On February 28, 2020, the Oregon Tax Court held that multiple airlines operating as a unitary business should aggregate not only transportation revenue but also other metrics, such as departure ratios, that are factored into the apportionment formula used by Oregon for airline taxpayers. Oregon regulations provide a modified single sales factor apportionment rule for airlines whereby the numerator of the sales factor includes, in part, the taxpayer’s total transportation revenue multiplied by its departure ratio. The Oregon Department of Revenue challenged the taxpayer’s amended returns which did not include a unitary affiliate’s departure ratio, i.e., the ratio of departures of aircraft in Oregon (weighted by cost and value of the aircraft) compared to total departures of aircraft similarly weighted, in the taxpayer’s sales factor. The taxpayer argued that each airline should be considered separately with regard to its departures within the state, citing to the fact that each airline has a separate license and operating certificate form the Federal Aviation Administration. The court disagreed, stating that the Plaintiff’s reading is contrary to the apportionment of business income of a unitary group filing a consolidated return in Oregon. The court held that because the base of income to be apportioned represents the business activity of the entire unitary group, then other metrics incorporated into the apportionment formula, such as the departure ratio, must also reflect the business activity of the entire group.
In addition to the court’s determination of the taxpayer’s unitary group question, the court also held that revenue generated by taxpayer for codeshare sales, i.e., sales made by taxpayer for seats on non-affiliated airline flights, are not considered “transportation revenue” and therefore not included in the taxpayer’s sales factor. Citing to the relationship between the flight data used in the departure ratio and the relationship between the departure ratio and transportation revenue, the court agreed with the taxpayer that such codeshare revenue is not “transportation revenue” because third party airlines, not the taxpayer, operate the flights underlying such sales and thus taxpayer does not receive the benefit of the third party’s flight data for such flights when calculating taxpayer’s departure ratio. Further, the court found that certain income from taxpayer’s rents, interest, and proceeds on the sales of aircraft constituted passive income that should be excluded from the sales factor.