By Charles Capouet and Timothy Gustafson

The Oregon Supreme Court held that an out-of-state taxpayer providing voice and data telecommunications services over a global network was required to use a transactional approach to source sales of other than tangible personal property for Oregon sales factor purposes under Oregon’s costs of performance method. Sales are sourced to Oregon if a greater proportion of income-producing activity is performed in Oregon than in any other state, based on costs of performance. The taxpayer’s network, managed from a global operations center in New Jersey, worked together as an integrated whole and was used to provide all of the taxpayer’s services at issue. While the taxpayer provided voice and data service on its own facilities, the “last-mile service” was provided by a local exchange carrier, for which the taxpayer paid the local carrier an access fee. In calculating its Oregon income tax liability under the Department of Revenue’s costs of performance sourcing rule, the taxpayer included business activities associated with its network operations in determining its income-producing activity. Because the taxpayer’s cost accounting study demonstrated that the costs related to such activities were incurred in New Jersey and exceeded those in Oregon, the taxpayer did not source its sales to Oregon. However, the court concluded that the taxpayer’s study did not identify the correct income-producing activities, noting that Oregon’s rule defining “income producing activity” looks to each particular “item of income” and defers to the Department’s “plausible” interpretation of that term as relating to individual sales (e.g., per minute charges for phone calls or flat-rate monthly subscriptions). Accordingly, the court held that the taxpayer failed to carry its burden to show that greater costs of performance of the transactions and activity to produce each individual sale, excluding the overall network costs, were incurred outside of Oregon. AT&T Corp. v. Dep’t of Revenue, 357 Or. 691 (Or. 2015).