United States: Oregon Supreme Court Holds Business Energy Tax Credit May Be Used To Satisfy The Corporate Minimum Tax

On May 31, the Oregon Supreme Court held that a taxpayer could utilize a business energy tax credit (BETC) to satisfy its obligation to pay a corporate minimum tax (CMT) of $75,000 on its corporate excise tax return.¹ In affirming the Tax Court's decision, the Supreme Court concluded that there is no language in the CMT statute that prevents a credit from being used to pay the tax. Also, unlike the statutory language for some other credits, there is nothing in the BETC statute that precludes applying the credit against the CMT. This decision provides a refund opportunity to taxpayers that had a BETC in the same year(s) for which they paid their CMT liability. Similarly, taxpayers with credits under other Oregon statutes that do not explicitly disallow the use of the credit against the CMT may use this case to support refund claims.

Background

The taxpayer, a corporation doing business in Oregon and other states, reported sales of over $79 million in Oregon for the 2009 tax year. Based on the amount of sales, the taxpayer had a CMT liability of $75,000 for the year. As the taxpayer possessed a valid BETC that it had purchased from a third party during the prior year, the taxpayer attempted to apply the credit against its CMT liability on its 2009 corporate excise tax return. The taxpayer had paid $50,000 in estimated tax for the 2009 tax year, and wanted to apply $25,000 of the estimated tax to its 2010 tax liability, requesting a refund of the remaining $25,000.

After disallowing the taxpayer's application of the BETC to its CMT liability, the Oregon Department of Revenue applied the $50,000 in estimated payments to the liability and assessed a deficiency of $25,000 plus interest and penalties. The taxpayer appealed the Department's decision to the Oregon Tax Court, which granted the taxpayer's motion for summary judgment and held that the taxpayer could apply the BETC against its CMT liability. The Department appealed the Tax Court's decision.

Corporate Minimum Tax

Oregon law provides that corporations filing a corporate excise tax return must pay an annual minimum tax for the privilege of carrying on or doing business within the state.² Prior to 2009, the CMT was limited to $10 for most corporations. Beginning January 1, 2009, the CMT was increased and amended to apply to businesses on a sliding scale, based on the amount of a taxpayer's Oregon gross receipts. The CMT ranges from $150 to $100,000. If a taxpayer's sales within the state are $75 million or more, but less than $100 million, the minimum tax is $75,000.

Credit May Be Applied Against Corporate Minimum Tax

The Oregon Supreme Court affirmed the Tax Court and agreed that the BETC could be used to satisfy the CMT. The Department unsuccessfully argued that a BETC could not be used to satisfy the CMT because: (i) tax credits can operate only to reduce, not fully satisfy, a tax liability; (ii) a minimum tax cannot be reduced by credits; and (iii) a credit may not be used to pay a tax because the term "pay" requires cash payment. In reaching its decision, the Supreme Court considered the language and the legislative history of the relevant statutes.

Before addressing the Department's arguments, the Court briefly reviewed the pertinent legislative history. Between 1945 and 1975, a predecessor to the current CMT statute prohibited the application of certain discounts. However, this provision was removed by the legislature in 1975. As explained by the Court, nothing in the current statute prohibits the application of credits or discounts to the CMT. In 1979, the legislature enacted the BETC statute³ and the kicker tax credit statute.⁴ The Court noted that the kicker tax credit statute expressly prohibits applying the credit against the CMT, but the BETC statute does not contain similar language.

Tax Credits Can Fully Satisfy a Tax Liability

The Court first considered the Department's claim that a tax credit cannot be used to pay the CMT because tax credits only may be used to reduce tax liability. The BETC statute provides that "[a] credit is allowed against the taxes otherwise due" under the corporate excise tax.⁵ After considering the legal definitions of these terms, the Court determined that the BETC is a way of satisfying taxes otherwise due under the corporate excise tax, which includes the CMT. The Department argued that the legislature did not intend that a "credit" function as a "payment" because it has used these terms to signify different concepts in several statutes.⁶ After closely considering the language in these statutes, the Court determined that even though the legislature used these terms to signify distinct concepts, both credits and payments function to satisfy the amount of tax owed. The contextual usage of the terms in these other statutes reinforces the conclusion that the BETC provides a method of satisfying taxes otherwise due under the corporate excise tax.

Minimum Tax Can Be Reduced by Credits

The Department argued that the term "minimum" in the CMT statute bars the use of credits to satisfy the tax liability. The Court acknowledged that there was "some appeal" to this argument because "minimum" refers to the "least possible" quantity. However, when viewed in context, "minimum" focuses on the amount of tax that is imposed, rather than how the tax must be satisfied. The Court noted that the statutory language for the tax credit for contributions of computers or scientific equipment to schools⁷ and the kicker tax credit⁸ expressly provides that these specific credits are not allowed against the CMT. The taxpayer successfully argued that, when the legislature does not want a credit to be applied against the CMT, it provides express language in the statute. According to the Court, the presence in the BETC statute of the phrase "allowed against taxes otherwise due" under the corporate excise tax, and the absence of an express prohibition of the use of credits against the CMT, "weigh against" the Department's argument that the legislature intended to prohibit the use of a BETC against the CMT. The Court also determined that the legislative history of the CMT and BETC further supported its conclusion that the legislature intentionally omitted a specific exception for the CMT in the BETC statute.

The Court rejected the Department's five responses to its conclusion that the legislature intended to allow the BETC to be used against the CMT. First, the Department argued that the term "minimum" in the CMT was functionally identical to the phrases used in the credit statutes that specifically barred the credits from being using against the CMT. Second, the Department argued that, because the credit for contributions of computers or scientific equipment to schools⁹ was enacted after the BETC, it could not be considered in determining the legislature's intent in enacting the BETC. Third, the Department argued that the kicker tax credit¹⁰ should not be considered in determining the legislature's intent in enacting the BETC because the kicker tax credit was part of the kicker tax rebate scheme. Fourth, the Department argued that the legislature's amendments to the CMT in 1975 were solely intended to remove obsolete statutory references and did not illuminate the legislature's intent in enacting the CMT. Finally, the Department argued that the decision conflicted with the intent of the voters in enacting a measure in 2010 that substantially increased the amount of the CMT. According to the Court, the measure did not alter the text of the CMT statute that was at issue in the case or refer to tax credits.

In conclusion, the Court held that nothing in the text, context or legislative history of the BETC or CMT indicated that the legislature intended the BETC to be inapplicable to the CMT.

"Pay" Does Not Require Cash Payment

The Court also rejected the Department's argument that the term "pay" used in the CMT statute required payment in cash. The CMT statute does not contain a specific requirement that the tax be paid in cash. Also, the Court disagreed with the Department that the ordinary and legal meaning of "tax" supported its conclusion. After considering the ordinary and legal definitions of "tax," the Court determined that "tax" does not require payment in cash. Therefore, the Court concluded that the legislature's use of "tax" in the CMT statute did not indicate a legislative intent to require that the CMT be paid in cash, implying that a payment through the use of a credit was acceptable.

Commentary

As the Department has disallowed the use of tax credits to offset the CMT liability,¹¹ the Oregon Supreme Court's decision is likely to result in viable refund opportunities for companies that have paid significant amounts of CMT in Oregon in recent years. After the Tax Court released its decision in favor of the taxpayer in December 2011, the Department released guidance that explained its position on the application of tax credits to the CMT and detailed protective refund claim procedures. The Department explained that it would defer action on all claims pending a final decision. Now that the Oregon Supreme Court has handed down its decision, the Department is likely to start processing refund claims.

Although this case specifically concerns the use of the BETC to offset CMT liability, this case potentially opens the door for the use of other tax credits against the CMT as well. The decision is supported by the reasoning that the BETC statute does not expressly preclude the use of the credit against the CMT. Therefore, this decision can be used to support refund claims based on other credits that similarly do not contain the restrictive CMT language. For example, the statutory language of the credits for qualified research expenses¹² and pollution control facilities¹³ does not expressly prevent using these credits to satisfy the CMT. This opportunity may be most beneficial for companies that have a significant market for their product in Oregon, but are not reporting any net income because they are unprofitable or have large Oregon subtraction modifications that eliminate Oregon net income. Depending upon the level of Oregon sales, these companies could be reporting a significant amount of CMT that potentially could be offset by credits.

Footnotes

1 Con-Way Inc. & Affiliates v. Department of Revenue, Oregon Supreme Court, No. SC S060141, May 31, 2013.

2 OR. REV. STAT. § 317.090.

3 OR. REV. STAT. § 315.354.

4 OR. REV. STAT. § 291.349.

5 OR. REV. STAT. § 315.354(1).

6 In support of its argument, the Department cited to OR. REV. STAT. §§ 305.265(12); 314.400(9); and 315.068(5).

7 OR. REV. STAT. § 317.151(5)(a).

8 OR. REV. STAT. § 291.349(3).

9 OR. REV. STAT. § 317.151(5)(a).

10 OR. REV. STAT. § 291.349(3).

11 The Oregon Corporation Excise Tax Return (Form 20) Instructions state that "[t]ax credits cannot be used to reduce minimum excise tax."

12 OR. REV. STAT. § 317.152.

13 OR. REV. STAT. § 315.304.

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