By Derek Takehara and Pilar Mata
The Magistrate Division of the Oregon Tax Court held that for the tax year 2003, (1) Rent-A-Center, a rent-to-own operator, and its wholly-owned franchising subsidiary, ColorTyme, were not unitary; (2) ColorTyme did not have nexus with Oregon; and (3) Rent-A-Center and its captive insurance subsidiary, Legacy Insurance Co. (Legacy), were unitary. The court began by addressing the proper unitary test to be used for the 2003 tax year. By statute, Oregon required the presence of three factors to demonstrate a sharing or exchange of value: centralized management, centralized administrative functions resulting in economies of scale and a flow of resources demonstrating functional integration. The court rejected the Department’s attempt to retroactively apply 2007 statutory amendments that would have permitted the finding of a unitary business based upon the presence of only one or two of these factors, ruling that the Department’s interpretation was inconsistent with the legislature’s intent. Thus, with regard to Rent-A-Center and ColorTyme, the court held the companies were not unitary because they lacked centralized management, even though the companies shared corporate officers and directors, ColorTyme’s president received Rent-A-Center stock options, and Rent-A-Center’s board discussed ColorTyme as part of its growth strategy. The court observed that “[a] sharing of corporate officers who did not direct or dictate ColorTyme’s operations does not result in centralized management” and that ColorTyme controlled its own franchising operations and acted as an independent business in competition with Rent-A-Center.
The court next held that ColorTyme did not have nexus with Oregon because its activities did not satisfy the state’s “doing business” regulation. During 2003, ColorTyme derived franchise fees and royalties from seven in-state franchisees, and ColorTyme employees visited Oregon for eight days. The court characterized ColorTyme’s activities as “sporadic and non-recurring” and held they were insufficient to rise to the level of “doing business” in the state. Because the court ruled ColorTyme lacked nexus under the state’s regulation, it did not undertake a constitutional nexus analysis.
Finally, with regard to Rent-A-Center and Legacy, the court held the companies were unitary under the three-part statutory test. The parties did not dispute that Rent-A-Center and Legacy shared centralized management and were functionally integrated, so the court only addressed whether centralized administrative functions resulting in economies of scale were present. The court reasoned that Legacy’s creation to provide insurance for Rent-A-Center’s unitary group relieved members of the group from the burden of administering the insurance function and created a financial benefit for the entire group. In the court’s opinion, this resulted in economies of scale sufficient to demonstrate the requisite sharing or exchange of value for a finding that Legacy was unitary with the Rent-A-Center group. Rent-A-Center, Inc. v. Dep’t of Revenue, No. TC-MD 111031D (Or. T.C. May 12, 2014).