Capital One did not seek any time to respond, the Tax Court could impose corporate income tax liability on Capital One under Oregon Rev. Stat. § 305.575.

Next, the Supreme Court found that Capital One was liable for the corporate income tax on the income from the banks. Capital One claimed that, under Oregon Rev. Stat. § 318.020(2), income from sources within Oregon is required to be from property located in Oregon, property with a situs in Oregon, or activities in Oregon, which require the taxpayer to have physical presence in Oregon. However, the list was not exclusive, and that none of the listed requirements for income to be sourced to Oregon require the taxpayer to be physically present in Oregon.

The Supreme Court also noted in its opinion that the corporate income tax and corporate excise tax create the same tax liability, but on different bases, and are not duplicative. The corporate excise tax is a tax on the privilege of doing business in Oregon that is measured by Oregon income, and the corporate income tax is a tax on income derived from sources in Oregon. The corporate excise tax was intended to tax Oregon domestic corporations, while the corporate income tax was implemented later in response to the United States Supreme Court holding in Spector Motor Service v. O’Connor that provided that a corporate excise tax could not be imposed on foreign corporations on purely interstate activities. While Spector Motor Service was later overruled, the dual corporate tax structure remains in place in Oregon.

Because the Supreme Court found that Capital One’s income from its affiliated banks was subject to Oregon corporate income tax, it did not need to address the issue of whether the income was subject to the Oregon corporate excise tax because the amount of liability would be equal.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is the Oregon Supreme Court correct that Capital One’s affiliated banks had income from sources within Oregon?

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