On August 29, 2024, the Oregon Tax Court issued its decision in Microsoft Corp. v. Department of Revenue, TC 5413, partially granting summary judgment to Microsoft. Microsoft had requested a refund of more than $11 million, based on the use of alternative apportionment to factor in the federal repatriation amount reported under IRC §965, part of the 2017 Tax Cuts and Jobs Act (TCJA). As a rolling conformity state, Oregon incorporated the federal rule but modified it to exclude from the tax base 80% of the repatriated funds under the state’s dividend received deduction rules. Thus, Microsoft had included in its tax base 20% of the Section 965 amount; however, it did not include any portion in the numerator or denominator of its Oregon sales factor. Subsequently, Microsoft filed a refund claim to include in its sales factor 100% of the federal repatriation amount under an alternative apportionment scheme.
Microsoft presented two arguments for recalculating the amount of tax due to Oregon. First, under Oracle Corp. and Subsidiaries II v. Dept. of Rev., 24 OTR 359 (2021) (“Oracle II”), Microsoft claimed the federal repatriation amount was a deemed dividend because the amount was based on earnings and profits from controlled foreign corporations (CFCs) that were part of the same unitary business that shared a single primary business activity. This warranted “reinclusion” in the sales factor of the 20% of the federal repatriation amount recognized by Oregon. The company also argued inclusion of 100% of the federal repatriated amount in the denominator of the sales factor, as well as separate accounting.
The Tax Court agreed with Microsoft’s argument based on Oracle II. Microsoft was part of a water’s-edge group (as recognized under Oregon’s tax scheme) engaged in a single unitary business with its CFCs. This triggered the reinclusion provision of ORS §314.665 to treat the deemed dividend from the federal repatriation amount as income from sales rather than income from holding intangible assets. Although the amount of refund due to Microsoft under the reinclusion provision was not determined at the time of the decision, it would represent less than half of the total refund sought by Microsoft.
Microsoft presented different alternative apportionment theories to obtain the remainder of the requested refund. Unfortunately, Microsoft’s arguments did not account for the outcome of the reinclusion argument. The Tax Court noted that Microsoft made no arguments as to whether the amount of tax due after reinclusion would “fairly represent” the company’s business activities in Oregon.
Notably, the Tax Court analyzed the legislative history of ORS §317.267, which provides for the 80% subtraction of the federal repatriation amount. The court determined that this subtraction was intended to be a proxy for the type of factor relief sought by Microsoft through alternative apportionment. Microsoft would have to prove that the relief provided by the 80% subtraction was insufficient. However, the court determined that Microsoft did not carry its burden of proof that it was due any additional refunds. The court also rejected Microsoft’s arguments that the assessment was unconstitutional.
Greg Rottjakob, Ryan Principal, comments, “Despite the Court’s comprehensive opinion, there are still many questions unaddressed. For example, there was no acknowledgment that the water’s-edge method employs a method of separate accounting in its own right or that taxation without factor representation is a constitutional tenant that isn’t afforded a proxy by way of a deduction. It appeared that the court was going out of its way to just uphold its decision in Oracle II and looked for ways to discount the taxpayer’s other arguments. The holding in this case shouldn’t dissuade taxpayers on future refund claims in Oregon on global intangible low-taxed income (GILTI) inclusion because its inclusion is of current year taxable income representing a quasi-worldwide filing without statutory authority and without factor representation.”
The issue of including repatriation income in the sales factor denominator has emerged in other jurisdictions. Taxpayers who have not included repatriation income in their state apportionment factor are encouraged to reach out to a Ryan tax professional listed below to assess whether a refund is warranted.
TECHNICAL INFORMATION CONTACTS:
Gina Rodriquez
Principal
Ryan
916.414.0400
gina.rodriquez@ryan.com
Jonathan Geiger
Manager
Ryan
425.440.2333
jonathan.geiger@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.
- Topics
- Gina Rodriquez
- Income Tax
- Oregon