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Capital One Auto Finance Inc. v. Department of Revenue

Supreme Court of Oregon, En Banc

August 9, 2018

CAPITAL ONE AUTO FINANCE INC., Plaintiff-Appellant,
v.
DEPARTMENT OF REVENUE, Defendant-Respondent.

          Argued and submitted May 7, 2018.

          On appeal from the Oregon Tax Court (TC 5197). [*] Henry C. Breithaupt, Judge.

          Julia E. Markley, Perkins Coie, LLP, Portland, argued the cause and filed the briefs for appellant. Also on the briefs were Courtney R. Peck and Gregg Barton.

          Melisse S. Cunningham, Assistant Attorney General, Salem, argued the cause and filed the brief for respondent. Also on the brief were Ellen F. Rosenblum, Attorney General; Benjamin Gutman, Solicitor General; and Darren Weirnick and Peenesh H. Shah, Assistant Attorneys General.

         Case Summary: Taxpayer fled consolidated income tax returns for a group that included two corporate affiliates that did not have a physical presence in this state. The Department of Revenue issued notices of deficiency for tax years 2006 through 2008, alleging that the affiliates were subject to Oregon's corporate excise tax. Taxpayer appealed to the Tax Court. In proceedings before the Tax Court, the department alleged for the first time that the affiliates were alternatively subject to Oregon's corporate income tax. The Tax Court concluded that the affiliates were subject to the corporate income tax, and taxpayer appealed to the Oregon Supreme Court. Held: (1) the department timely raised the issue of the affiliates' liability for corporate income tax pursuant to ORS 305.575; and (2) although taxpayer's affiliates may not have had a physical presence in this state, they did have "income derived from sources within this state" under ORS 318.020, and thus were subject to Oregon's corporate income tax.

         The judgment of the Tax Court is affirmed.

         [363 Or. 442] NAKAMOTO, J.

         Capital One Auto Finance, Inc. (taxpayer) filed consolidated Oregon corporate excise tax returns as part of a group that included two corporate affiliates. Taxpayer disputed the Department of Revenue's contention that it owed additional taxes and filed an action in the Tax Court. The ultimate issue in this case is whether taxpayer's corporate affiliates, which do not have a physical presence in this state, were subject to either Oregon's corporate excise tax or its corporate income tax for the tax years 2006-2008. Preliminarily, taxpayer also asserts that the department lacked the authority to assert for the first time in the Tax Court that the affiliates were subject to corporate income tax.

         Ruling on cross-motions for summary judgment, the Tax Court concluded that the affiliates were subject to the corporate income tax and entered judgment in favor of the department. Capital One Auto Finance, Inc. v. Dept. of Rev., 22 OTR 326 (2016). On taxpayer's appeal, we conclude that the department timely raised the corporate income tax issue and that the corporate affiliates are subject to the corporate income tax based on "income derived from sources within this state." ORS 318.020(1). Accordingly, because there was no genuine issue of material fact for trial and the department was entitled to judgment as a matter of law, we affirm.

         I. FACTUAL AND LEGAL BACKGROUND

         A. Corporate Tax Structure

         Before describing the facts and procedural history, we provide a brief overview of Oregon's corporate tax structure. Oregon has two different-but closely related-tax regimes for multistate corporations: the corporate excise tax and the corporate income tax. In a nutshell, to supplement the corporate excise tax, the corporate income tax was enacted in 1955 in response to a United States Supreme Court case that had determined the constitutionality of state taxation of corporations based on how the tax statutes were drafted. The dual corporate tax regime remains in place today, although the case that provided the impetus and need for enactment of a corporate income tax to supplement the excise tax has since been overruled.

         [363 Or. 443] The corporate income tax is found in ORS chapter 318.[1] The relevant statute provides in part:

"(1) There hereby is imposed upon every corporation for each taxable year a tax *** upon its Oregon taxable income derived from sources within this state * * *.
"(2) Income from sources within this state includes income from tangible or intangible property located or having a situs in this state and income from any activities carried on in this state, regardless of whether carried on in intrastate, interstate or foreign commerce."

ORS 318.020. During the proceeding before the Tax Court, the department relied on ORS 318.020 to argue that taxpayer's affiliates owed corporate income tax on income derived from sources within Oregon.

         The corporate excise tax, found in ORS chapter 317, is not a tax on Oregon income, but a tax on the privilege of doing business in Oregon that is measured by Oregon income.[2] Thus, ORS 317.070 provides:

"Every *** business corporation and every financial institution doing business within this state * * * shall annually pay to this state, for the privilege of carrying on or doing business by it within this state, an excise tax according to or measured by its Oregon taxable income * * *."

         The corporate income tax and the corporate excise tax are not duplicative; they create the same tax liability, but on different bases. See ORS 318.020(1) (creating corporate income tax at same rate as prescribed in ORS chapter 317, and adding that corporate income tax does not apply to "income for which the corporation is subject to the tax imposed by ORS chapter 317 according to or measured by its Oregon taxable income"). In light of the department's assertion of the corporate income tax, as opposed to the corporate [363 Or. 444] excise tax, as a basis for taxpayer's tax liability, we find it helpful to explain the development of and relationship between the two corporate taxes.

         Those two tax schemes were enacted at different times. The corporate excise tax was first enacted in Oregon in 1929. Or. Laws 1929, ch 427. As this court has recognized, in 1951, the United States Supreme Court held in Spector Motor Service v. O'Connor, 340 U.S. 602, 71 S.Ct. 508, 95 L.Ed. 573 (1951), that a corporate excise tax could not be imposed constitutionally "on the activities of foreign corporations within its boundaries, if such activities were purely interstate." Cal-Roof Wholesale v. Tax Com., 242 Or. 435, 440-41, 410 P.2d 233 (1966). This court also explained, however, that the same tax, had it been an income tax, would have been constitutional. See id. at 440 (describing the effect of Spector Motor). The legislature responded to Spector Motor by enacting the corporate income tax in 1955, adding it to the corporate excise tax so that Oregon could tax income that might otherwise escape state taxation. Cal-Roof Wholesale. 242 Or. at 441.

         The court explained the relationship between the corporate excise tax and corporate income tax:

"[T]he language of the pertinent statutes, the chronology of their enactment, and the judicial decisions extant at the time of their enactment all point to the conclusion that the intention of the legislature was not to enact a corporation income tax law as a separate entity and for a purpose other than that for which it had enacted the corporation excise tax law. Both are revenue producing statutes and the obvious legislative purpose was to create a corporate tax structure which taxed at a uniform rate all corporate income derived from activities within the state in the pursuit of gain. The sole purpose of separately labeling the component parts of this structure as 'income' and 'excise' was to meet the requirements of the Spector case, supra."

Id. at 444. This court has since recognized that, "[b]ecause both taxes are within the overall corporate tax structure, they should be construed together." Pacific First Federal v. Dept. of Rev.,308 Or. 332, ...


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