Ooma, Inc. v. Dep't of Revenue

• Decision Date: 13 April 2018
• Docket Number: TC-MD 160375G
• Parties: OOMA, INC., a foreign corporation, Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.
• Court: Oregon Tax Court

OOMA, INC., a foreign corporation, Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.

TC-MD 160375G

OREGON TAX COURT MAGISTRATE DIVISION Emergency Communications Tax

April 13, 2018

FINAL DECISION¹

On cross-motions for summary judgment, this case concerns whether an out-of-state telecommunications provider without a physical presence in Oregon must collect Oregon's emergency communications tax (9-1-1 tax) from its subscribers. Plaintiff (Ooma) appealed from Defendant's (the department's) Notices of Assessment for the quarters ending March 2013 to March 2016.

I. STATEMENT OF FACTS

Ooma is a foreign corporation (subchapter C) with its principal place of business in Palo Alto, California. (Stip Facts ¶¶ 1,5.) Ooma did not file 9-1-1 tax returns with the department during the periods at issue. (Id. ¶ 4.)

Ooma provides voice-over-internet-protocol (VoIP) services to customers across the United States, including residents of Oregon. (Stip Facts ¶ 7.) VoIP technology enables customers to conduct voice communications via a high-speed (broadband) internet connection. (Id.) Ooma also provides additional telecommunications services to residents of Oregon that include voicemail, call waiting, call forwarding and caller identification. (Id. ¶ 8.) Oregonresidents purchase the broadband connections necessary to receive Ooma's services from unaffiliated independent third parties. (Id. ¶ 9.)

To access the VoIP services provided by Ooma, an Oregon resident must first purchase one of two Ooma VoIP devices known as "Ooma Telo" or "Ooma Office." (Stip Facts ¶ 11.) The Telo and Office devices can be purchased from independent retail stores, directly from Ooma via Ooma's website, and from several independent online retailers. (Id.) Ooma sold the equipment needed to access its VoIP services to independent third-party retailers with locations in Oregon for resale to Oregon residents. (Id. ¶ 16.)

Once an Oregon resident has the equipment necessary to access Ooma's services, calls are transmitted along one of two different paths. (Stip Facts ¶ 12.) Calls between Ooma customers are transmitted via broadband directly from one Ooma device to the other. (Id. ¶ 13.) If the call recipient is not an Ooma customer, the digital data sent from the call initiator is processed through one of several regional data centers. (Id. ¶ 14.) Those digital data centers convert the digital data into an analog audio signal, which is then directed to the Public Switched Telephone Network (PSTN). (Id.) Such digital data centers and the telecommunications lines and other equipment relevant to the transmission of calls on the PSTN are owned and operated by unrelated third parties. (Id.)

For purposes of the parties' motions, the department did not dispute the following assertions of Ooma with respect to the periods at issue. (Stip Facts ¶ 19.)

a. None of Ooma's employees visited the State of Oregon;

b. Ooma did not hire or compensate independent sales representatives, agents or anyone of similar role or function to act on its behalf in Oregon to promote, advertise, solicit, or sell its VoIP services to Oregon residents;

c. Ooma did not hire or compensate independent third parties, agents or anyone of similar role or function to act on its behalf in the State of Oregon to pursue anaction to enforce or defend rights regarding tangible or intangible property or contractual rights;

d. Ooma did not participate in any court proceeding, mediation or arbitration in Oregon;

e. Ooma did not participate in any legal or collection action in the State of Oregon;

f. Ooma did not possess any license, permit, registration, or authorization issued by any entity, government, or organization in the State of Oregon;

g. Ooma did not communicate with any entity, government or organization in Oregon regarding whether any license, permit, registration, or authorization was required relating to the provision of Ooma's VoIP services to Oregon residents;

h. Ooma made no direct or indirect representation that it would pay or had paid Oregon taxes on VoIP services sold to Oregon residents; and

i. Ooma owned no real or tangible personal property in Oregon.

Ooma prepared marketing plans and employed business strategies that targeted customers nationwide, including Oregon residents. (Stip Facts ¶¶ 21, 22.) Ooma provided promotional and marketing materials to select national retailers for use in their retail locations, including retail locations in Oregon. (Id. ¶ 23.) In those instances, the retailer decided where and when to use Ooma's promotional and marketing materials. (Id.) On certain occasions, at the direction of a national retailer, Ooma shipped promotional and marketing materials to the retailer's location or locations in the State of Oregon. (Id. ¶ 24.)

The parties' stipulated exhibits include a list Ooma's equipment sales in Oregon during the periods at issue; two versions of a standard form contract ("Terms and Conditions") used by Ooma with its VoIP customers nationwide, including in Oregon; and totals of Ooma's Oregon revenues from recurring billings and product sales during the periods at issue. (Stip Facts, Exs B, C, E.) The parties also stipulated to a chart showing the amount of tax Ooma would owe if it were subject to the 9-1-1 tax: $299,175.75 over the periods at issue, not including penalties andinterest. (Id. ¶ 26, Ex D.) Details from the stipulated exhibits are introduced where pertinent in the analysis below.

II. ANALYSIS

The issue is whether the United States Constitution prohibits Oregon from requiring Ooma to collect, report, and remit the 9-1-1 tax during the periods at issue. Oregon imposes a tax of 75 cents per month on telecommunications service subscribers with access to the emergency communications system—the 9-1-1 tax.² ORS 403.200. Although the subscriber is liable, the service provider must collect the tax and file a return with the department each quarter. ORS 403.200(2),(3); 403.215. Ooma contends that requiring it to collect and remit the 9-1-1 tax violates the Due Process Clause of the Fourteenth Amendment and the Commerce Clause of the United States Constitution.

A. Due Process Clause

"The Due Process Clause requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax, and that the income attributed to the State for tax purposes must be rationally related to values connected with the taxing State[.]" Quill Corp. v. N. Dakota By & Through Heitkamp, 504 US 298, 306, 112 S Ct 1904, 119 L Ed 2d 91 (1992) (citations and internal quotation marks omitted). The United States Supreme Court has often identified "notice" or "fair warning" that an individual might be subject to the power of the state as the "analytic touchstone of due process nexus analysis." Id. at 312. "[T]his 'fair warning' requirement is satisfied if the defendant has 'purposefully directed' his activities at residents of the forum." Burger King Corp. v. Rudzewicz, 471 US 462, 472, 105 SCt 2174, 85 L Ed 2d 528 (1985) (holding court's exercise of jurisdiction over lawsuit against out-of-state company did not violate the Due Process Clause).

A taxpayer need not be physically present in a state to have due process nexus with that state. See Quill, 504 US at 298 (overruling cases requiring physical presence for the imposition of duty to collect use tax); Am. Refrigerator Transit Co. v. State Tax Comm'n, 238 Or 340, 347, 395 P2d 127, 131 (1964) ("Nexus may be found even where neither property nor personnel of the taxpayer is employed within the taxing state if it can be said that the state substantially contributes to the production of the taxpayer's income."). A taxpayer engaging in "continuous and widespread solicitation of business within a State" has the "fair warning" required by the Due Process clause. Quill, 504 US at 308. When a company makes "regular monthly sales" of tangible personal property to a state's residents, that company's engagement with the state "cannot by any stretch of the imagination be characterized as random, isolated, or fortuitous." Keeton v. Hustler Magazine, Inc., 465 US 770, 774, 104 S Ct 1473, 79 L Ed 2d 790 (1984).

Here, Ooma's activities with respect to Oregon are evidence that it purposely solicited sales from Oregon residents. Ooma entered into thousands of contracts with Oregon residents to provide VoIP services. Ooma's lines in service grew from 6,663 to 13,467 during the periods at issue, and its monthly billings grew from approximately $34,000 in January 2013 to approximately $97,000 in March 2016. (Def's Mot at 3-4.) Further, Ooma sold more than 2,000 devices to Oregon retailers and directly to Oregon residents. (Stip Facts, Ex B.) By the department's calculations, those sales averaged approximately $16,000 per month. (Def's Mot at 7.)

Ooma argues that its activities were not purposefully directed toward Oregon residents because Oregon residents were not specifically targeted, but were merely swept up in its nationalmarketing strategy. Ooma would hold that the Due Process clause requires that companies have state-specific business plans before becoming subject to state tax. Its argument appears to be based on the plurality opinion in J. McIntyre Machinery, Ltd. v. Nicastro (Nicastro), 564 US 873, 131 S Ct 2780, 2783, 180 L Ed 2d 765 (2011). In Nicastro, four justices endorsed a "forum-by-forum, or sovereign-by-sovereign, analysis" to show that a party has "targeted the forum" before an exercise of jurisdiction over that party is proper. Id. at 884; but see Willemsen v. Invacare Corp., 352 Or 191, 200-02, 282 P3d 867, 875 (2012) (concluding that Justice Breyer's concurrence, not the plurality opinion, was controlling).

The facts of this case differ significantly from those in Nicastro and other products liability cases examining the so-called "stream-of-commerce doctrine." See 564 US at 877-78 (lawsuit in New Jersey court against foreign manufacturer of injurious machinery distributed by...