Corporate Close-Up: States Adopt ‘Shockingly’ Different Characterizations of Electricity

Is electricity tangible or intangible property? The answer can depend on which state you ask. A recent Oregon decision contradicts the position of two other states.

Recently the Oregon Supreme Court issued its decision in Powerex Corporation v. Department of Revenue (357 Or. 40 (March 26, 2015)). In a shocking twist, the court reversed the ruling of the Oregon Tax Court in finding that sale of electricity is the sale of tangible personal property for the purposes of calculating the sales factor for apportionment of multistate corporate income. The ruling contradicts decisions in other states, including California and Massachusetts.

As  reported upon by BNA in the Daily Tax Report, the Oregon Tax Court previously ruled on this case, rejecting the arguments of the Oregon Department of Revenue on both the location of delivery of natural gas and the nature of electricity as defined for sourcing. The parties agreed that natural gas is tangible personal property, but disagreed on where the delivery had been completed for its sales. The tax court disagreed with the department, saying that the delivery had not occurred in Oregon merely because the gas had passed through a hub in the state on its way to purchasers in other states.

Additionally, the tax court ruled that electricity is not tangible personal property and therefore must fall into the category of sales, other than the sale of tangible personal property. This is notable because Oregon follows a cost of performance sourcing method for receipts from sales of other than tangible personal property. In this case, because the tax court ruled that electricity was not tangible personal property, the sales were not sourced to Oregon, leading to a lower tax liability for Powerex. The Oregon Department of Revenue appealed.

The Oregon Supreme Court reached the same conclusion as the Oregon Tax Court on the issue of sourcing for the sales of natural gas. However, the state’s supreme court disagreed with the tax court on the nature of sales of electricity. While both parties presented expert testimony on the nature of electricity, the court noted, as provided by the U.S. Supreme Court in Yates v. U.S., 135 S Ct 1074 (2015)(plurality opinion), “whether an object is tangible or not does not necessarily turn on physics or even the object’s physical properties; rather, it can depend on the context in which the legislature used the word tangible.”

The court found that although electricity does not neatly fall into either of the two groups of tangible and intangible personal property, it must be classified as tangible personal property for purposes of sourcing its sale. Central to this conclusion was the fact that electricity is perceptible to the senses, can be measured and identified by a well-recognized unit of sale and can be delivered to purchasers within a particular state. The court also gave consideration to the fact that electricity’s physical properties are what give it value to purchasers.

In its opinion, the court noted that two other states have ruled on this subject and reached different conclusions. California’s Board of Equalization stated in its administrative opinion in In re Appeal of PacifiCorp, No. 90027 (Cal. State Bd. Equal. Sept 12, 2002) that sale of electricity was a sale of service. However, the Oregon Supreme Court found fault in applying this ruling to the present case, saying that the authority on which California based their case should not control, as it was an Ohio case (Otte v. Dayton Power & Light Co., 523 NE2d 835 (Ohio 1988)) that ruled that the distribution system for electricity was a service for the purpose of product liability law, not on electricity itself for determining apportionment of multistate income.

The court similarly found the reasoning in a Massachusetts case, Eua Ocean State Corp. v. Comm’r of Revenue (Docket Nos. C258405-406, C258424-425, C258882-883, C259158-159, C259653 & C262566-568 (Mass. App. Tax Bd. April 24, 2006)), unpersuasive on the issue. In Eua, the Massachusetts Appellate Tax Board found that, although electricity has some physical features, it lacks physical form and precise location and could therefore not be defined as tangible personal property. The court disagreed, stating that contractual language typical in the sale of electricity routinely give it specific quantity and location, making concepts of title, possession and delivery applicable to sales of electricity.

The court also rejected the argument  by the department of revenue that they should find that electricity is not tangible personal property to achieve consensus among the states. The opinion notes that the consensus suggested is only two states whose rationales are different in reaching the same result, and several other states have ruled that electricity is tangible personal property in various contexts (See Exelon v. Ill. Dept. of Rev., 917 NE2d at 911 (Ill. 2009)).

Having explained its rationale, the court remanded the case for determination on where the sales of electricity actually occurred, that issue not having been reached previously. It remains to be seen whether the sales of electricity will be sourced to Oregon, but for now the ruling defining electricity as tangible personal property for sourcing of receipts from sales is the new rule in Oregon.

The full text of the ruling can be found here:

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