Health Net, Inc. v. Dep't of Revenue

• Decision Date: 09 September 2015
• Docket Number: TC 5127
• Court: Oregon Tax Court
• Parties: HEALTH NET, INC. and SUBSIDIARIES, Plaintiffs, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.

HEALTH NET, INC. and SUBSIDIARIES, Plaintiffs, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.

TC 5127

OREGON TAX COURT REGULAR DIVISION Corporation Excise Tax

September 9, 2015

ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AND GRANTING DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

This corporation excise tax case for the 2005 through 2007 tax years is before the court on cross-motions for summary judgment filed by Plaintiffs (taxpayer) and Defendant (the department).

II. FACTS

The relevant facts have been established through stipulation, including stipulated exhibits. For the years at issue, those facts are as follows.

(1) Taxpayer, a Delaware Corporation headquartered in Woodland Hills, California, is engaged in the delivery of managed health care services through health plans and government-sponsored managed care plans.

(2) Taxpayer is a federal affiliated group.

(3) Taxpayer began doing business in the State of Oregon no later than 1989 and has continued doing business in Oregon since then.

(4) The department is, and at all times mentioned herein was, the duly created agency and instrumentality of the State of Oregon charged with the administration of the tax laws of Oregon. ORS 305.120.¹

(5) This court has jurisdiction over this action pursuant to ORS 305.270(10) and 305.501(1).

(6) This is an action for refund of corporation excise taxes paid by taxpayer in the amount of $458,369, plus interest, for the tax years ending December 31, 2005; December 31, 2006; and December 31, 2007. The amounts for the individual years at issue are: $90,632 for 2005; $103,614 for 2006; and $264,123 for 2007.

(7) During the years at issue, taxpayer engaged in a multi-state, unitary business. Accordingly, taxpayer was required to determine the portion of its consolidated income subject to tax in Oregon by apportioning unitary income pursuant to an apportionment formula in the Oregon Revised Statutes.

(8) In its original tax returns for the years at issue, taxpayer apportioned the Oregon component of its consolidated income by using the Oregon apportionment formula found at ORS 314.650 which includes a single sales factor for apportionment.² Taxpayer's 2005 return was timely filed October 19, 2006. Its 2006 return was timely filed October 18, 2007. Its 2007 return was timely filed October 20, 2008.

(9) The Internal Revenue Service ("IRS") audited taxpayer's original federal tax returns for the years at issue. The IRS completed its audit and issued a Revenue Agent's Reportwith respect to the 2005 return on or about August 9, 2007, and an undated Revenue Agent's Report with respect to the 2007 return on or about July 2, 2009. No changes were made to the 2006 return.

(10) The department audited taxpayer's original Oregon tax returns for the years at issue. The department completed its audit in January 2010. At the completion of the audit, taxpayer was assessed additional tax for 2005 in the amount of $43,209, and for 2006 in the amount of $35,439; the department decreased tax for 2007 in the amount of $56,966. On or about February 1, 2010, taxpayer paid $55,875 ($43,209 tax plus $12,666 interest) for 2005 and $43,284 ($35,439 tax plus $7,804 interest) for 2006, such payments resulting from refund offsets from other tax years.

(11) On or about October 15, 2010, taxpayer filed timely amended returns/claims for refund for the years at issue ending December 31, 2005, and December 31, 2006, and subsequently filed a timely amended return/claim for refund for the year at issue ending December 31, 2007, on or about July 7, 2011. The amended returns/claims for refund changed the apportionment formula to the equally-weighted three-factor formula (property, payroll, and sales) set forth at ORS 305.655, the Oregon enactment of the Multistate Tax Compact (the "Compact"), in accordance with Article III, section 1, of the Compact (the "Compact Election").

(12) In Notices of Proposed Refund Adjustment dated May 11, 2011, the department denied taxpayer's refund claims for the years at issue ending December 31, 2005, and December 31, 2006, on the basis that the Compact Election was not available to taxpayer.

(13) In a Notice of Proposed Refund Adjustment dated August 23, 2011, the departmentpartially denied taxpayer's refund claim for the year at issue ending December 31, 2007, on the basis that the Compact Election was not available to taxpayer.

(14) Taxpayer timely appealed the Notices of Proposed Refund Adjustment and requested an in-person conference with the department regarding the Notices of Proposed Refund Adjustment for the years at issue.

(15) By Conference Decision Letter, dated April 2, 2012, the department upheld the refund denials on the basis that the Compact Election was not available to taxpayer.

(16) Taxpayer timely appealed the department's denial of its refund claims under ORS 305.270(10), 305.280, and 305.418 to the Magistrate Division of the Oregon Tax Court.

(17) By Order filed on October 16, 2012, those refund claims were specially designated for hearing in the Regular Division of the Oregon Tax Court.

(18) For the years at issue, Oregon did not change its Compact membership status to anything less than full membership.

(19) Taxpayer's Oregon taxable income subject to apportionment for the years at issue was $212,656,103 for 2005, $178,742,961 for 2006, and $495,156,474 for 2007.

(20) Taxpayer's Oregon payroll for the years at issue was $15,655,388 for 2005, $18,298,032 for 2006, and $17,449,624 for 2007, and taxpayer's everywhere payroll for the years at issue was $642,479,812 for 2005, $761,803,334 for 2006, and $774,312,433 for 2007.

(21) Taxpayer's Oregon payroll percentage (i.e., Oregon payroll divided by everywhere payroll) for the years at issue was 2.4367 percent for 2005, 2.4019 percent for 2006, and 2.2536 percent for 2007.

(22) Taxpayer's Oregon property for the years at issue was $8,614,258 for 2005, $9,653,981 for 2006, and $10,665,344 for 2007, and taxpayer's everywhere property for the years at issue was $698,277,293 for 2005, $728,873,891 for 2006, and $797,253,428 for 2007.

(23) Taxpayer's Oregon property percentage (i.e., Oregon property divided by everywhere property) for the years at issue was 1.2336 percent for 2005, 1.3245 percent for 2006, and 1.3378 percent for 2007.

(24) Taxpayer's Oregon sales for the years at issue were $372,139,784 for 2005, $391,487,495 for 2006, and $400,658,306 for 2007, and taxpayer's everywhere sales for the years at issue were $11,561,469,701 for 2005, $12,308,639,159 for 2006, and $13,319,774,216 for 2007.

(25) Taxpayer's Oregon sales percentage (i.e., Oregon sales divided by everywhere sales) for the years at issue was 3.2188 percent for 2005, 3.1806 percent for 2006, and 3.0080 percent for 2007.

(26) Under ORS 314.650 through 314.665, taxpayer's Oregon apportionment percentage for the years at issue was 2.9421 percent for 2005, 3.1806 percent for 2006, and 3.0080 percent for 2007.

(27) If the Compact Election were allowed, taxpayer's Oregon apportionment percentage for the years at issue would be 2.29636 percent for 2005, 2.3023 percent for 2006, and 2.1998 percent for 2007.

(28) Based on paragraphs 19 and 26 above, taxpayer's Oregon tax due for the years at issue was $264,525 for 2005, $375,217 for 2006, and $308,008 for 2007.

(29) Based on paragraphs 19 and 27 above, if the Compact Election were allowed, taxpayer's Oregon tax due for the years at issue would be $173,893 for 2005, $271,603 for 2006, and $43,885 for 2007.

(30) Except to the extent that ORS 305.765 requires otherwise, if taxpayer were permitted to use the apportionment formula set forth in ORS 305.655, it would be entitled to a refund of tax for the years at issue of $90,632 for 2005, $103,614 for 2006, and $264,123 for 2007, plus interest as provided by law. If taxpayer were not permitted to use the apportionment formula set forth in ORS 305 .655, taxpayer would not be entitled to a refund for the years at issue.

III. ISSUES

There are six issues for decision in this case:

(1) What is the effect of Oregon Laws 1993, chapter 726, section 20 (codified and hereafter referred to as ORS 314.606)?

(2) Did the legislative process employed in adopting ORS 314.606 violate Article IV, section 22, of the Oregon Constitution (the "Full Text Provision")?

(3) Did the action of the Oregon Legislature in adopting ORS 314.606 violate Article I, section 21, of the Oregon Constitution (the "Oregon Contract Clause")?

(4) Did the action of the Oregon Legislature in adopting ORS 314.606 violate a federal statute?

(5) Did the action of the Oregon Legislature in adopting ORS 314.606 violate Article I, Section 10, Clause 1, of the United States Constitution (the "Federal Contract Clause")?

(6) Did the action of the Oregon Legislature in adopting ORS 314.606 violate Article I, Section 10, Clause 3, of the United States Constitution (the "Compact Clause")?

IV. ANALYSIS

Taxpayer contends that the action of the Oregon Legislature in adopting ORS 314.606 violated the Full Text Provision, the Oregon Contract Clause, the Federal Contract Clause, and the Compact Clause. Taxpayer--correctly--does not inquire as to the authority of the Oregon Legislature to adopt ORS 314.606. That authority is plenary, subject to certain specific limitations.³

Under the "first things first" doctrine, Oregon courts first examine state statutory issues and state constitutional claims before addressing any federal statutory or federal constitutional claims. Hughes v. State of Oregon, 314 Or 1, 12, 838 P2d 1018 (1992) (citing Stelts v. State of Oregon, 299 Or 252, 257, 701 P2d 1047 (1985); State v. Kennedy, 295 Or 260, 262, 666 P2d 1316 (1983)).⁴ As between state statutes and state constitutional matters, Oregon courts ordinarily analyze state statutory challenges before state constitutional ones. Stelts, 299 Or at 257. The court therefore first addresses the effect of ORS 314.606 and whether the actions of the Oregon Legislature in enacting ORS 314.606 violated...