Oregon: Electricity wholesaler not a public utility for apportionment purposes

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Detailed Oregon Development

The Oregon Tax Court recently held that a purchaser and seller of wholesale electricity and natural gas was not a “public utility.” This meant that the taxpayer was not subject to a special rule for apportionment that applied to public utilities for the tax year at issue, and its sales were sourced under Oregon’s normal UDITPA sourcing rules. The taxpayer had previously been involved in litigation addressing whether its sales of electricity were sales of tangible personal property sourced using the ultimate destination test for such sales. The Oregon Supreme Court ruled that the taxpayer was selling tangible personal property, and as the ultimate destination of its sales was outside Oregon, none of the taxpayer’s receipts were sourced to Oregon. During the course of the first round of litigation, the Department of Revenue issued a new regulation requiring a public utility to source receipts from sales of natural gas and electricity to the “contractually specified point of physical delivery.” The Department determined the taxpayer was a “public utility” and asserted that the regulation applied to source its receipts. The taxpayer protested, arguing that because all its sales were wholesale sales, it was not a “public utility” and, even if it was, the Department’s rule was not validly promulgated. In 1965, Oregon adopted a definition of a “public utility” that means “any business entity whose principal business is ownership and operation for public use of any plant, equipment, property, franchise, or license for the transmission of communications, transportation of goods or persons, or the production, storage, transmission, sale, delivery, or furnishing of electricity, water, steam, oil, oil products or gas.” The taxpayer did not own any plant or equipment in Oregon; the dispute centered on whether it owned or operated any other property for “public use.” The Department appeared to argue that because the taxpayer was selling power for ultimate use by the public, it owned property for public use.  After an extensive review of cases and authorities addressing the scope of the term “public use,” the court concluded that the taxpayer was not a public utility. Notably, the term “public use” as used in the definition of a public utility required that some segment of the public must acquire a right to buy or otherwise use a company’s commodity or service before the company could be considered to have put its property in public use. The uncontested evidence in this case showed that no segment of the public had acquired any such right.  As such, the taxpayer was not subject to the apportionment regulation for public utilities. Please contact Rob Passmore at 503-820-6844 with questions on Powerex Corp. v. Dep’t of Revenue. 

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US