Powerex Corp. II v. Dept. of Rev. , 21 Or. Tax 30 ( 2012 )

30 September 17, 2012 No. 4
IN THE OREGON TAX COURT
REGULAR DIVISION
POWEREX CORP.,
Plaintiff,
v.
DEPARTMENT OF REVENUE,
Defendant.
(TC 4800)
Plaintiff (taxpayer) appealed Defendant (the department)’s assessment of
tax, and the department’s position that revenues from taxpayer’s electricity sales
are sales of tangible personal property and that the revenues from such sales can
be sourced in Oregon and included in the numerator of the Oregon sales factor
used for apportionment of taxpayer’s income. Taxpayer argued that electricity is
other than tangible personal property and that because the greatest portion of
the costs of its income producing activity related to the sales of electricity were
incurred at its office and trading location in Canada, the revenue from taxpayer’s
sales of electricity cannot be sourced in Oregon under ORS 314.665(4). Ruling for
taxpayer, the court found that given the nature of electricity, and the positions of
the MTC and other UDITPA states, the sale of electricity is a sale other than a
sale of tangible personal property.
Trial was held September 12 and 13, 2011, in the court-
room of the Oregon Tax Court, Salem.
Eric J. Coffill, Morrison & Foerster LLP, Sacramento,
argued the cause for Plaintiff (taxpayer) pro hac vice.
Marilyn J. Harbur, Senior Assistant Attorney General,
Department of Justice, Salem, argued the cause for Defen-
dant (the department).
Decision for Plaintiff rendered September 17, 2012.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This matter is before the court after a trial. Certain
facts have been stipulated by the parties. The tax at issue
is the corporate income tax and the years at issue are the
years ending March 31, 2002, March 31, 2003, and March 31,
2004.
Cite as 21 OTR 30 (2012) 31
II. FACTS
Plaintiff (taxpayer) is a company headquartered in
Vancouver, British Columbia. Plaintiff is wholly owned by
British Columbia Hydro and Power Authority, a Provincial
Crown Corporation (BC Hydro). Taxpayer sells electricity,
generated by BC Hydro, at wholesale to many customers. In
some cases, the sales contracts specify a contractual point
of delivery that is within Oregon, typically at a substation
that is part of a large transmission system. The electricity
delivered in such cases is further transmitted to users, most
of whom are not in Oregon.
The court finds as a matter of fact, based on the tes-
timony and other record made in this case, that the majority
of the costs incurred by taxpayer in carrying on the income
producing activity of its wholesale electricity sales business
are incurred in British Columbia. That record includes evi-
dence from taxpayer as to direct costs incurred in British
Columbia in connection with the sales in question and an
absence of evidence from Defendant Department of Revenue
(the department) that direct costs of performance of the
transactions giving rise to the transactions in question
occurred at any other location.
Taxpayer also sells natural gas at wholesale. Again,
the contractual delivery point for some of those sales is in
Oregon. However, the record establishes that none of the
actual purchasers of natural gas sold by taxpayer are located
in Oregon. Rather, the natural gas is sold by taxpayer and
further transmitted from the contractual point of delivery to
the ultimate user.
The department has asserted that the revenues
from the electricity sales of taxpayer are sales of tangible
personal property. If that is the case, the revenues from such
sales could be sourced in Oregon and included in the numer-
ator of the Oregon sales factor used for apportionment of
the income of taxpayer depending on the application of other
statutory rules relating to the location of the purchaser. See
ORS 314.665(2).1
1
All references to the Oregon Revised Statutes (ORS) are to the 2001 edition.
32 Powerex Corp. II v. Dept. of Rev.
Taxpayer argues that electricity is other than tan-
gible personal property. Based on that position, taxpayer
further argues that because the greatest portion of the
costs of the income producing activity related to the sales of
electricity are incurred at its office and trading location in
Canada, the revenue from the sales of electricity cannot be
sourced in Oregon under ORS 314.665(4).
Taxpayer accepts the conclusion of the department
that natural gas is tangible personal property. However, as
to the natural gas, taxpayer points out that all purchasers
of such gas involved in this case are located outside the state
of Oregon. The record does not disclose directly whether the
purchasers are the ultimate end users of the gas covered
by the sales agreements. However, the record supports an
inference that those who purchase gas from taxpayer sell
the gas on to others. Taxpayer argues that because the
location of its purchaser is outside Oregon, its sales of gas
cannot be considered to have occurred in this state under
ORS 314.665(2).
III. ISSUES
Given the finding of the court as to the proportion
of the income producing activity occurring in Oregon with
respect to taxpayer’s sales of electricity, the issues for deci-
sion are:
(1) Is the sale of electricity the sale of tangible personal
property or a sale other than a sale of tangible personal
property?
(2) Are taxpayer’s sales of natural gas made in Oregon
or at the location of the ultimate user of the natural gas?
If, but only if, electricity is tangible personal property, the
same issue exists as to taxpayer’s sales of electricity.
IV. ANALYSIS
The trial in this matter was very interesting, pri-
marily because of the testimony of two distinguished phys-
icists regarding the nature of electricity, a question which
has engaged scientists for over 100 years and which, accord-
ing to the department’s expert witness, is not yet resolved.
Cite as 21 OTR 30 (2012) 33
The nature of electricity is of interest here because
of the wording of the Uniform Division of Income for Tax
Purposes Act (UDITPA), a statute drafted in the second
half of the twentieth century and adopted in Oregon shortly
afterwards.2 The nature of electricity is important here only
because UDITPA distinguishes between sales of tangible
personal property and all other sales.
For sales of tangible personal property, the reve-
nue from the sale is sourced to Oregon in all cases where
the property is delivered or shipped to a purchaser within
Oregon. ORS 314.665(2). For all other sales, revenue is
sourced to Oregon only when a greater proportion of the
income producing activity associated with the sale is per-
formed in Oregon than in any other state. ORS 314.665(4).
As noted above, the court finds that the greatest proportion
of income producing activity related to the sales of electric-
ity at issue here occurs in Canada.
The court is of the opinion that the proper resolution
of the first issue in this case, the nature of electricity, is to
be informed by the testimony of the experts as to the nature
of electricity, the position of the Multistate Tax Commission
(MTC) for the years at issue here and the decisions of tribu-
nals in other states that have adopted UDITPA.
A. The Nature of Electricity
The testimony of the experts is relevant to a con-
sideration of the statutory language regarding “tangible
personal property,” that is “delivered or shipped” without
regard to the “f.o.b. point or other conditions of the sale.”
ORS 314.665(2). Tangible personal property must be not
only “property” but also “tangible” and subject to being
“delivered or shipped,” and potentially be loaded “free on
board.”
The testimony of taxpayer’s expert witness sup-
ports a finding that electricity does not involve the trans-
fer of something that is tangible or a “thing” that is deliv-
ered to a purchaser. Rather, according to that testimony,
the transmission of electricity involves transmission of a
2
Oregon’s version of UDITPA is codified at ORS 314.605 to 314.675.
34 Powerex Corp. II v. Dept. of Rev.
force occurring by reason of the operation of “virtual pho-
tons,” which have no mass. Importantly, the testimony of
taxpayer’s expert established, and the department’s witness
agreed, that the sale of electricity is not the transfer of elec-
trons from the seller to the buyer. There are as many elec-
trons in the relevant system after the point of transmission
of energy to the purchaser as before.
The expert witness for the department did not con-
test any of the conclusions or positions of the expert witness
for taxpayer. Rather, the witness for the department simply
opined that taxpayer’s witness had chosen the wrong level
of description for the problem at hand. This expert merely
concluded that the question was to be differently analyzed
when considering sales of electricity on the power grid—his
viewpoint—as opposed to the level of particle physics—the
viewpoint of the expert for taxpayer.
The problem with the approach of the witness for
the department is that there is no indication in the statute
that the answer to the question of whether a sale is of tangi-
ble property changes depending on the level of analysis. The
court therefore can give no credit to the ultimate conclusion
of the witness for the department. However, because the wit-
ness for the department agreed with the scientific analysis
of the witness for taxpayer, the court concludes that on this
score taxpayer has prevailed on the question of whether,
more probably than not, the sale of electricity is a sale other
than one of tangible personal property.3 The court concludes
that in selling electricity, a seller provides to the purchaser
a force and not an item of property.
The court also considers it important that the dis-
cussion by the experts of the nature of electricity reveals
that the characteristics of electricity do not fit at all well
into the general framework found in ORS 314.665(2).
Recall that this statute talks of property that is “delivered
or shipped.” The statute also contemplates that the prop-
erty is of a type as to which a shipping term of “f.o.b.” could
be applied. Finally, paragraph (b) of subsection (2) of ORS
3
“More probably than not” may be the best anyone can do on these funda-
mental questions as to the nature of the world and the matter and forces found in
this world.
Cite as 21 OTR 30 (2012) 35
314.665 addresses property that could be shipped “from an
office, store, warehouse, factory, or other place of storage in
this state.”
Although it may go too far to conclude that all tan-
gible personal property must be capable of being shipped
from such locations, this language is used in a way that
suggests that the tangible personal property with which the
subsection is concerned would be capable of such shipment
from such a location. The court cannot comfortably imag-
ine shipping electricity “f.o.b.” or otherwise from any of the
locations mentioned in the statute. Nor did the testimony
of either expert witness in this case suggest that electricity
could be considered to be of such a character. The conclusion
that taxpayer’s expert established is that electricity is a phe-
nomenon in which virtual photons transmit force—not mat-
ter. Transmitters of force with no mass do not, in the opinion
of the court, come within the legislative understanding of
tangible personal property.
B. Position of the MTC
The treatment of gross receipts in the sales fac-
tor is, of course, a function of the provisions of UDITPA as
adopted in Oregon. As such, courts in Oregon pay particu-
lar attention to the views of the MTC and sister states that
have adopted provisions of UDITPA or are members of the
Multistate Tax Compact which itself contains the provisions
of UDITPA. Atlantic Richfield Co. v. Dept. of Rev., 300 Or
637, 717 P2d 613, on rehearing, 301 Or 242, 722 P2d 727(1986); Twentieth Century-Fox Film v. Dept. of Rev., 299
Or 220, 700 P2d 1035 (1985). For the years at issue, the
MTC Corporation Income Tax Audit Procedures Guideline
Manual specified that electricity was to be treated as intan-
gible personal property. The department argues that the
MTC has altered its position to “neutral” on the matter. The
department relies for this position on material that is not
in the trial record and that, on its face, indicates that the
change may have only been proposed for discussion. The
behavior of the department in this regard is inconsistent
with both the rules of evidence by which it is bound and
basic principles of logic. For the years at issue a major insti-
tution in the effort to achieve uniformity among the states
36 Powerex Corp. II v. Dept. of Rev.
following UDITPA principles has accepted that electricity is
intangible in nature.
C. Case Law of Other UDITPA States
The question of the nature of electricity for purposes
of apportionment of income under UDITPA has only been
considered in two cases. Those cases are Appeal of PacifiCorp,
Cal St Bd of Equal, No 90027, 2002 Cal Tax LEXIS 469
(Sept 12, 2002) and EUA Ocean State Corporation et al., v.
Commissioner of Revenue, No C258405-406, 2006 Mass Tax
LEXIS 35 (Apr 24, 2006).
In PacifiCorp the tax administrative tribunal of
a state neighboring this one—one with a long history of
leading the way in issues of taxation of interstate business
operations—concluded that the sale of electricity was the sale
of a service and not the sale of tangible personal property.
The decision of the tribunal is well reasoned and included
consideration of testimony from the same expert witness
who appeared on behalf of the department in this case.4 The
court considers this opinion to be especially important as
well because the record in this case indicates that many of
the sales of electricity in the western United States occur in
the north-south corridor that includes the states of Oregon
and California. Consistency in treatment of electricity in
these two states is therefore of particular importance.
In EUA Ocean State, a tax tribunal of another
UDITPA state considered at length evidence very similar to
the evidence presented to this court and concluded, in a well
reasoned manner, that electricity was similar to heat, light
and sound and as such was not tangible. This conclusion is
consistent with the views of taxpayer’s expert witness on
the nature of electricity as a force conductor that transmits
energy to a purchaser as opposed to a “thing” with mass
that is transferred to a purchaser.
Cases from other jurisdictions have been cited to
the court. The department has also relied on a commercial
summary of the positions of states as to how electricity is
4
Indeed, the report of this witness presented in this case was essentially the
same report submitted in the PacifiCorp proceeding.
Cite as 21 OTR 30 (2012) 37
treated. There are obvious errors in this summary and the
department has not provided the court with detailed analysis
of the material in the summary or information that would
assist the court in determining the authoritative validity of
this summary.
Several cases upon which the department relies are
sales tax cases in which electricity is treated as subject to
tax. The department states its position as “a sale is a sale is
a sale.” The court declines to accept the department’s invita-
tion to decide important matters based on euphemistic con-
clusions based on no analysis or consideration of parallel tax-
ation regimes. It is enough to observe that a definition used in
determining the base for taxation cannot, without much more
than what the department provides, be used in the apportion-
ment of the base of a separate and distinct tax regime.
D. Conclusion as to Electricity
The record in this case fully supports the conclusion
that the sale of electricity is a sale other than a sale of tangi-
ble personal property. That conclusion rests not only on the
testimony and material submitted by the expert witnesses
as to the nature of electricity but also, given the positions
of the MTC and other UDITPA states, on considerations of
uniformity and consistency in the application of UDITPA
provisions to taxpayers generally and this taxpayer in
particular.5
E. Treatment of Sales of Natural Gas
The other issue presented in this case is the proper
treatment of receipts from the sale of natural gas in the
computation of the sales factor computation for taxpayer for
one of the years at issue. The parties agree that natural gas
5
The department has asserted that it has a long held administrative position
that electricity is tangible personal property. It is not clear that there is such a
long held policy and the attempts by the department to articulate that conclusion
have met with difficulties addressed in previous summary judgment proceedings
in this case. See Powerex Corp. v. Dept. of Rev., 20 OTR 338 (2011); Powerex Corp.
v. Dept. of Rev., TC No 4800 (Dec 17, 2010). In any case, the court’s conclusion
is based on the statute, the factual record in this case and the considerations
that must go into construing a uniform law. Even if the department had properly
articulated its position on this question, that position could not trump the conclu-
sion of this court based on the factors the court has considered.
38 Powerex Corp. II v. Dept. of Rev.
is tangible personal property. Therefore, the proper treat-
ment of the receipts from the sale of the natural gas depends
upon ORS 314.665 and its directive that receipts are Oregon
receipts when tangible personal property is “delivered or
shipped to a purchaser * * * within this state.”
The position of the department is that because the
contractual point of delivery of the natural gas in question is
a location in Oregon, the sales are Oregon sales for purposes
of computing the sales factor. Taxpayer points out that all
of the customers who purchase natural gas from taxpayer
are located in other states and do not use the natural gas in
Oregon. Taxpayer argues that the statute should be inter-
preted as employing an ultimate destination rule such that
the “interim” nature of what may be called delivery of the
natural gas to a contractually agreed upon point in Oregon
is not determinative.
The position of the department can be stated to be
that where delivery of tangible personal property is made
to a purchaser, the statute applies if the delivery point is in
Oregon. The focus of the department is on the place of deliv-
ery. The position of taxpayer can be stated to be that where
a purchaser is located outside Oregon, the statute dictates
that the sale is not an Oregon sale. The focus of taxpayer is
on the place where the purchaser is located.
For the year at issue, there is no question that the
purchaser under the contract is not located in Oregon. The
parties did not spend much effort in providing to the court
the details of the gas transactions. However, from the record
provided it appears that the gas in question is being trans-
mitted over interstate pipelines that are, or function as, com-
mon carriers. The delivery point under the sales contracts
in question is at a market center or hub that functions in an
overall coordinated transmission system for natural gas that
has developed in connection with changes in federal policy
regarding interstate gas transmission. The gas in question
is not consumed at the market hub point of delivery but is
transferred to an ultimate user in another location.
It appears that although the statutory provisions of
UDITPA have been construed by some states in the fashion
urged by the department and in some states in the fashion
Cite as 21 OTR 30 (2012) 39
urged by taxpayer, most courts that have addressed the
issue have adopted an ultimate destination rule rather than
a state of delivery rule. Jerome R. Hellerstein and Walter
Hellerstein, 1 State Taxation ¶ 9.18 [1][a]. In particular, in
cases where delivery by a seller is to a common carrier for
further shipment an ultimate destination approach is fol-
lowed.6 This is so even though the MTC takes the position
that a sale is completed at the delivery point, even though
the product is then subject to further shipment by the
purchaser.
The purpose of the sales factor in apportionment
is to recognize the contribution of the market state to the
income producing process. Hellerstein, 1 State Taxation at
¶ 8.06[2]. On the facts of this case that purpose is clearly
best served by looking beyond the point of contractual deliv-
ery where the purchaser is located in another state. This
is especially so in cases such as this one where the “deliv-
ery” is a transfer of title within a common carrier pipeline.
Applying an ultimate destination rule also will put Oregon
in the position of the majority of states that have had to
address the question under UDITPA. For these reasons,
the court is of the opinion that taxpayer prevails as to the
treatment of natural gas sales as well as with respect to the
nature of electricity.
In the opinion of the court, an ultimate destination
rule should be followed as to these sales of natural gas and
the position of the department must be rejected.
V. CONCLUSION
The taxpayer is entitled to the relief requested and
the deficiencies asserted by the department should be can-
celled with appropriate refunds to be paid in accordance
with law. Now, therefore,
IT IS THE DECISION OF THIS COURT that
Plaintiff’s appeal is granted.
6
See especially the concession of the Louisiana Department of Revenue in
Department of Revenue v. Parker Banana Co., 391 So 2d 762 (Fla Dist Ct App
1980) as to situations involving delivery to a common carrier, discussed in State
Taxation ¶ 9.18[1][a].