Argued and Submitted May 1, 2014.
On appeal from the Oregon Tax Court TC 4800.[*] Henry C. Breithaupt, Judge.
Powerex Corp. v. Dep't of Revenue, 21 OTR 30 (2012)
Marilyn Harbur, Assistant Attorney General, Salem, argued the cause and filed the briefs for appellant. With her on the briefs was Ellen F. Rosenblum, Attorney General.
Eric J. Coffill, Morrison & Foerster LLP, Sacramento, California, argued the cause and filed the brief for respondent. With him on the brief were Jenny Choi and Carol Vogt Lavine, Gladstone, Oregon.
Scott G. Seidman, Tonkon Torp LLP, Portland, filed the briefs for amicus curiae Portland General Electric Company. With him on the briefs was Michael J. Millender.
[357 Or. 42] KISTLER, J.
Powerex wholesales natural gas and electricity to purchasers throughout the western part of North America. The question in this case is how much of Powerex's income may Oregon tax. Under the terms of a uniform statute that Oregon has adopted, the answer to that question turns on the extent to which Powerex's sales of natural gas and electricity were " in this state." ORS 314.665(1). For the reasons explained below, we agree with the Tax Court that none of Powerex's natural gas sales occurred in Oregon. However, we do not necessarily agree with the Tax Court that none of Powerex's electricity sales occurred in Oregon. The Tax Court did not reach an issue--whether the electricity that Powerex sold was " delivered or shipped to a purchaser * * * within this state" --that, as we explain below, controls whether Powerex's electricity sales were " in this state." See ORS 314.665(2)(a) (stating that standard). We accordingly affirm the Tax Court's judgment in part, reverse it in part, and remand the case for further proceedings.
Before setting out the facts in this case, we first describe briefly the statutory framework in which this case arises. In 1965, Oregon adopted the Uniform Division of Income for Tax Purposes Act (UDITPA), codified at ORS 314.605 to 314.675, to apportion income earned by unitary businesses that operate within and without Oregon. See Or. Laws 1965, ch 152; Crystal Communications, Inc. v. Dept. of Rev., 353 Or. 300, 302, 297 P.3d 1256 (2013). Generally, UDITPA uses the percentage of a multistate company's sales within Oregon (the " sales factor" ) to determine the percentage of the company's business income that Oregon may tax. See ORS 314.650. Specifically, for each tax year, a company's sales " in this state" are divided by the company's total sales to arrive at the sales factor. ORS 314.665(1). Currently, the company's total income is multiplied by the sales factor to [357 Or. 43] determine the percentage of the company's income that is subject to taxation in Oregon. ORS 314.650.
This case turns on whether Powerex's sales of electricity and natural gas occurred " in this state." The rules for making that determination differ depending on whether the sales are sales of " tangible personal property" or other types of sales. ORS 314.665(2), (4). Generally, sales of tangible personal property are " in this state" if " [t]he property is delivered or shipped to a purchaser * * * within this state regardless of the f.o.b. point or other conditions of the sale." ORS 314.665(2)(a). Generally, sales of something other than tangible personal property are " in this state" if the greater part of the activity that produced the income from those sales occurred within Oregon. ORS 314.665(4).
In the Tax Court, the parties agreed that natural gas is tangible personal property. They disagreed whether, in selling natural gas, Powerex shipped or delivered natural gas to purchasers " within this state." The Tax Court found that Powerex shipped gas to purchasers in other states through a hub in Malin, Oregon, where two pipelines intersect. It concluded that, in doing so, Powerex had not shipped or delivered gas to purchasers within Oregon.
Regarding Powerex's sales of electricity, the parties disagreed whether electricity is tangible personal property. The Tax Court ruled that electricity is not tangible personal property and that, because the greater part of the activity that produced the income from Powerex's electricity sales occurred in British Columbia, those sales were not attributable to Oregon. The Tax Court accordingly concluded that, [357 Or. 44] for the tax years at issue here, neither Powerex's sales of electricity nor its sales of natural gas were " in this state."
On appeal, the Oregon Department of Revenue (the department) challenges both of the Tax Court's rulings. We begin with the Tax Court's ruling that the natural gas that Powerex sold was not shipped or delivered to purchasers " within this state." We then turn to its ruling that electricity is not tangible personal property.
I. NATURAL GAS
Natural gas is transmitted through interstate and intrastate pipelines organized around regional " market centers" or " hubs."  The concept of a market center or hub (for our purposes, the terms are synonymous) emerged as a result of a 1992 Federal Energy Regulatory Commission order, which required that " interstate natural gas pipeline companies transform themselves from buyers and sellers of natural gas to [become] strictly gas transporters." " Market centers and hubs evolved to provide new gas shippers with many of the physical capabilities and administrative support services formally handled by the interstate pipeline company as 'bundled' sales services." Among other things, market centers and hubs provide " transportation between and interconnections with other pipelines, and the physical coverage of short-term receipt/delivery balancing needs." 
In 2003, there were 37 market centers or hubs in the United States and Canada. Two of those hubs, Stanfield and Malin, were in Oregon. In 2003, Powerex sold natural gas to retailers in California through the hub in Malin. When Powerex filed its Oregon tax
returns for the 2003 tax year, it treated those sales as sales " in this state" for the purpose of calculating the " sales factor" -- i.e., for the purpose of calculating the percentage of Powerex's total income that was attributable to Oregon. In 2006, Powerex filed a claim for a refund for the 2003 tax year. In its filing, Powerex explained [357 Or. 45] that it had shipped the natural gas to the hub at Malin, Oregon " where title transferred to the purchaser." Its refund claim stated that the gas then " entered into PG& E's system for transport into California." 
Before the Tax Court, the department argued that, because the contractual point of delivery was in Malin, Oregon, Powerex " delivered or shipped [the natural gas] to a purchaser * * * within this state." Powerex responded that the department's focus on the contractual point of delivery missed the mark. In Powerex's view, Malin merely served as the point at which gas was transferred from one pipeline to another on its way to a purchaser in California. Powerex argued that, because it shipped the gas to a purchaser in California, it did not deliver or ship it to a purchaser within Oregon.
The Tax Court agreed with Powerex. It found that the gas was being transmitted over pipelines that functioned as common carriers. It explained that both the majority of cases interpreting other states' analogues to ORS 314.665(2) and the purpose of that rule supported the conclusion that " where delivery by a seller is to a common carrier for further shipment an ultimate destination approach is followed." Because the ultimate destination in this case was California, the Tax Court concluded that Powerex's natural gas sales were not sales " to a purchaser * * * within this state." See ORS 314.665(2)(a).
On appeal, the department does not dispute that the natural gas that Powerex sold was destined for California. It also does not question the Tax Court's implicit finding that two pipelines connected at the " hub" in Malin so that the natural gas that Powerex delivered through one pipeline to Malin flowed from that pipeline into another pipeline on its way to the purchaser in California. The department argues, however, that the hub at Malin was critical for two reasons: (1) the natural gas contracts that Powerex entered into specified Malin as the " contractual point of delivery" and (2) they [357 Or. 46] also specified that title to the gas passed from Powerex to the purchaser at Malin. The department reasons that, given those two facts, we should conclude that the natural gas was " delivered or shipped to [the] purchaser" in Malin, Oregon, not in California.
In considering the department's argument, we look initially to the text, context, and history of ORS 314.665(2). See State v. Gaines, 346 Or. 160, 171-72, 206 P.3d 1042 (2009). We begin with the text of that statute, which provides, in part:
" Sales of tangible personal property are in this state if:
" (a) The property is delivered or shipped to a purchaser, other than the United States, within this state regardless of the f.o.b. point or other conditions of the sale[.]"
ORS 314.665(2)(a). The text of subsection (2)(a) divides into two parts. The first part provides that a sale of tangible personal property is " in this state if [t]he property is delivered or shipped to a purchaser * * * within this state." The second part provides that the determination where property is shipped or delivered to the purchaser should be made without regard to " the f.o.b. point or other conditions of the sale."
Textually, the first part of the statute asks a simple question: Where was the property shipped or delivered to the purchaser? See Arthur D. Lynn, Jr., The Uniform Division of Income for Tax Purposes Act, 19 Ohio St LJ 41, 50 (1958) (noting the " conceptual simplicity" of the Uniform Act formulation). In asking that question, ORS 314.665(2)(a) uses the passive voice. The question under that statute is not who shipped or delivered the property to the purchaser but where the property was shipped or delivered to the purchaser.
[357 Or. 47] The second part of the statute reinforces that conclusion. It provides that the determination of where property is shipped or delivered to the purchaser should be made " regardless of the f.o.b. point or other conditions of the sale." We assume that the rule of ejusdem generis applies so that the phrase " other conditions of the sale" shares the same qualities as the specific term that precedes it, " the f.o.b. point." See Baker v. City of Lakeside, 343 Or. 70, 76, 164 P.3d 259 (2007). That is, the phrase " other conditions of the sale" refers to those conditions of the sale that are similar to " the f.o.b. point." See id. The primary conclusion that we draw, at this point, from the second part of the text is that it reinforces what the first part says. The question where tangible property was delivered or shipped to the purchaser should not turn on legal technicalities, such as the f.o.b. point; rather, the question calls for a more practical answer.
In addition to the text of ORS 314.665(2)(a), we also consider its context. See Stevens v. Czerniak, 336 Or. 392, 401, 84 P.3d 140 (2004) (explaining that the context for interpreting a statute's text includes the preexisting common law and the statutory framework within which the law was enacted). ORS 314.665 is modeled on a uniform law that the Commissioners on Uniform State Laws proposed in 1957 and that Oregon adopted in 1965. Compare Or. Laws 1965, ch 152, § 17, with Uniform Act, § 16 (1957). In 1957 and also in 1965, the meaning of the phrase " the f.o.b. point" was well-established. See Samuel Williston, 2 The Law Governing the Sale of Goods § § 280-280b (rev ed 1948); Laurence Vold, The Handbook of the Law of Sales § 33 (2d ed 1959).
The initials f.o.b. stand for the words " free on board" and were originally used in connection with the shipment of goods by sea. Williston, 2 The Law of Sales § 280. " [T]he primary significance of the words was that the seller [wa]s bound to put the goods free of expense on board a vessel for transportation to the buyer." Id. The same rule also applied when goods were shipped by rail or other forms of transportation, although questions could arise regarding the extent of the seller's obligation. See id. Williston explained that, to avoid those questions, the parties could specify more precisely the point to which the seller was bound to deliver the goods. For [357 Or. 48] example, " [w]here the contract is for a sale f.o.b., the place of destination, undoubtedly the seller contracts to get the goods to that place, and this involves getting cars in which to load the goods when transportation is to be by rail * * *." Id. § 280a. Williston explained that two presumptions attach to the f.o.b. point. Id. § 280b. First, title to the goods passes at the f.o.b. point. Id. Second, " the place where the goods are to be delivered f.o.b. is the place of delivery to the buyer." Id.
That established definition of " the f.o.b. point" informs the meaning of the first part of the statute, as an example will illustrate. Suppose that a seller agrees to ship goods by rail from Vancouver, Washington, to a purchaser in Los Angeles, California. Those goods could be shipped f.o.b. Vancouver, f.o.b. Portland, or even f.o.b. Los Angeles. See id. at § 280a (explaining that even " though the expressions f.o.b. the point of destination or some intermediate point are less common [than f.o.b. the point of shipment], such bargains are not infrequent" ). Whichever f.o.b. point the agreement specified would establish, as a condition of the sale, the place where the seller was responsible for delivering the goods, the place where
title passed to the buyer, and the place of delivery to the buyer. See id. at § § 280a, 280b. However, the text of ORS 314.665(2)(a), read in context, makes clear that, for the purposes of determining the " sales factor," the place where property is shipped or delivered to the purchaser is determined without regard to " the f.o.b. point or other conditions of the sale." In the example set out above, the place where the goods were shipped to the purchaser would be Los Angeles. That is true even if the goods were shipped f.o.b. Portland and even if, as a result, title passed to the buyer in Portland and the contractual place of delivery was Portland.
The history of the rule leads to the same conclusion. Before the Commissioners on Uniform State Laws adopted the Uniform Act in 1957, sales of tangible property by multistate businesses were allocated among states based on the property's (1) destination; (2) origin; (3) the location of the sales office; (4) sales activity; or (5) place of acceptance by the purchaser. [357 Or. 49] State Taxation of Interstate Commerce: Report of the Special Subcommittee on State Taxation of Interstate Commerce, House Committee on the Judiciary, H R Rep No 952, 89th Cong, 1st Sess, 181-83 (1965); see Jerome R. Hellerstein, Walter Hellerstein, and John A. Swain, 1 State Taxation ¶ 9.18(1) (3d ed 2000 & Supp 2014).
Each of those theories for allocating sales of tangible personal property had its disadvantages. However, one theory--allocating sales to the state or country where title passed--was probably the least favored:
" Apportionment of sales to the state or country where title passes is hit or miss. The effect of the apportionment will depend wholly upon legal conclusions based upon construction of contracts, terms of waybills, customs in the business, evidence as to the intention of the parties, and other considerations having little or no relation to the problem of determining where income is earned."
George T. Altman and Frank M. Keesling, Allocation of Income in State Taxation 127 (2d ed 1950). See also Frank M. Keesling and John S. Warren, California's Uniform Division of Income for Tax Purposes Act Part I, 15 UCLA L Rev 156, 161 (1967) (" Most states consider the place where title passes irrelevant in determining the source of income." ).
The comment to section 16 of the Uniform Act, on which Oregon modeled ORS 314.665, suggests, as do the text and context of that section, that the drafters of the Uniform Act did not intend to allocate sales based on where title passed; rather, they intended to adopt the ultimate-destination theory of allocating sales. We note that the comment does not explain how the general rule--that sales are allocated to the place where tangible personal property is shipped or delivered to the purchaser--works. Instead, the comment identifies two variations on that general rule and explains how the Uniform Act would allocate sales in those situations. The comment also ...