Departments of Revenue are notorious for treating their guidance as the final and absolute word on an issue. However, that doesn’t mean that they are always right. The recent decision of the Oregon Tax Court in Microsoft Corporation v. Department of Revenue, T.C. 5413 (Aug. 29, 2024), highlights just that.
As part of the federal Tax Cuts and Jobs Act, corporations were required to make a one-time repatriation of certain deferred earnings of controlled foreign corporations (“CFCs”) for federal tax purposes. Oregon, like many states, treated the repatriated earnings as deemed dividends, which were included in the State’s tax base at 20% (thereby excluding 80% of the income). In addition, the Oregon Department of Revenue issued Oregon Revenue Bulletin 2018-01 that explicitly stated that, although the repatriated earnings were included in the tax base, such earnings were excluded from the sales factor.
Microsoft filed its 2018 Oregon return including 20% of its repatriated earnings in the tax base and excluding such earnings from the sales factor, in line with the Department’s guidance. Subsequently, Microsoft filed an amended return including the repatriated earnings in the sales factor, which the Department denied.
On appeal, the Tax Court examined two issues: first, whether the 20% of Microsoft’s repatriated earnings included in the tax base should also be included in the sales factor; and second, whether other factor representation should be granted.
As to the first issue, the Tax Court succinctly determined that the portion of the repatriated earnings included in the tax base was required to be included in the sales factor. Under Oregon law, this inclusion was necessary as the earnings were derived from Microsoft’s primary business activity because Microsoft operated as a unitary business with the CFCs—which was directly contrary to the Department’s guidance. However, the court explicitly stated that it was expressing “no view as to whether it would reach the same conclusion if [Microsoft] and the CFCs were not engaged in a single unitary business.”
On the second issue, Microsoft provided three alternative proposals to achieve factor representation. Unfortunately, the Tax Court was not persuaded by the Company’s arguments. The court held that the 80% exclusion from the tax base of the repatriated earnings was a proxy for factor relief.
Ultimately, Microsoft achieved a substantial victory and established that what is included in the tax base must also be included in the sales factor. In addition, this case serves as a reminder to taxpayers that guidance issued by Departments is merely the opinion of those Departments—not the law.
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