Electricity Not Tangible Property

Electricity not tangible property

August 11, 2016 | By Keith Martin in Washington, DC

Oregon cannot tax part of the income earned from sales of electricity and gas that pass through the state on the way to customers in California.

Companies are taxed in Oregon only on income that is earned in Oregon. Revenue from sales of “tangible personal property” is treated as earned in the place of delivery. Thus, if the customer is in Oregon, the sales income is earned in Oregon. Other sales are sourced to where most of the income-producing activity occurs.

BC Hydro, through a trading subsidiary called Powerex, sells electricity generated in Canada to wholesale customers in the United States. Some of the electricity is delivered to a delivery point on the Oregon utility grid, but most of that electricity is then wheeled over the grid to customers outside Oregon.

The state Supreme Court held in the case in March 2015 that electricity is not tangible personal property. Therefore, whether sales income can be taxed depends on where the electricity is considered delivered. It sent the case back to the Oregon Tax Court, where it had originated, to consider where the electricity is delivered. The Tax Court said that even though the electricity changed hands between two transmission systems in Oregon on the way to California, that is not delivery in Oregon but merely transfer of the electricity from one common carrier or shipper to another to continue the journey.

The case is Powerex Corporation v. Department of Revenue. The Oregon Tax Court released its decision on August 1.

Powerex also delivers natural gas to a hub in Oregon. The ultimate users of this gas are outside Oregon. The company conceded that gas is tangible personal property, but argued that the state should adopt an ultimate destination rule by treating the sale as occurring where the gas is ultimately used. Both the Tax Court and the state Supreme Court agreed.