Physical Presence Not Necessary for Corporation to Be Liable for Oregon Corporate Income Tax

While the Wayfair decision involved sales tax issues, the fact that the Supreme Court found that there was no need for physical presence for a business to be required to collect sales taxes suggested it was unlikely that such a test would apply for other types of taxes.  Shortly after the Wayfair decision was announced, Wells Fargo announced it was picking up an additional $481 million in state income taxes on its financial statements.[1]

Now the Oregon Supreme Court has ruled that the state’s corporate income tax does not require the physical presence of the corporation in the case of Capital One Auto Finance, Inc. v. Department of Revenue, Docket No. SC S064803.

The Court noted that the entities in this case did not have an office in Oregon, nor did it have any employees in the state:

The banks did not have any property, offices, or employees in Oregon, and they did not apply to the Secretary of State under ORS 60.707 for authority to do business here. The parties have stipulated that the banks' “activities in [offering credit card products, consumer loans, accepting deposit products, and engaging in consumer and small-business lending] were all from [their] offices outside of Oregon.”

However, they did have revenue that had its source in the state of Oregon:

The banks did, however, make substantial amounts of money from customers in Oregon. The banks provided “consumer finance products” — credit cards, consumer loans, and similar products — to Oregonians; communicated with Oregonians; and collected fees from Oregonians. In 2007 and 2008, the banks sent 24 million solicitations to Oregonians. The banks had 536,000 Oregon customers in 2007, and 495,000 customers in 2008. During those same years, the banks charged Oregonians nearly $150 million in fees each year, including finance charges, late fees, and over-limit fees.

The taxpayer concluded that there was no Oregon tax liability since they had no physical presence in the state:

Because the banks had no physical presence in Oregon, taxpayer concluded that the banks were not subject to Oregon tax. Accordingly, taxpayer did not use income earned by the banks from Oregonians in the formula to calculate the fraction of its income that could be taxed by Oregon.

The Oregon Department of Revenue did not agree with that position, taking the position that the corporations owed Oregon income tax.[2]

The opinion notes that at the trial court the:

… taxpayer contended that both the corporate income tax and the corporate excise tax applied only to taxpayers that had a physical presence in the State of Oregon. The corporate excise tax applies only when a taxpayer is “doing business * * * within this state,” ORS 317.070, and taxpayer asserted that that phrase required a taxpayer to be physically conducting business activities in Oregon. As to the corporate income tax, taxpayer contended that the banks did not have any “income derived from sources within this state.” ORS 318.020(1). That argument, too, was based on the banks not having any property or physically conducting any activities within this state.

The Supreme Court looked at Oregon’s statute, found at ORS 318.020(1), for income that is subject to Oregon’s income tax:

(1) There hereby is imposed upon every corporation for each taxable year a tax at the rate provided in ORS 317.061 upon its Oregon taxable income derived from sources within this state, other than income for which the corporation is subject to the tax imposed by ORS chapter 317 according to or measured by its Oregon taxable income.

The taxpayer did not argue that it had no items of income, nor that such income was not from Oregon residents.  But the taxpayer argues the examples provided by the legislature in ORS 318.020(2) all involve taxpayers with a physical presence in the state, thus indicating that such a presence is required:

The legislature provided a list of three examples of what constitutes “income from sources within this state” in ORS 318.020(2):7 income from property located here, income from property with a situs here, and income from activities here. Taxpayer correctly recognizes that the examples in ORS 318.020(2) are not exclusive, because of the connotation of the term “includes,” and asserts that our understanding of “income derived from sources within this state” should be informed by what it considers the “common characteristic” of all the examples. Specifically, taxpayer contends that “each [example] involves income derived from the taxpayer’s physical presence in the state.” (Emphasis in original.) Thus, taxpayer asserts, we should conclude that “income derived from sources within this state” requires a taxpayer to have a physical presence in Oregon.

The Court agrees with the idea that the examples presented are context for understanding what was meant by the phrase “income derived from sources within the state.”  But the agreement stops there:

However, we do not find in the examples set out in ORS 318.020(2) the common characteristic that taxpayer asserts. What is common to all the examples — “income from tangible or intangible property located or having a situs in this state and income from any activities carried on in this state” — is that the source of the income — the property or the activities — are in this state. The examples imply only the taxpayer's existence as recipient of the income, and they say nothing about where the taxpayer must be located. The common characteristic that we find thus accords with the ordinary meaning of the text: there must be income from “sources within this state,” and the taxpayer must receive that income. Nothing about the statutory text or context suggests that the taxpayer must also have some physical presence here.

…Accordingly, the Tax Court correctly concluded that taxpayer is subject to assessment for income earned by the banks from its Oregon customers.

States had been asserting that there was no need for physical presence to impose an income tax with increasing frequency even before the Wayfair decision, as federal courts indicated that Quill was a sales tax only case.  But, as Wells Fargo’s actions note, many now expect more states to start looking for tax from out of state businesses on their income even when the businesses have no physical presence in the state.

While PL 86-272 does provide some protection for out of state businesses from an income tax imposed by a state, that protection is very limited.  In this case it wasn’t relevant because the issue was not the sale of a product, but rather the services provided by the banks.


[1] “Wells Fargo’s $481 Million Tax Surprise”, Wall Street Journal, Online Edition, July 13, 2018,

[2] Note the case will refer both to the Oregon income tax and the Oregon excise tax.  The opinion gives the history and relationship between these two taxes (which arrive at the same tax), but the opinion notes that the two taxes should be construed together.  For this reason, the article will simply refer to the Oregon corporate income tax.