Current through Register Vol. 63, No. 9, September 1, 2024
(1) This rule adopts a model regulation
recommended by the Multistate Tax Commission to promote uniform treatment of
this item by the states. This rule applies to tax years beginning on or after
January 1, 2018.
(2) Apportionment
and Allocation. ORS 314.610(1) and
(5) require that every item of income be
classified either as apportionable income or nonapportionable income. Income
for purposes of classification as apportionable or nonapportionable includes
gains and losses. Apportionable income is apportioned among jurisdictions by
use of a formula. Nonapportionable income is specifically assigned or allocated
to one or more specific jurisdictions pursuant to express rules. An item of
income is classified as apportionable income if it falls within the definition
of apportionable income. An item of income is nonapportionable income only if
it does not meet the definitional requirements for being classified as
apportionable income.
(3)
Apportionable Income. Apportionable income means all income that is
apportionable under the Constitution of the United States and is not allocated
under the laws of this state, including:
(a)
Income arising from transactions and activity in the regular course of the
taxpayer's trade or business; and
(b) Income arising from tangible and
intangible property if the acquisition, management, employment, development or
disposition of the property is or was related to the operation of the
taxpayer's trade or business; and
(c) Any income that would be allocable to
this state under the Constitution of the United States, but that is apportioned
rather than allocated pursuant to the laws of this state. The classification of
income by the labels occasionally used, such as manufacturing income,
compensation for services, sales income, interest, dividends, rents, royalties,
gains, income derived from accounts receivable, operating income, non-operating
income, etc., is of no aid in determining whether income is apportionable or
nonapportionable income.
(4) "Trade or business," as used in the
definition of apportionable income and in the application of that definition
means the unitary business of the taxpayer, part of which is conducted within
Oregon.
(5) Transactional Test.
Apportionable income includes income arising from transactions and activity in
the regular course of the taxpayer's trade or business.
(a) If the transaction or activity is in the
regular course of the taxpayer's trade or business, part of which trade or
business is conducted within Oregon, the resulting income of the transaction or
activity is apportionable income for Oregon. Income may be apportionable income
even though the actual transaction or activity that gives rise to the income
does not occur in Oregon.
(b) For a
transaction or activity to be in the regular course of the taxpayer's trade or
business, the transaction or activity need not be one that frequently occurs in
the trade or business. Most, but not all, frequently occurring transactions or
activities will be in the regular course of that trade or business and will,
therefore, satisfy the transactional test. It is sufficient to classify a
transaction or activity as being in the regular course of a trade or business,
if it is reasonable to conclude transactions of that type are customary in the
kind of trade or business being conducted or are within the scope of what that
kind of trade or business does. However, even if a taxpayer frequently or
customarily engages in investment activities, if those activities are for the
taxpayer's mere financial betterment rather than for the operations of the
trade or business, such activities do not satisfy the transactional test. The
transactional test includes, but is not limited to, income from sales of
inventory, property held for sale to customers, and services which are commonly
sold by the trade or business. The transactional test also includes, but is not
limited to, income from the sale of property used in the production of
apportionable income of a kind that is sold and replaced with some regularity,
even if replaced less frequently than once a year.
(6) Functional test. Apportionable income
also includes income from tangible and intangible property, if the acquisition,
management, employment, development, or disposition of the property is or was
related to the operation of the taxpayer's trade or business. "Property"
includes any direct or indirect interest in, control over, or use of real
property, tangible personal property and intangible property by the taxpayer.
Property that is "related to the operation of the trade or business" refers to
property that is or was used to contribute to the production of apportionable
income directly or indirectly, without regard to the materiality of the
contribution. Property that is held merely for investment purposes is not
related to the operation of the trade or business. "Acquisition, management,
employment, development or disposition" refers to a taxpayer's activities in
acquiring property, exercising control and dominion over property and disposing
of property, including dispositions by sale, lease or license. Income arising
from the disposition or other utilization of property which was acquired or
developed in the course of the taxpayer's trade or business constitutes
apportionable income, even if the property was not directly employed in the
operation of the taxpayer's trade or business. Income from the disposition or
other utilization of property which has been withdrawn from use in the
taxpayer's trade or business and is instead held solely for unrelated
investment purposes is not apportionable. Property that was related to the
operation of the taxpayer's trade or business is not considered converted to
investment purposes merely because it is placed for sale, but any property
which has been withdrawn from use in the taxpayer's trade or business for five
years or more is presumed to be held for investment purposes.
Example 1: Taxpayer purchases a
chain of 100 retail stores for the purpose of merging those store operations
with its existing business. Five of the retail stores are redundant under the
taxpayer's business plan and are sold six months after acquisition. Even though
the five stores were never integrated into the taxpayer's trade or business,
the income is apportionable because the property's acquisition was related to
the taxpayer's trade or business.
Example
2: Taxpayer is in the business of developing
adhesives for industrial and construction uses. In the course of its business,
it accidentally creates a weak but non-toxic adhesive and patents the formula,
awaiting future applications. Another manufacturer uses the formula to create
temporary body tattoos. Taxpayer wins a patent infringement suit against the
other manufacturer. The entire damages award, including interest and punitive
damages, constitutes apportionable income.
Example 3: Taxpayer is engaged
in the oil refining business and maintains a cash reserve for buying and
selling oil on the spot market as conditions warrant. The reserve is held in
overnight "repurchase agreement" accounts of U.S. treasuries with a local bank.
The interest on those amounts is apportionable income because the reserves are
necessary for the taxpayer's business operations. Over time, the cash in the
reserve account grows to the point that it exceeds any reasonably expected
requirement for acquisition of oil or other short-term capital needs and is
held pending subsequent business investment opportunities. The interest
received on the excess amount is nonapportionable income.
Example 4
: A manufacturer
decides to sell one of its redundant factories to a real estate developer and
transfers the ownership of the factory to a special purpose subsidiary, SaleCo
(Taxpayer) immediately prior to its sale to the real estate developer. The
parties elect to treat the sale as a disposition of assets under IRC
338(h)(10), resulting in Taxpayer recognizing a capital gain on the sale. The
capital gain is apportionable income.
(a)
Under the functional test, income from the disposition or other utilization of
property is apportionable if the property is or was related to the operation of
the taxpayer's trade or business. This is true even though the transaction or
activity from which the income is derived did not occur in the regular course
of the taxpayer's trade or business.
(b) Income that is derived from isolated
sales, leases, assignments, licenses, and other infrequently occurring
dispositions, transfers, or transactions involving property, including
transactions made in the full or partial liquidation or the winding-up of any
portion of the trade or business, is apportionable income, if the property is
or was related to the taxpayer's trade or business. Income from the licensing
of an intangible asset, such as a patent, copyright, trademark, service mark,
know-how, trade secrets, or the like, that was developed or acquired for use by
the taxpayer in its trade or business, constitutes apportionable income whether
or not the licensing itself constituted the operation of a trade or business,
and whether or not the taxpayer remains in the same trade or business from or
for which the intangible asset was developed or acquired.
(c) Under the functional test, income from
intangible property is apportionable income when the intangible property serves
an operational function as opposed to solely an investment function.
(d) If the acquisition, management,
employment, development, or disposition of the property is or was related to
the operation of the taxpayer's trade or business, then income from that
property is apportionable income even though the actual transaction or activity
involving the property that gives rise to the income does not occur in
Oregon.
Example
5: A manufacturer purchases raw materials to be
incorporated into the product it offers for sale. The nature of the raw
materials is such that the purchase price is subject to extreme price
volatility. In order to protect itself from extreme price increases (or
decreases), the manufacturer enters into future contracts pursuant to which the
manufacturer can either purchase a set amount of the raw materials for a fixed
price, within a specified time period, or resell the future contracts. Any gain
on the sale of the future contracts would be considered apportionable income,
regardless of whether the contracts were either made or resold in
Oregon.
Example 6
: A
national retailer produces substantial revenue related to the operation of its
trade or business. It invests a large portion of the revenue in fixed income
securities which are divided into three categories;
(a) short-term securities held pending use of
the funds in the taxpayer's trade or business;
(b) short-term securities held pending
acquisition of other companies or favorable developments in the long-term money
market, and
(c) long-term
securities held as an investment. Interest income on the short-term securities
held pending use of the funds in the taxpayer's trade or business (a) is
apportionable because the funds represent working capital necessary to the
operations of the taxpayer's trade or business. Interest income derived from
the other investment securities (b) and (c) is not apportionable as those
securities were not held in furtherance of the taxpayer's trade or
business.
(e) If with respect to an
item of property a taxpayer (i) takes a deduction from income that is
apportioned to Oregon or (ii) includes the original cost in the property
factor, it is presumed that the item or property is or was related to the
operation of the taxpayer's trade or business. No presumption arises from the
absence of any of these actions.
(f) Application of the functional test is
generally unaffected by the form of the property (e.g., tangible or intangible
property, real or personal property). Income arising from an intangible
interest, as, for example, corporate stock or other intangible interest in an
entity or a group of assets, is apportionable income when the intangible itself
or the property underlying or associated with the intangible is or was related
to the operation of the taxpayer's trade or business. Thus, while apportionment
of income derived from transactions involving intangible property may be
supported by a finding that the issuer of the intangible property and the
taxpayer are engaged in the same trade or business, i.e., the same unitary
business, establishment of such a relationship is not the exclusive basis for
concluding that the income is subject to apportionment. It is sufficient to
support the finding of apportionable income if the holding of the intangible
interest served an operational rather than an investment function.
(7)
Relationship of transactional and functional tests to U.S. Constitution. The
Due Process Clause and the Commerce Clause of the U.S. Constitution restrict
states from apportioning income that has no rational relationship with the
taxing state. The protection against extra-territorial state taxation afforded
by these Clauses is often described as the "unitary business principle." The
unitary business principle requires apportionable income to be derived from the
same unitary business that is being conducted at least in part in Oregon. The
unitary business that is conducted in Oregon includes both a unitary business
that the taxpayer alone may be conducting and a unitary business the taxpayer
may conduct with any other person or persons. Satisfaction of either the
transactional test or the functional test complies with the unitary business
principle, because each test requires that the transaction or activity (in the
case of the transactional test) or the property (in the case of the functional
test) be tied to the same trade or business that is being conducted within
Oregon. Determination of the scope of the unitary business being conducted in
Oregon is without regard to the extent to which Oregon requires or permits
combined reporting.
(8)
Nonapportionable income. Nonapportionable income means all income other than
apportionable income.
