In two separate cases evaluating Massachusetts’ and Oregon’s virtually identical costs-of-performance (COP) rules, the unresolved fundamental difficulties in applying the nearly half-a-century old rules are highlighted in the courts differing conclusions. Under the Uniform Division for Income Tax Purposes Act (UDITPA) (as adopted by both states), receipts from sources “other than sales of tangible personal property” (e.g., services and intangibles) are sourced for income tax apportionment purposes based on a preponderance COP methodology. Specifically, this methodology requires that such receipts be included in the states’ sales factor numerator only if the preponderance of the COP associated with the income producing activity are performed in the state.

The Massachusetts Appellate Tax Board (Board) and Oregon Tax Court (Tax Court) evaluated application of the COP methodology in AT&T Corp. v. Comm’r of Revenue, Mass. ATB Findings of Fact and Reports, 2011-524 and AT&T Corp. v. Dep’t of Revenue, Oregon Tax Court, TC 4814. At issue in both cases was whether AT&T’s receipts from interstate and international voice and data telecommunication services should be included in the states’ sales factor numerator. In providing these services, AT&T utilized its vast network of telecommunications assets, including its Global Network Operations Center in New Jersey. Both states’ Departments of Revenue took the position that AT&T’s income-producing activity consisted of each individual telephone call or data transmission to customers located in the state (referred to as the “Transactional Approach”). AT&T argued that its income-producing activity consisted of its revenue streams from its various services (the “Operational Approach”) rather than the “Transactional Approach.”Continue Reading Two States, One Similar Costs-of-Performance Rule, Different Results