Capital One Auto Fin. Inc. v. Dep't of Revenue
| Decision Date | 23 December 2016 |
| Docket Number | TC 5197 |
| Court | Oregon Tax Court |
| Parties | CAPITAL ONE AUTO FINANCE INC., Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant. |
This matter is before the court on cross-motions for partial summary judgment and stipulated facts.1 This order addresses whether the corporate excise tax or the corporate income tax may be imposed on purely economic activity in the state without any physical presence by Plaintiff (taxpayer). See ORS 317.070; ORS 318.020.2 The tax years at issue are 2006, 2007, and 2008. There are other issues before the court not addressed in this order.3
During the tax years at issue, Capital One Financial Corporation (COFC) was the parent company of an affiliated group that filed a consolidated federal return. COFC and its subsidiaries, which were wholly-owned by COFC, were corporations incorporated, headquartered, and domiciled outside of Oregon.
One of COFC's subsidiaries, Capital One Auto Finance (taxpayer), "was authorized to conduct, and conducted, business in Oregon and other states." (Stip Facts at 2.) It offered "automobile and other motor vehicle financing products to consumers primarily through auto dealerships." (Id.)
Taxpayer filed consolidated Oregon excise tax returns for tax years 2006, 2007, and 2008. The returns included taxpayer as well as Capital One Bank (COB),4 Capital One FSB (FSB),5 and Capital One Services, Inc., all of which were subsidiaries of COFC. In those returns, taxpayer excluded from the numerator of the sales apportionment factor the gross receipts of COB and FSB (collectively referred to as "the Banks").6
The Banks did not obtain authorization to conduct business in Oregon. The Banks had no real or tangible personal property, offices, or employees in Oregon. In addition, at oral argument, Defendant Department of Revenue (the department) conceded, for purposes of these motions, that the receivables of the Banks are not located in Oregon.
/ / / COB "offered credit card products, other consumer loans, and deposit products to customers throughout the United States, including Oregon, and in certain international markets." (Stip Facts at 2.) FSB "accepted deposit products and engaged in consumer and small business lending to customers in Oregon and other states." (Id.) These activities "were all from [their] offices outside of Oregon." (Id. at 3.)
The Banks offered their products to Oregon customers primarily through direct mail solicitations that originated from locations outside of Oregon. These solicitations were designed to be sent to and received by customers and potential customers in Oregon. The Banks sent approximately 24,600,000 solicitations to Oregon customers over the course of 2007 and 2008. The number of solicitations sent in 2006 is unknown, but it is accepted by both parties to be materially the same.
The Banks had approximately 536,000 Oregon customers in 2007 and approximately 495,000 Oregon customers in 2008. The number of Oregon customers is not known for 2006, but it is accepted by both parties to be materially the same. The Banks sent monthly statements to their Oregon customers with outstanding credit card balances, and initiated lawsuits in Oregon in aid of collection against delinquent accounts in Oregon. The number of lawsuits in Oregon initiated by or for the Banks was equal to 2,502 in 2006; 9,824 in 2007; and 9,071 in 2008.
The Banks earned revenue from or related to transactions in which its customers used Capital One-branded credit cards in Oregon or engaged in other types of consumer lending in Oregon. These transactions included cash advances from Automatic Teller Machines (ATMs) located in Oregon but neither owned nor operated by the Banks (or any related Capital One entity), as well as purchases at vendors in Oregon. The types of fees that the Banks charged included finance charges, late fees, overlimit fees, annual membership fees, and interchangefees.7 The amount of fees charged by the Banks totaled nearly $150,000,000 in each year for 2007 and 2008. The amount of fees charged by the Banks in 2006 is unknown, but it is accepted by both parties to be materially the same.
In 2011, the department audited taxpayer's corporate excise returns for tax years 2006, 2007, and 2008. The department determined that the Banks were subject to the corporate excise tax by reason of their lending and depositing activities and issued notices of deficiency. After holding a conference with taxpayer, the department issued notices of assessment including tax, penalty, and interest.8
Taxpayer appealed the notices of assessment to this court.
There are two issues before the court. The first issue is whether the Banks are subject to taxation in Oregon under either the corporate excise tax or the corporate income tax by reason of their economic activities with respect to Oregon customers.9 The second issue is whether the economic activities of the Banks created substantial nexus for purposes of the Commerce Clause of the United States Constitution so as to permit taxation of the Banks in Oregon.
/ / /
Taxpayer argues that it is not subject to taxation in Oregon for the income earned from the lending or depositing activities of the Banks with respect to Oregon customers. Although taxpayer makes arguments under state and federal law, it essentially makes only one challenge to the tax imposed. That challenge is that the Banks must have a physical presence in Oregon to be subject to taxation.10 Under Oregon's "first things first" doctrine, this court examines first the state law claims before addressing any federal law claims. Hughes v. State of Oregon, 314 Or 1, 12, 838 P2d 1018 (1992).
A preliminary question that must be addressed is what tax regimes are at issue. In its motion for partial summary judgment, taxpayer argued that the corporate excise tax in ORS chapter 317 does not reach to taxpayers who have no physical presence in Oregon. The department responded in two ways. First, it argued that the lending and depositing activities of the Banks do subject them to the corporate excise tax, regardless of the lack of physical presence in the state. Second, it argued that, even if the Banks are not subject to the excise tax, they are subject to the corporate income tax in ORS chapter 318.
In turn, taxpayer argues that it was not given proper notice that the department was asserting the corporate income tax as a basis for taxation. See ORS 305.885 (). However, after the notice of deficiency, the department is allowed to assert alternative grounds under ORS 305.575. The statutory provisions of ORS 305.575 authorize the departure from previously communicated reasons under ORS 305.885, so long as certainconditions are met. ORS 305.575 provides that this court may consider such alternative grounds if they are raised "before or at the hearing or any rehearing of the case." It also provides that the taxpayer is given additional time to amend or otherwise plead to the alternative grounds asserted. Taxpayer here did not request such additional time, and in fact argued in its response to the department's motion as to why it thinks that the corporate income tax does not reach to the activities of the Banks.
This court will consider the imposition of both tax regimes.
Oregon's corporate excise tax is "a tax measured by or according to net income * * * for the privilege of carrying on or doing business in this state." ORS 317.010(5). It is imposed on financial institutions "doing business" in this state by ORS 317.070. "Doing business" is defined as "any transaction or transactions in the course of its activities conducted within the state by a national banking association, or any other corporation * * * ." ORS 317.010(4).
ORS 318.020(2). Although ORS 318.020(2) includes examples of income from sources within Oregon, those examples are not exclusive. The term "source" is not defined by statute, but it is defined as "a point of origin" or "a point of emanation." Webster's Third New Int'l Dictionary2177 (unabridged ed 2002). The income at issue in this case has its point of origin or point of emanation in Oregon, namely, the Oregon resident customers and merchants.
Despite being contained in separate chapters, the corporate excise and corporate income tax regimes were intended to operate as one cohesive tax regime. See Cal-Roof Wholesale v. Tax Com., 242 Or 435, 441, 444, 410 P2d 233 (1966) (). Indeed, the corporate income tax only reaches to income not already subject to the corporate excise tax, and it taxes such income at the same tax rate. ORS 318.020(1) (referring to ORS 317.061). Further, ORS chapter 317 is incorporated in its entirety into ORS chapter 318, and both taxes are to be "administered as uniformly as possible." ORS 318.031.
Taxpayer argues that the Banks are not "doing business" in Oregon for purposes of the excise tax because they...
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