The Oregon Supreme Court recently addressed whether a Texas-based motor vehicle financing entity was required to include the income of two affiliate banks in computing its Oregon tax. The two affiliated banks were based in Virginia and did not have any physical presence in Oregon. However, the banks had income from providing credit cards and consumer loans to Oregon customers. For the 2006, 2007, and 2008 tax years at issue, the taxpayer filed a consolidated Oregon corporate excise tax return. Because the banks lacked a physical presence in Oregon, the taxpayer did not include the income earned by the banks in the taxpayer’s Oregon apportionment formula. The Department of Revenue challenged this treatment and assessed additional taxes, fees, and penalties of $5.7 million.
On appeal one of the issues raised by the taxpayer dealt with Oregon’s duel corporate income and corporate excise tax regime. In sum, the original assessments were “corporate excise tax” assessments. The corporate excise tax is imposed on taxpayers “doing business” in Oregon. Later, the Department asserted that the taxpayer was subject to “corporate income tax” because it had income derived from sources in Oregon. The taxpayer essentially argued that the Department was precluded from raising the issue of corporate income tax liability because it had not pleaded as such in its notices of deficiency. The tax court rejected the taxpayer’s procedural argument and then held that the banks were subject to Oregon corporate income tax, despite their lack of physical presence in the state. The Oregon Supreme Court first agreed with the tax court’s ruling that the Department was not precluded from raising the corporate income tax issue before the tax court, despite the fact that the notices of deficiency addressed only corporate excise tax. Next the court addressed whether the taxpayer had “income derived from sources within” Oregon. The taxpayer argued that it did not because all the examples of having “income from sources within the state” in the corporate income tax statute required a physical presence in Oregon. The court found that what was common to all the examples was not a physical presence, but that the source of income was in Oregon. The taxpayer, the court concluded, had income derived from sources within Oregon and the tax court did not err in making this determination. On appeal to the Oregon Supreme Court, the taxpayer did not renew another argument that the imposition of corporate income tax was unconstitutional. Please contact Rob Passmore at 503-820-6844 with questions on this decision.