On March 31, Idaho Governor Brad Little (R) signed into law H.B. 677, a bill aiming to protect Idaho businesses from out-of-state tax authorities collecting tax on commerce occurring within the state’s territorial borders. The measure aims squarely at Oregon’s corporate activity tax (CAT), enacted in 2019 as a new business tax to fund investments in public education, and an aggressive enforcement position from Oregon’s Department of Revenue (the “Department”). It passed the legislature without a single dissenting vote in either chamber.
The Act declares, “The Oregon Department of Revenue’s extension of its corporate activity tax upon a seller in Idaho based on a sale that took place in Idaho to an Oregon resident in Idaho… violates the requirements of the Commerce Clause and the Due Process Clause of the United States Constitution, and is not acceptable to the sovereign State of Idaho.” Although the measure is perhaps easy to dismiss as signaling from a low-tax state, it sets the stage for an extraterritorial tax conflict over jurisdictional boundaries.
In testimony to Idaho’s House Revenue and Taxation Committee on March 2, the measure’s chief sponsor, Rep. Jim Addis (R-Coeur d’Alene), boiled the conflict down to Oregon sending tax assessment notices to Idaho businesses selling goods to Oregon residents within Idaho. For example, suppose an Oregon resident travels to Idaho (or any other state, for that matter) to purchase an automobile and returns it to Oregon. In some cases, the Department is requiring the Idaho seller to source that sale to Oregon and pay tax, despite the transaction occurring entirely outside of Oregon. Idaho contends the Department’s position is a generous interpretation of constitutional law and its protections for due process and interstate commerce.
Concerning Oregon law, ORS 317A.128 establishes the statutory sourcing regime for the Oregon CAT. ORS 317A.128(1)(b) and (c) state the sale of tangible personal property is sourced to Oregon to the extent the property is located or delivered to a purchaser in Oregon. The plain reading of the statute suggests that activity occurring outside the state, without any delivery to the purchaser, is not sourced to Oregon. Presumably, the Department relies primarily on its administrative rules to support its position. OAR 150-317-1030 (“Sourcing Commercial Activity to Oregon from Sales of Tangible Personal Property”) asserts an “ultimate destination” sourcing rule for out-of-state sellers. OAR 150-317-1030(2) says a sale occurs in Oregon “if the property is delivered to a purchaser within Oregon regardless of the f.o.b. point or other conditions of sale, whether transported by seller, **purchaser,** or common carrier” (emphasis added). The Department appears to rely heavily on the rule language deeming the purchaser’s transport of a good to Oregon as creating substantial taxable nexus.
Obviously, Idaho cannot pass a statute invalidating the constitutionality of another state’s law. However, it can refuse to aid in enforcing another state’s laws. In his comments during the March 2 hearing, Rep. Addis argued the measure authorizes the Idaho Attorney General and state agencies to disregard any liens or other enforcement mechanisms from Oregon for failure to comply with the Department’s notice of tax assessment.
Extraterritorial tax conflicts are increasingly common, especially with novel taxes. In the 2010s, Ohio’s business gross receipts tax, which Oregon relied significantly upon as a statutory framework, experienced litigation over its ultimate destination sourcing rule. In Greenscapes Home & Garden Prods., Inc. v. Testa, 2019-Ohio-384, a Georgia business without any locations in Ohio made sales to customers who arranged to transport goods from a retail store in Georgia. Upon appeal, the Ohio Court of Appeals affirmed a lower court ruling determining the sales of lawn and garden products destined to Ohio were sufficient to impose the tax. Notably, Ohio R.C. 5751.033(E) contains an ultimate destination provision, whereas Oregon’s statute omitted such language.
States challenging the tax authority of another state are less common than challenges by private entities; however, they are becoming more frequent as states adopt creative tax regimes. In 2019, Arizona filed a complaint to the U.S. Supreme Court challenging a California “doing business” minimum tax on businesses and individuals that do not conduct business in the state but hold passive investments. California resorted to aggressive tax enforcement tactics to compel compliance from out-of-state taxpayers, including liens and seizure orders requiring banks to transfer funds from an account holder to pay tax assessments. Ultimately, the Court declined to intervene in the dispute after the U.S. Solicitor General urged the Court to dismiss the case and allow aggrieved private entities to contest the matter through California’s judicial process.
Perhaps Idaho recognized Arizona’s struggle to contest another state’s interstate tax rules on its residents. In fact, during the March 2 hearing, Rep. Addis made clear that the measure’s aim is not to insert the state into the extraterritorial legal dispute but, rather, to provide businesses a tool to circumvent aggressive tax assessment and enforcement. Oregon could try to challenge the refusal to abet the enforcement of its tax laws, but that, too, could prove an uphill political and legal battle.
It is worth noting the Department’s ultimate destination sourcing position is not the only aggressive policy position the state has taken using its administrative powers. Although Oregon lawmakers prioritized corrective actions to the CAT in recent legislative sessions, much work remains for policymakers to provide clarity and certainty for tax administrators and payers. If not, perhaps clarity will eventually come through judicial review.