Opinion ID: 2792367
Heading Depth: 1
Heading Rank: 1

Heading: natural gas

Text: Natural gas is transmitted through interstate and intrastate pipelines organized around regional “market centers” or “hubs.”4 The concept of a market center or hub (for our purposes, the terms are synonymous) emerged as a result of a 1992 Federal Energy Regulatory Commission order, which required that “interstate natural gas pipeline companies transform themselves from buyers and sellers of natural gas to [become] strictly gas transporters.” “Market centers and hubs evolved to provide new gas shippers with many of the physical capabilities and administrative support services formally handled by the interstate pipeline company as ‘bundled’ sales services.” Among other things, market centers and hubs provide “transportation between and interconnections with other pipelines, and the physical coverage of short-term receipt/delivery balancing needs.”5 In 2003, there were 37 market centers or hubs in the United States and Canada. Two of those hubs, Stanfield and Malin, were in Oregon. In 2003, Powerex sold natural gas to retailers in California through the hub in Malin. When Powerex filed its Oregon tax returns for the 2003 tax year, it treated those sales as sales “in this state” for the purpose of calculating the “sales factor”—i.e., for the purpose of calculating the percentage of Powerex’s total income that was attributable to Oregon. In 2006, Powerex filed a claim for a refund for the 2003 tax year. In its filing, Powerex explained 4 The following facts regarding the shipment of natural gas are taken from a stipulated exhibit. Neither side offered any testimony on that subject. 5 Depending on the market center or hub’s infrastructure, market centers or hubs can balance the supply of and demand for natural gas by, among other things, parking or loaning natural gas on a short-term basis, storing it on a longer term basis, and entering into other “short-term interruptible arrangement[s].” Cite as 357 Or 40 (2015) 45 that it had shipped the natural gas to the hub at Malin, Oregon “where title transferred to the purchaser.” Its refund claim stated that the gas then “entered into PG&E’s system for transport into California.”6 Before the Tax Court, the department argued that, because the contractual point of delivery was in Malin, Oregon, Powerex “delivered or shipped [the natural gas] to a purchaser    within this state.” Powerex responded that the department’s focus on the contractual point of delivery missed the mark. In Powerex’s view, Malin merely served as the point at which gas was transferred from one pipeline to another on its way to a purchaser in California. Powerex argued that, because it shipped the gas to a purchaser in California, it did not deliver or ship it to a purchaser within Oregon. The Tax Court agreed with Powerex. It found that the gas was being transmitted over pipelines that functioned as common carriers. It explained that both the majority of cases interpreting other states’ analogues to ORS 314.665(2) and the purpose of that rule supported the conclusion that “where delivery by a seller is to a common carrier for further shipment an ultimate destination approach is followed.” Because the ultimate destination in this case was California, the Tax Court concluded that Powerex’s natural gas sales were not sales “to a purchaser    within this state.” See ORS 314.665(2)(a). On appeal, the department does not dispute that the natural gas that Powerex sold was destined for California. It also does not question the Tax Court’s implicit finding that two pipelines connected at the “hub” in Malin so that the natural gas that Powerex delivered through one pipeline to Malin flowed from that pipeline into another pipeline on its way to the purchaser in California. The department argues, however, that the hub at Malin was critical for two reasons: (1) the natural gas contracts that Powerex entered into specified Malin as the “contractual point of delivery” and (2) they 6 The Tax Court found that the gas that Powerex sold was shipped or delivered to purchasers outside of Oregon. Powerex stated that the natural gas was shipped or delivered to purchasers in California, and we assume that California was the gas’s ultimate destination. 46 Powerex Corp. v. Dept. of Rev. also specified that title to the gas passed from Powerex to the purchaser at Malin. The department reasons that, given those two facts, we should conclude that the natural gas was “delivered or shipped to [the] purchaser” in Malin, Oregon, not in California. In considering the department’s argument, we look initially to the text, context, and history of ORS 314.665(2). See State v. Gaines, 346 Or 160, 171-72, 206 P3d 1042 (2009). We begin with the text of that statute, which provides, in part: “Sales of tangible personal property are in this state if: “(a) The property is delivered or shipped to a purchaser, other than the United States, within this state regardless of the f.o.b. point or other conditions of the sale[.]” ORS 314.665(2)(a).7 The text of subsection (2)(a) divides into two parts. The first part provides that a sale of tangible personal property is “in this state if [t]he property is delivered or shipped to a purchaser    within this state.” The second part provides that the determination where property is shipped or delivered to the purchaser should be made with- out regard to “the f.o.b. point or other conditions of the sale.” Textually, the first part of the statute asks a simple question: Where was the property shipped or delivered to the purchaser? See Arthur D. Lynn, Jr., The Uniform Division of Income for Tax Purposes Act, 19 Ohio St LJ 41, 50 (1958) (noting the “conceptual simplicity” of the Uniform Act formulation).8 In asking that question, ORS 314.665(2)(a) uses the passive voice. The question under that statute is not who shipped or delivered the property to the purchaser but where the property was shipped or delivered to the purchaser. 7 The subsection quoted above states the general rule. ORS 314.665(2) (b) states two exceptions to that rule. ORS 314.665(2)(b) addresses sales to the United States and sales to purchasers in states where the taxpayer is exempt from taxation. It provides that sales are within this state if the goods are shipped from an office, warehouse, or other place of storage in this state and either the purchaser is the United States Government or the taxpayer is not taxable in the state where the goods are shipped or delivered to the purchaser. 8 We refer to the Oregon statute as UDITPA. We refer to the uniform act on which Oregon based UDITPA as the Uniform Act. ORS 314.665(2)(a) tracks essentially verbatim the corresponding section of the Uniform Act. Cite as 357 Or 40 (2015) 47 The second part of the statute reinforces that conclusion. It provides that the determination of where property is shipped or delivered to the purchaser should be made “regardless of the f.o.b. point or other conditions of the sale.” We assume that the rule of ejusdem generis applies so that the phrase “other conditions of the sale” shares the same qualities as the specific term that precedes it, “the f.o.b. point.” See Baker v. City of Lakeside, 343 Or 70, 76, 164 P3d 259 (2007). That is, the phrase “other conditions of the sale” refers to those conditions of the sale that are similar to “the f.o.b. point.” See id. The primary conclusion that we draw, at this point, from the second part of the text is that it reinforces what the first part says. The question where tangible property was delivered or shipped to the purchaser should not turn on legal technicalities, such as the f.o.b. point; rather, the question calls for a more practical answer. In addition to the text of ORS 314.665(2)(a), we also consider its context. See Stevens v. Czerniak, 336 Or 392, 401, 84 P3d 140 (2004) (explaining that the context for interpreting a statute’s text includes the preexisting common law and the statutory framework within which the law was enacted). ORS 314.665 is modeled on a uniform law that the Commissioners on Uniform State Laws proposed in 1957 and that Oregon adopted in 1965. Compare Or Laws 1965, ch 152, § 17, with Uniform Act, § 16 (1957). In 1957 and also in 1965, the meaning of the phrase “the f.o.b. point” was wellestablished. See Samuel Williston, 2 The Law Governing the Sale of Goods §§ 280-280b (rev ed 1948); Laurence Vold, The Handbook of the Law of Sales § 33 (2d ed 1959). The initials f.o.b. stand for the words “free on board” and were originally used in connection with the shipment of goods by sea. Williston, 2 The Law of Sales § 280. “[T]he primary significance of the words was that the seller [wa]s bound to put the goods free of expense on board a vessel for transportation to the buyer.” Id. The same rule also applied when goods were shipped by rail or other forms of transportation, although questions could arise regarding the extent of the seller’s obligation. See id. Williston explained that, to avoid those questions, the parties could specify more precisely the point to which the seller was bound to deliver the goods. For 48 Powerex Corp. v. Dept. of Rev. example, “[w]here the contract is for a sale f.o.b., the place of destination, undoubtedly the seller contracts to get the goods to that place, and this involves getting cars in which to load the goods when transportation is to be by rail   .” Id. § 280a. Williston explained that two presumptions attach to the f.o.b. point. Id. § 280b. First, title to the goods passes at the f.o.b. point. Id. Second, “the place where the goods are to be delivered f.o.b. is the place of delivery to the buyer.” Id. That established definition of “the f.o.b. point” informs the meaning of the first part of the statute, as an example will illustrate. Suppose that a seller agrees to ship goods by rail from Vancouver, Washington, to a purchaser in Los Angeles, California. Those goods could be shipped f.o.b. Vancouver, f.o.b. Portland, or even f.o.b. Los Angeles. See id. at § 280a (explaining that even “though the expressions f.o.b. the point of destination or some intermediate point are less common [than f.o.b. the point of shipment], such bargains are not infrequent”). Whichever f.o.b. point the agreement specified would establish, as a condition of the sale, the place where the seller was responsible for delivering the goods, the place where title passed to the buyer, and the place of delivery to the buyer. See id. at §§ 280a, 280b. However, the text of ORS 314.665(2)(a), read in context, makes clear that, for the purposes of determining the “sales factor,” the place where property is shipped or delivered to the purchaser is determined without regard to “the f.o.b. point or other conditions of the sale.” In the example set out above, the place where the goods were shipped to the purchaser would be Los Angeles. That is true even if the goods were shipped f.o.b. Portland and even if, as a result, title passed to the buyer in Portland and the contractual place of delivery was Portland. The history of the rule leads to the same conclusion. Before the Commissioners on Uniform State Laws adopted the Uniform Act in 1957, sales of tangible property by multistate businesses were allocated among states based on the property’s (1) destination; (2) origin; (3) the location of the sales office; (4) sales activity; or (5) place of acceptance by the purchaser. State Taxation of Interstate Commerce: Report of the Special Subcommittee on State Taxation of Interstate Cite as 357 Or 40 (2015) 49 Commerce, House Committee on the Judiciary, H R Rep No 952, 89th Cong, 1st Sess, 181-83 (1965); see Jerome R. Hellerstein, Walter Hellerstein, and John A. Swain, 1 State Taxation ¶ 9.18(1) (3d ed 2000 & Supp 2014). Each of those theories for allocating sales of tangible personal property had its disadvantages. However, one theory—allocating sales to the state or country where title passed—was probably the least favored: “Apportionment of sales to the state or country where title passes is hit or miss. The effect of the apportionment will depend wholly upon legal conclusions based upon construction of contracts, terms of waybills, customs in the business, evidence as to the intention of the parties, and other considerations having little or no relation to the problem of determining where income is earned.” George T. Altman and Frank M. Keesling, Allocation of Income in State Taxation 127 (2d ed 1950). See also Frank M. Keesling and John S. Warren, California’s Uniform Division of Income for Tax Purposes Act Part I, 15 UCLA L Rev 156, 161 (1967) (“Most states consider the place where title passes irrelevant in determining the source of income.”). The comment to section 16 of the Uniform Act, on which Oregon modeled ORS 314.665, suggests, as do the text and context of that section, that the drafters of the Uniform Act did not intend to allocate sales based on where title passed; rather, they intended to adopt the ultimatedestination theory of allocating sales. We note that the comment does not explain how the general rule—that sales are allocated to the place where tangible personal property is shipped or delivered to the purchaser—works. Instead, the comment identifies two variations on that general rule and explains how the Uniform Act would allocate sales in those situations. The comment also discusses an exception to the general rule and the reason for the exception. In doing so, the comment sheds light, albeit indirectly, on the meaning of the general rule. Regarding the first variation, the comment states: “The phrase ‘delivered or shipped to a purchaser’ in this state includes shipments, at the designation of the purchaser, to a 50 Powerex Corp. v. Dept. of Rev. person in this state such as designating, while a shipment is en route, the ultimate recipient.” Uniform Act, § 16, comment. Although its syntax leaves something to be desired, that part of the comment recognizes that tangible personal property will be shipped or delivered to a purchaser within this state when the purchaser designates a person in this state as the “ultimate recipient” of the property. The comment thus clarifies that, in determining the place where tangible personal property is shipped or delivered to the pur- chaser, the identity of the “ultimate recipient” can matter. The comment also discusses why the Uniform Act excepts shipments to the United States government from the general rule. It explains: “Sales to the United States are treated separately. It is thought that this is justified because sales to the United States are not necessarily attributable to a market existing in the state to which the goods are originally shipped. This different treatment may also be justified because, if the goods are defense or war materials, it may be impossible to determine whether the goods ever came to rest in the state due to use of coded delivery instructions.” Uniform Act, § 16, comment. As the comment notes, one reason for excepting goods sold to the United States from the general rule is that, for some categories of goods, “it may be impossible to determine whether the goods [sold to the United States] ever came to rest in the state” to which they were delivered or shipped. Implicit in that explanation is that ordinarily what matters in determining where property was shipped or delivered to the purchaser is where the property “came to rest.”9 9 The other reason the comment notes for excepting sales to the United States points in the same direction. By providing that sales are allocated to the state where the goods are shipped or delivered to the purchaser, the Uniform Act recognizes the contribution that “the state of destination, which provides the market, [makes] to the generation of income.” Lynn, The Uniform Division of Income for Tax Purposes Act, 19 Ohio St LJ at 51; see also Keesling and Warren, California’s Uniform Division of Income for Tax Purposes Act Part I, 15 UCLA L Rev at 161 (same). As the comment explains, however, sales of goods to the United States “are not necessarily attributable to the market existing in the state to which the goods are originally shipped.” Uniform Act, § 16, comment. As a consequence, sales to the United States are not attributed to the state where the goods are shipped or delivered but instead are allocated to the state from which the goods are shipped. See ORS 314.665(2)(b) (so providing). Cite as 357 Or 40 (2015) 51 Given the text, context, and history of the Uniform Act, most legal authorities have acknowledged that section 16(a) of the Uniform Act is best read as embodying an ultimate-destination theory of sales apportionment. Professors Keesling and Warren understood the Uniform Act to adopt the destination theory. “The Act provides that sales of tangible personal property should be apportioned to the state or country of destination, provided the taxpayer is subject to tax in such state or country.” Frank M. Keesling and John S. Warren, California’s Uniform Division of Income for Tax Purposes Act Part II, 15 UCLA L Rev 655, 671 (1968); see also Lynn, The Uniform Division of Income for Tax Purposes Act, 19 Ohio St LJ at 50 (describing Section 16(a) of [the Uniform Act] as “assign[ing] sales to the sales factor numerator of the state of delivery,” that is, “customer location”) (emphasis added). So, too, has almost every jurisdiction that has interpreted the text. See, e.g., Olympia Brewing Co. v. Comm’r of Revenue, 326 NW2d 642, 648 (Minn 1982); McDonnell Douglas Corp. v. Franchise Tax Bd., 26 Cal App 4th 1789, 1794, 33 Cal Rptr 2d 129 (1994) (collecting cases); Hellerstein et al., 1 State Taxation § 9.18[1][a] (“[M]ost courts that have considered the issue have adopted the ultimate-destination rule rather than the place-ofdelivery rule.”). We recognize that asking where property was shipped or delivered to the purchaser does not always lead to a clear answer. One issue has arisen when a seller ships goods to a loading dock in one state where the purchaser picks them up and then transports them to their “ultimate destination” in another state. See Department of Revenue v. Parker Banana, 391 So 2d 762 (Fla Dist Ct App 1980); Hellerstein et al., 1 State Taxation ¶ 9.18[1][a] (discussing issue). The question in that situation is whether the goods were shipped to the purchaser in the first state or the second. In analyzing that question, the seminal case started from the proposition that, if the seller had shipped the goods to the loading dock in the first state and a common carrier had picked the goods up and delivered them to the purchaser in the second state, then the goods would have been “delivered or shipped to [the] purchaser” in the second state for the 52 Powerex Corp. v. Dept. of Rev. purposes of UDITPA. See Parker Banana, 391 So 2d at 763. The court held that the result should be no different if the purchaser picked up the goods at the loading dock in the first state and transported them itself to their ultimate destination in the second state rather than having a common carrier do so. See id. at 764. Agreement is not universal, however. See Hellerstein et al., 1 State Taxation ¶ 9.18[1][a] (recognizing general agreement with Parker Banana but noting that asking where the goods were shipped rather than ultimately received would be a more administratively convenient test). Although the parties urge us to take a position on that issue, the Tax Court’s opinion obviates the need to do so. As we read the Tax Court’s opinion, it found that Malin was simply the point at which the natural gas that Powerex sold went from one pipeline to another pipeline on its way to its ultimate destination outside of Oregon. More importantly, the Tax Court analogized the role that the pipelines played to that of common carriers. It explained that “it appears that the gas in question is being transmitted over interstate pipelines that are, or function as, common carriers.” Given the Tax Court’s findings, we conclude that this case does not require us to decide what the rule should be when the purchaser takes physical possession of the goods at a loading dock in one state and transports them itself to their ultimate destination in another state. Rather, this is a case in which the natural gas merely went from one “common carrier” to another at Malin on the gas’s way to the purchaser in California. The department identifies no case in which any court has held that such a transfer constitutes a “delivery” to the purchaser within the meaning of UDITPA or its analogues in other states. The department argues, however, that we should reach a different conclusion for three reasons. First, as noted above, the department argues that “the contractual points of delivery for Powerex’s natural gas transactions were in Oregon.” It also notes that “title to the [natural gas] passe[d] from Powerex to its purchasers at the delivery point specified in their contracts”—namely, in Malin. The department concludes from those facts that Powerex delivered the natu- ral gas to the purchasers in Malin, not in California. Cite as 357 Or 40 (2015) 53 The department never explains what the phrase “contractual point of delivery” means.10 The record, however, contains two standard form contracts that Powerex incorporated by reference in selling natural gas.11 One form sets out the general terms and conditions for “Base Contracts for Sale and Purchase of Natural Gas.” The other sets out general terms and conditions for a “Base Contract for Short-Term Sale and Purchase of Natural Gas.”12 Section One of the Base Contract for Sale and Purchase of Natural Gas defines “Delivery Point(s)” as “mean[ing] such point(s) as are agreed to by the parties in a transaction.” Section Four provides that “[s]eller shall have the sole responsibility for transporting the Gas to the Delivery Point(s). Buyer shall have the sole responsibility for transporting the Gas from the Delivery Point(s).” Section Eight of the agreement provides: “Unless otherwise specified, title to the Gas shall pass from Seller to Buyer at the Delivery Point(s). Seller shall have responsibility for and assume any liability with respect to the Gas prior to its delivery to Buyer at the specified Delivery Point(s). Buyer shall have responsibility for and any liability with respect to said Gas after its delivery to Buyer at the Delivery Point(s).” It appears from those contract provisions that the “contractual point of delivery,” on which the department relies, serves the same function as an f.o.b. point. The contractual point of delivery specifies the point to which Powerex was responsible for delivering the natural gas, the point at which title to the gas passed from Powerex to the purchaser, and the point at which responsibility for any loss passed from Powerex to the purchaser. 10 The department cites one exhibit to demonstrate that Powerex sold natural gas with contractual points of delivery in Oregon. That exhibit is a response to the department’s request for production of natural gas sales in the 2003 tax year “with a contractual delivery point within Oregon.” The exhibit consists of a list of gas sales that Powerex compiled in response to the department’s request for production. However, neither the request nor the response contains any explanation of what “contractual point of delivery” means. 11 In selling natural gas, Powerex entered into confirmation agreements with the purchasers, which incorporated by reference the terms of the standard contracts. 12 The terms in the two standard form contracts are similar but not identical. 54 Powerex Corp. v. Dept. of Rev. The department identifies no evidence that would suggest some different meaning for those contractual terms, and we conclude that the “contractual points of delivery” on which the department bases its argument are “other conditions of the sale” that are effectively the same as “the f.o.b. point.” Put differently, the department’s argument is based on “other conditions of the sale” that ORS 314.665(2) (a) directs us to disregard in deciding where the natural gas was delivered or shipped to the purchaser. The conditions of sale on which the department relies provide no reason to reject the Tax Court’s conclusion that the natural gas merely passed from one pipeline to another at Malin on its way to purchasers in other states. The department also relies on two rules that it promulgated to implement ORS 314.665(2)(a). The first rule was in effect when the transactions at issue here occurred. The second rule did not become effective until 2011, several years after the 2003 gas sales at issue here. The first rule provides: “Property is delivered or shipped to a purchaser within this state if the shipment terminates in this state, even though the property is subsequently transferred by the purchaser to another state.” OAR 150-314.665(2)-(A)(4). That rule includes the following example to illustrate its application: “The taxpayer makes a sale to a purchaser who maintains a central warehouse in Oregon at which all merchandise purchases are received. The purchaser reships the goods to its branch stores in other states for sale. All of taxpayer’s products shipped to the purchaser’s warehouse in Oregon [are] property ‘delivered or shipped to a purchaser within this state.’ ” Id. We defer to an agency’s interpretation of its own rule “as long as its interpretation is a plausible one and not inconsistent with the rule, its context, or any other source of law.” Crystal Communications, 353 Or at 311. In our view, the difficulty with the department’s reliance on OAR 150314.665(2)-(A)(4) lies in its application to the facts of this Cite as 357 Or 40 (2015) 55 case. Given the Tax Court’s decision, it is difficult to see how the department can say that Powerex’s shipments of natural gas “terminate[d]” in Malin. Rather, as the Tax Court concluded, all that occurred at Malin was that the natural gas went from one interstate pipeline to another on its way to purchasers in other states. The department points to nothing in the record that contradicts the Tax Court’s conclusion or that suggests that this transaction fell within the example that illustrates how OAR 150-314.665(2)-(A)(4) applies. The department relies on a second rule, which pro- vides that “[a] sale of tangible personal property,    which is delivered or shipped to a purchaser with a contracted point of delivery in Oregon is a sale in this state.” OAR 150314.665(2)-(C)(1). The phrase “contracted point of delivery” can have more than one meaning. It can mean (1) the ultimate destination to which the goods are shipped or delivered to the purchaser by either the seller or by one or more common carriers; (2) the point at which the purchaser takes possession of the goods but not the goods’ ultimate destination, as in the loading dock example noted above; or (3) the f.o.b. point or other conditions of the sale. As explained above, in applying OAR 150-314.665(2)-(C)(1) to the gas sales at issue here, the department equates the phrase in the rule “contracted point of delivery” with the f.o.b. point or other conditions of the sale. The rule, applied to these gas sales, is squarely inconsistent with the statute. That is, the rule, as the department applies it to these gas sales, gives dispositive effect to “conditions of the sale” that ORS 314.665(2)(a) directs us to disregard in deciding where tangible personal property was shipped or delivered to the purchaser. We need not decide whether the department’s rule validly can be applied to the second situation identified above (the loading dock example). As the Tax Court concluded, Malin simply served as a transfer point from one “common carrier” to another on the gas’s way to the purchaser in another state.13 The Tax Court 13 The Tax Court ruled that OAR 150-314.665(2)-(C)(1) did not apply to the natural gas sales at issue here because the department adopted that rule after the period in which Powerex’s return for the 2003 tax year was “open for examination.” See OAR 150-305.100-(B) (“Administrative rules adopted by the department, unless specified otherwise by statute or by rule, shall be applicable for 56 Powerex Corp. v. Dept. of Rev. correctly held that Powerex’s natural gas sales were not “in this state.” See ORS 314.665(1).