Oregon
Rule Rule 150-314-0435
Sales Factor; Sales Other Than Sales of Tangible Personal Property in This State


(1) This rule adopts a model regulation recommended by the Multistate Tax Commission to promote uniform treatment of this item by the states. This rule applies to tax years beginning on or after January 1, 2018. In general, ORS 314.665 (Determination of sales factor)(4) provides for the inclusion of gross receipts arising from transactions other than sales of tangible personal property in the numerator of the sales factor.
(a) Market-Based Sourcing. Receipts, other than receipts described in ORS 314.665 (Determination of sales factor)(2) (from sales of tangible personal property) are in Oregon within the meaning of ORS 314.665 (Determination of sales factor)(4) and this rule if and to the extent that the taxpayer’s market for the sales is in Oregon. In general, the provisions in this section establish uniform rules for (1) determining whether and to what extent the market for a sale other than the sale of tangible personal property is in Oregon, (2) reasonably approximating the state or states of assignment where the state or states cannot be determined, and (3) excluding receipts from the sale of intangible property from the numerator and denominator of the sales factor pursuant to Oregon Laws 2017, chapter 549, section 2(3)(c).
(b) Outline of Topics.
(A) General Rules
(i) Market-Based Sourcing
(ii) Outline of Topics
(iii) Definitions
(iv) General Principles of Application; Contemporaneous Records
(v) Rules of Reasonable Approximation
(vi) Rules with respect to Exclusion of Receipts from the Sales Factor
(B) Sale, Rental, Lease, or License of Real Property
(C) Rental, Lease, or License of Tangible Personal Property
(D) Sale of a Service
(i) General Rule
(ii) In-Person Services
(iii) Services Delivered to the Customer or on Behalf of the Customer, or Delivered Electronically Through the Customer
(iv) Professional Services
(E) License or Lease of Intangible Property
(i) General Rules
(ii) License of a Marketing Intangible
(iii) License of a Production Intangible
(iv) License of a Mixed Intangible
(v) License of Intangible Property where Substance of the Transaction Resembles a Sale of Goods or Services
(F) Sale of Intangible Property: Assignment of Receipts
(G) Special Rules
(i) Software Transactions
(ii) Sales or Licenses of Digital Goods and Services
(c) Definitions.
(A) “Billing address” means the location indicated in the books and records of the taxpayer as the primary mailing address relating to a customer’s account as of the time of the transaction as kept in good faith in the normal course of business and not for tax avoidance purposes.
(B) “Business customer” means a customer that is a business operating in any form, including a sole proprietorship. Sales to a non-profit organization, to a trust, to the U.S. Government, to a foreign, state, or local government, or to an agency or instrumentality of that government are treated as sales to a business customer and must be assigned consistent with the rules for those sales.
(C) “Code” means the Internal Revenue Code as currently adopted by ORS 314.011 (Definitions).
(D) “Individual customer” means a customer that is not a business customer.
(E) “Intangible property” generally means property that is not physical or whose representation by physical means is merely incidental and includes, without limitation, copyrights; patents; trademarks; trade names; brand names; franchises; licenses; trade secrets; trade dress; information; know-how; methods; programs; procedures; systems; formulae; processes; technical data; designs; licenses; literary, musical, or artistic compositions; information; ideas; contract rights including broadcast rights; agreements not to compete; goodwill and going concern value; securities; and, except as otherwise provided in this rule, computer software.
(F) “Place of order” means the physical location from which a customer places an order for a sale other than a sale of tangible personal property from a taxpayer, resulting in a contract with the taxpayer.
(G) “Population” means the most recent population data maintained by the U.S. Census Bureau for the year in question as of the close of the taxable period.
(H) “Related party” means:
(i) A stockholder who is an individual, or a member of the stockholder’s family set forth in section 318 of the Code if the stockholder and the members of the stockholder’s family own, directly, indirectly, beneficially, or constructively, in the aggregate, at least 50 percent of the value of the taxpayer’s outstanding stock;
(ii) A stockholder, or a stockholder’s partnership, limited liability company, estate, trust, or corporation, if the stockholder and the stockholder’s partnerships, limited liability companies, estates, trusts, and corporations own directly, indirectly, beneficially or constructively, in the aggregate, at least 50 percent of the value of the taxpayer’s outstanding stock; or
(iii) A corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of the Code if the taxpayer owns, directly, indirectly, beneficially, or constructively, at least 50 percent of the value of the corporation’s outstanding stock. The attribution rules of the Code apply for purposes of determining whether the ownership requirements of this definition have been met.
(iv) The provisions of this rule regarding sales between related parties do not apply to sales that are treated as intercompany transactions between affiliated corporations filing a consolidated Oregon return eliminated as provided in section (3) of OAR 150-314-0630.
(I) “State where a contract of sale is principally managed by the customer” means the primary location at which an employee or other representative of a customer serves as the primary contact person for the taxpayer with respect to the day-to-day execution and performance of a contract entered into by the taxpayer with the customer.
(d) General Principles of Application; Contemporaneous Records. In order to satisfy the requirements of this rule, a taxpayer’s assignment of receipts other than receipts from sales of tangible personal property must be consistent with the following principles:
(A) This rule provides various assignment rules that apply sequentially in a hierarchy. For each sale to which a hierarchical rule applies, a taxpayer must make a reasonable effort to apply the primary rule applicable to the sale before seeking to apply the next rule in the hierarchy (and must continue to do so with each succeeding rule in the hierarchy, where applicable). For example, in some cases, the applicable rule first requires a taxpayer to determine the state or states of assignment, and if the taxpayer cannot do so, the rule requires the taxpayer to reasonably approximate the state or states. In these cases, the taxpayer must attempt to determine the state or states of assignment (i.e., apply the primary rule in the hierarchy) in good faith and with reasonable effort before it may reasonably approximate the state or states.
(B) A taxpayer’s method of assigning its receipts, including the use of a method of approximation, where applicable, must reflect an attempt to obtain the most accurate assignment of receipts consistent with the regulatory standards set forth in this rule, rather than for tax avoidance purposes. A method of assignment that is reasonable for one taxpayer may not necessarily be reasonable for another taxpayer, depending upon the applicable facts.
(e) Rules of Reasonable Approximation.
(A) In General. In general, this rule establishes uniform rules for determining whether and to what extent the market for a sale other than the sale of tangible personal property is in Oregon. This rule also sets forth rules of reasonable approximation, which apply if the state or states of assignment cannot be determined. In some instances, the reasonable approximation must be made in accordance with specific rules of approximation prescribed in this rule. In other cases, the applicable rule permits a taxpayer to reasonably approximate the state or states of assignment using a method that reflects an effort to approximate the results that would be obtained under the applicable rules or standards set forth in this rule.
(B) Approximation Based Upon Known Sales. In an instance where, applying the applicable rules set forth in section (4) of this rule (Sale of a Service), a taxpayer can ascertain the state or states of assignment of a substantial portion of its receipts from sales of substantially similar services (“assigned receipts”), but not all of those sales, and the taxpayer reasonably believes, based on all available information, that the geographic distribution of some or all of the remainder of those sales generally tracks that of the assigned receipts, it must include receipts from those sales which it believes tracks the geographic distribution of the assigned receipts in its sales factor in the same proportion as its assigned receipts. This rule also applies in the context of licenses and sales of intangible property where the substance of the transaction resembles a sale of goods or services. See sections (5)(e) and (6)(c) of this rule.
(C) Related-Party Transactions – Information Imputed from Customer to Taxpayer. Where a taxpayer has receipts subject to this rule from transactions with a related-party customer, information that the customer has that is relevant to the sourcing of receipts from these transactions is imputed to the taxpayer.
(f) Rules with Respect to Exclusion of Receipts from the Sales Factor
(A) The sales factor only includes those amounts defined as sales under ORS 314.610 (Definitions for ORS 314.605 to 314.675)(7) and applicable rules.
(B) Certain receipts arising from the sale of intangibles are excluded from the numerator and denominator of the sales factor pursuant to Oregon Laws 2017, chapter 549, section 2(3)(c). See section (6)(d) of this rule.
(C) Receipts of a taxpayer from hedging transactions, or from holding cash or securities, or from the maturity, redemption, sale, exchange, loan, or other disposition of cash or securities, must be excluded pursuant to ORS 314.610 (Definitions for ORS 314.605 to 314.675)(7).
(2) Sale, Rental, Lease, or License of Real Property. In the case of a sale, rental, lease, or license of real property, the receipts from the sale are in Oregon if and to the extent that the property is in Oregon.
(3) Rental, Lease, or License of Tangible Personal Property. In the case of a rental, lease, or license of tangible personal property, the receipts from the sale are in Oregon if and to the extent that the property is in Oregon. If property is mobile property that is located both within and without Oregon during the period of the lease or other contract, the receipts assigned to Oregon are the receipts from the contract period multiplied by the fraction computed under OAR 150-314-0392 (Property Factor; Property Used for the Production of Apportionable Income) (as adjusted when necessary to reflect differences between usage during the contract period and usage during the taxable year).
(4) Sale of a Service.
(a) General Rule. The receipts from a sale of a service are in Oregon if and to the extent that the service is delivered to a location in Oregon. In general, the term “delivered to a location” refers to the location of the taxpayer’s market for the service, which may not be the location of the taxpayer’s employees or property. The rules to determine the location of the delivery of a service in the context of several specific types of service transactions are set forth at sections (4)(b)-(d) of this rule.
(b) In-Person Services.
(A) In General. Except as otherwise provided in section (4)(b) of this rule, in-person services are services that are physically provided in person by the taxpayer, where the customer or the customer’s real or tangible property upon which the services are performed is in the same location as the service provider at the time the services are performed. This rule includes situations where the services are provided on behalf of the taxpayer by a third-party contractor. Examples of in-person services include, without limitation, warranty and repair services; cleaning services; plumbing services; carpentry; construction contractor services; pest control; landscape services; medical and dental services, including medical testing, x-rays, and mental health care and treatment; child care; hair cutting and salon services; live entertainment and athletic performances; and in-person training or lessons. In-person services include services within the description above that are performed at (1) a location that is owned or operated by the service provider or (2) a location of the customer, including the location of the customer’s real or tangible personal property. Various professional services, including legal, accounting, financial and consulting services, and other similar services as described in section (4)(d) of this rule, although they may involve some amount of in-person contact, are not treated as in-person services within the meaning of section (4)(b) of this rule.
(B) Assignment of Receipts.
(i) Rule of Determination. Except as otherwise provided in section (4)(b)(B) of this rule, if the service provided by the taxpayer is an in-person service, the service is delivered to the location where the service is received. Therefore, the receipts from a sale are in Oregon if and to the extent the customer receives the in-person service in Oregon. In assigning its receipts from sales of in-person services, a taxpayer must first attempt to determine the location where a service is received, as follows:
(I) If the service is performed with respect to the body of an individual customer in Oregon (e.g. hair cutting or x-ray services) or in the physical presence of the customer in Oregon (e.g. live entertainment or athletic performances), the service is received in Oregon.
(II) If the service is performed with respect to the customer’s real estate in Oregon or if the service is performed with respect to the customer’s tangible personal property at the customer’s residence or in the customer’s possession in Oregon, the service is received in Oregon.
(III) If the service is performed with respect to the customer’s tangible personal property and the tangible personal property is to be shipped or delivered to the customer, whether the service is performed within or outside Oregon, the service is received in Oregon if the property is shipped or delivered to the customer in Oregon.
(C) Rule of Reasonable Approximation. In an instance in which the state or states where a service is actually received cannot be determined, the taxpayer must reasonably approximate such state or states.
(D) Examples. Note that for purposes of the examples it is irrelevant whether the services are performed by an employee of the taxpayer or by an independent contractor acting on the taxpayer’s behalf.
(c) Services Delivered to the Customer or on Behalf of the Customer, or Delivered Electronically Through the Customer.
(A) In General. If the service provided by the taxpayer is not an in-person service within the meaning of section (4)(b) of this rule or a professional service within the meaning of section (4)(d) of this rule, and the service is delivered to or on behalf of the customer, or delivered electronically through the customer, the receipts from a sale are in Oregon if and to the extent that the service is delivered in Oregon. For purposes of section (4)(c) of this rule, a service that is delivered “to” a customer is a service in which the customer and not a third party is the recipient of the service. A service that is delivered “on behalf of” a customer is one in which a customer contracts for a service but one or more third parties, rather than the customer, is the recipient of the service, such as fulfillment services, or the direct or indirect delivery of advertising to the customer’s intended audience (see section (4)(c)(B)(i) of this rule and Example 4 under section (4)(c)(B)(i)(III) of this rule). A service can be delivered to or on behalf of a customer by physical means or through electronic transmission. A service that is delivered electronically “through” a customer is a service that is delivered electronically to a customer for purposes of resale and subsequent electronic delivery in substantially identical form to an end user or other third-party recipient.
(B) Assignment of Receipts. The assignment of receipts to a state or states in the instance of a sale of a service that is delivered to the customer or on behalf of the customer, or delivered electronically through the customer, depends upon the method of delivery of the service and the nature of the customer. Separate rules of assignment apply to services delivered by physical means and services delivered by electronic transmission. (For purposes of section (4)(c) of this rule, a service delivered by an electronic transmission is not a delivery by a physical means). If a rule of assignment set forth in section (4)(c) of this rule depends on whether the customer is an individual or a business customer, and the taxpayer acting in good faith cannot reasonably determine whether the customer is an individual or business customer, the taxpayer must treat the customer as a business customer.
(i) Delivery to or on Behalf of a Customer by Physical Means Whether to an Individual or Business Customer. Services delivered to a customer or on behalf of a customer through a physical means include, for example, product delivery services where property is delivered to the customer or to a third party on behalf of the customer; the delivery of brochures, fliers, or other direct mail services; the delivery of advertising or advertising-related services to the customer’s intended audience in the form of a physical medium; and the sale of custom software (e.g., where software is developed for a specific customer in a case where the transaction is properly treated as a service transaction for purposes of corporate taxation) where the taxpayer installs the custom software at the customer’s site. The rules in section (4)(c)(B)(i) of this rule apply whether the taxpayer’s customer is an individual customer or a business customer.
(I) Rule of Determination. In assigning the receipts from a sale of a service delivered to a customer or on behalf of a customer through a physical means, a taxpayer must first attempt to determine the state or states where the service is delivered. If the taxpayer is able to determine the state or states where the service is delivered, it must assign the receipts to that state or states.
(II) Rule of Reasonable Approximation. If the taxpayer cannot determine the state or states where the service is actually delivered, it must reasonably approximate the state or states.
(III) Examples:
(ii) Delivery to a Customer by Electronic Transmission. Services delivered by electronic transmission include, without limitation, services that are transmitted through the means of wire, lines, cable, fiber optics, electronic signals, satellite transmission, audio or radio waves, or other similar means, whether or not the service provider owns, leases, or otherwise controls the transmission equipment. In the case of the delivery of a service by electronic transmission to a customer, the following rules apply.
(I) Services Delivered By Electronic Transmission to an Individual Customer.
(I-a) Rule of Determination. In the case of the delivery of a service to an individual customer by electronic transmission, the service is delivered in Oregon if and to the extent that the taxpayer’s customer receives the service in Oregon. If the taxpayer can determine the state or states where the service is received, it must assign the receipts from that sale to that state or states.
(I-b) Rules of Reasonable Approximation. If the taxpayer cannot determine the state or states where the customer actually receives the service, but has sufficient information regarding the place of receipt from which it can reasonably approximate the state or states where the service is received, it must reasonably approximate the state or states. If a taxpayer does not have sufficient information from which it can determine or reasonably approximate the state or states in which the service is received, it must reasonably approximate the state or states using the customer’s billing address.
(II) Services Delivered By Electronic Transmission to a Business Customer.
(II-a) Rule of Determination. In the case of the delivery of a service to a business customer by electronic transmission, the service is delivered in Oregon if and to the extent that the taxpayer’s customer receives the service in Oregon. If the taxpayer can determine the state or states where the service is received, it must assign the receipts from that sale to the state or states. For purposes of section (4)(c)(B)(ii)(II) of this rule, it is intended that the state or states where the service is received reflect the location at which the service is directly used by the employees or designees of the customer.
(II-b) Rule of Reasonable Approximation. If the taxpayer cannot determine the state or states where the customer actually receives the service, but has sufficient information regarding the place of receipt from which it can reasonably approximate the state or states where the service is received, it must reasonably approximate the state or states.
(II-c) Secondary Rule of Reasonable Approximation. In the case of the delivery of a service to a business customer by electronic transmission where a taxpayer does not have sufficient information from which it can determine or reasonably approximate the state or states in which the service is received, the taxpayer must reasonably approximate the state or states as set forth in this rule. In these cases, unless the taxpayer can apply the safe harbor set forth in section (4)(c)(B)(ii)(II)(II-d) of this rule, the taxpayer must reasonably approximate the state or states in which the service is received as follows: first, by assigning the receipts from the sale to the state where the contract of sale is principally managed by the customer; second, if the state where the customer principally manages the contract is not reasonably determinable, by assigning the receipts from the sale to the customer’s place of order; and third, if the customer’s place of order is not reasonably determinable, by assigning the receipts from the sale using the customer’s billing address; provided, however, if the taxpayer derives more than five percent of its receipts from sales of services from any single customer, the taxpayer is required to identify the state in which the contract of sale is principally managed by that customer.
(II-d) Safe Harbor. In the case of the delivery of a service to a business customer by electronic transmission, a taxpayer may not be able to determine, or reasonably approximate under section (4)(c)(B)(ii)(II)(II-b) of this rule, the state or states in which the service is received. In these cases, the taxpayer may, in lieu of the rule stated at section (4)(c)(B)(ii)(II)(II-c) of this rule apply the safe harbor stated in this subsection. Under this safe harbor, a taxpayer may assign its receipts from sales to a particular customer based upon the customer’s billing address in a taxable year in which the taxpayer (1) engages in substantially similar service transactions with more than 250 customers, whether business or individual, and (2) does not derive more than five percent of its receipts from sales of all services from that customer. This safe harbor applies only for purposes of services delivered by electronic transmission to a business customer, and not otherwise.
(II-e) Related-Party Transactions. In the case of a sale of a service by electronic transmission to a business customer that is a related party, the taxpayer may not use the secondary rule of reasonable approximation in section (4)(c)(B)(ii)(II)(II-c) of this rule but may use the rule of reasonable approximation in section (4)(c)(B)(ii)(II)(II-b) of this rule, and the safe harbor in section (4)(c)(B)(ii)(II)(II-d) of this rule, provided that the department may aggregate sales to related parties in determining whether the sales exceed five percent of receipts from sales of all services under that safe harbor provision if necessary or appropriate to prevent distortion.
(III) Examples: In these examples, unless otherwise stated, assume that the taxpayer is not related to the customer to which the service is delivered. Also, assume if relevant, unless otherwise stated, that the safe harbor set forth at section (4)(c)(B)(ii)(II)(II-d) of this rule does not apply.
(iii) Services Delivered Electronically Through or on Behalf of an Individual or Business Customer. A service delivered electronically “on behalf of” the customer is one in which a customer contracts for a service to be delivered electronically but one or more third parties, rather than the customer, is the recipient of the service, such as the direct or indirect delivery of advertising on behalf of a customer to the customer’s intended audience. A service delivered electronically “through” a customer to third-party recipients is a service that is delivered electronically to a customer for purposes of resale and subsequent electronic delivery in substantially identical form to end users or other third-party recipients.
(I) Rule of Determination. In the case of the delivery of a service by electronic transmission, where the service is delivered electronically to end users or other third-party recipients through or on behalf of the customer, the service is delivered in Oregon if and to the extent that the end users or other third-party recipients are in Oregon. For example, in the case of the direct or indirect delivery of advertising on behalf of a customer to the customer’s intended audience by electronic means, the service is delivered in Oregon to the extent that the audience for the advertising is in Oregon. In the case of the delivery of a service to a customer that acts as an intermediary in reselling the service in substantially identical form to third-party recipients, the service is delivered in Oregon to the extent that the end users or other third-party recipients receive the services in Oregon. The rules in this subsection apply whether the taxpayer’s customer is an individual customer or a business customer and whether the end users or other third-party recipients to which the services are delivered through or on behalf of the customer are individuals or businesses.
(II) Rule of Reasonable Approximation. If the taxpayer cannot determine the state or states where the services are actually delivered to the end users or other third-party recipients either through or on behalf of the customer, it must reasonably approximate the state or states.
(III) Select Secondary Rules of Reasonable Approximation.
(III-a) If a taxpayer’s service is the direct or indirect electronic delivery of advertising on behalf of its customer to the customer’s intended audience, and if the taxpayer lacks sufficient information regarding the location of the audience from which it can determine or reasonably approximate that location, the taxpayer must reasonably approximate the audience in a state for the advertising using the following secondary rules of reasonable approximation. If a taxpayer is delivering advertising directly or indirectly to a known list of subscribers, the taxpayer must reasonably approximate the audience for advertising in a state using a percentage that reflects the ratio of the state’s subscribers in the specific geographic area in which the advertising is delivered relative to the total subscribers in that area. For a taxpayer with less information about its audience, the taxpayer must reasonably approximate the audience in a state using the percentage that reflects the ratio of the state’s population in the specific geographic area in which the advertising is delivered relative to the total population in that area.
(III-b) If a taxpayer’s service is the delivery of a service to a customer that then acts as the taxpayer’s intermediary in reselling that service to end users or other third-party recipients, and if the taxpayer lacks sufficient information regarding the location of the end users or other third-party recipients from which it can determine or reasonably approximate that location, the taxpayer must reasonably approximate the extent to which the service is received in a state by using the percentage that reflects the ratio of the state’s population in the specific geographic area in which the taxpayer’s intermediary resells the services, relative to the total population in that area.
(III-c) When using the secondary reasonable approximation methods provided above, with regard to the relevant specific geographic area, include only the areas where the service was substantially and materially delivered or resold. Unless the taxpayer demonstrates the contrary, it will be presumed that the area where the service was substantially and materially delivered or resold does not include areas outside the United States.
(IV) Examples:
(d) Professional Services.
(A) In General. Except as otherwise provided in section (4)(d) of this rule, professional services are services that require specialized knowledge and in some cases require a professional certification, license, or degree. These services include the performance of technical services that require the application of specialized knowledge. Professional services include, without limitation, management services, bank and financial services, financial custodial services, investment and brokerage services, fiduciary services, tax preparation, payroll and accounting services, lending services, credit card services (including credit card processing services), data processing services, legal services, consulting services, video production services, graphic and other design services, engineering services, and architectural services. Nothing in this rule applies to services provided by a financial institution that must apportion and allocate its income under ORS 314.280 (Allocation of income of financial institution or public utility from business within and without state).
(B) Overlap with Other Categories of Services.
(i) Certain services that fall within the definition of “professional services” set forth in section (4)(d) of this rule are nevertheless treated as “in-person services” within the meaning of section (4)(b) of this rule and are assigned under the rules of that section. Specifically, professional services that are physically provided in person by the taxpayer such as carpentry, certain medical and dental services or child care services, where the customer or the customer’s real or tangible property upon which the services are provided is in the same location as the service provider at the time the services are performed, are “in-person services” and are assigned as such, notwithstanding that they may also be considered to be “professional services.” However, professional services where the service is of an intellectual or intangible nature, such as legal, accounting, financial, and consulting services, are assigned as professional services under the rules of section (4)(d) of this rule, notwithstanding the fact that these services may involve some amount of in-person contact.
(ii) Professional services may in some cases include the transmission of one or more documents or other communications by mail or by electronic means. In some cases, all or most communications between the service provider and the service recipient may be by mail or by electronic means. However, in these cases, despite this transmission, the assignment rules that apply are those set forth in (4)(d) of this rule, and not those set forth in section (4)(c) of this rule, pertaining to services delivered to a customer or through or on behalf of a customer.
(C) Assignment of Receipts. In the case of a professional service, it is generally possible to characterize the location of delivery in multiple ways by emphasizing different elements of the service provided, no one of which will consistently represent the market for the services. Therefore, the location of delivery in the case of professional services is not susceptible to a general rule of determination and must be reasonably approximated. The assignment of receipts from a sale of a professional service depends in many cases upon whether the customer is an individual or business customer. In any instance in which the taxpayer, acting in good faith, cannot reasonably determine whether the customer is an individual or business customer, the taxpayer must treat the customer as a business customer. For purposes of assigning the receipts from a sale of a professional service, a taxpayer’s customer is the person that contracts for the service, irrespective of whether another person pays for or also benefits from the taxpayer’s services.
(i) General Rule. Receipts from sales of professional services other than those services described in section (4)(d)(C)(ii) of this rule (architectural and engineering services) and section (4)(d)(C)(iv) of this rule (transactions with related parties) are assigned in accordance with section (4)(d)(C)(i) of this rule.
(I) Professional Services Delivered to Individual Customers. Except as otherwise provided in section (4)(d) of this rule (see in particular section (4)(d)(C)(iv) of this rule), in any instance in which the service provided is a professional service and the taxpayer’s customer is an individual customer, the state or states in which the service is delivered must be reasonably approximated as set forth in section (4)(d)(C)(i)(I) of this rule. In particular, the taxpayer must assign the receipts from a sale to the customer’s state of primary residence, or, if the taxpayer cannot reasonably identify the customer’s state of primary residence, to the state of the customer’s billing address; provided, however, in any instance in which the taxpayer derives more than five percent of its receipts from sales of all services from an individual customer, the taxpayer must identify the customer’s state of primary residence and assign the receipts from the service or services provided to that customer to that state.
(II) Professional Services Delivered to Business Customers. Except as otherwise provided in section (4)(d) of this rule, in any instance in which the service provided is a professional service and the taxpayer’s customer is a business customer, the state or states in which the service is delivered must be reasonably approximated as set forth in this section. In particular, unless the taxpayer may use the safe harbor set forth at section (4)(d)(C)(i)(III) of this rule, the taxpayer must assign the receipts from the sale as follows: first, by assigning the receipts to the state where the contract of sale is principally managed by the customer; second, if the place of customer management is not reasonably determinable, to the customer’s place of order; and third, if the customer place of order is not reasonably determinable, to the customer’s billing address; provided, however, in any instance in which the taxpayer derives more than five percent of its receipts from sales of all services from a customer, the taxpayer is required to identify the state in which the contract of sale is principally managed by the customer.
(III) Safe Harbor; Large Volume of Transactions. Notwithstanding the rules set forth in sections (4)(d)(C)(i)(I) and (II) of this rule, a taxpayer may assign its receipts from sales to a particular customer based on the customer’s billing address in any taxable year in which the taxpayer (1) engages in substantially similar service transactions with more than 250 customers, whether individual or business, and (2) does not derive more than five percent of its receipts from sales of all services from that customer. This safe harbor applies only for purposes of section (4)(d)(C)(i) of this rule and not otherwise.
(ii) Architectural and Engineering Services with respect to Real or Tangible Personal Property. Architectural and engineering services with respect to real or tangible personal property are professional services within the meaning of section (4)(d) of this rule. However, unlike in the case of the general rule that applies to professional services, (1) the receipts from a sale of an architectural service are assigned to a state or states if and to the extent that the services are with respect to real estate improvements located, or expected to be located, in the state or states; and (2) the receipts from a sale of an engineering service are assigned to a state or states if and to the extent that the services are with respect to tangible or real property located in the state or states, including real estate improvements located in, or expected to be located in, the state or states. These rules apply whether or not the customer is an individual or business customer. In any instance in which architectural or engineering services are not described in section (4)(d)(C)(ii) of this rule, the receipts from a sale of these services must be assigned under the general rule for professional services. See section (4)(d)(C)(i) of this rule.
(iii) Related-Party Transactions. In any instance in which the professional service is sold to a related party, rather than applying the rule for professional services delivered to business customers in section (4)(d)(C)(i)(II) of this rule, the state or states to which the service is assigned is the place of receipt by the related party as reasonably approximated using the following hierarchy: (1) if the service primarily relates to specific operations or activities of a related party conducted in one or more locations, then to the state or states in which those operations or activities are conducted in proportion to the related-party’s payroll at the locations to which the service relates in the state or states; or (2) if the service does not relate primarily to operations or activities of a related party conducted in particular locations, but instead relates to the operations of the related party generally, then to the state or states in which the related party has employees, in proportion to the related-party’s payroll in those states. The taxpayer may use the safe harbor provided by section (4)(d)(C)(i)(III) of this rule provided that the department may aggregate the receipts from sales to related parties in applying the five percent rule if necessary or appropriate to avoid distortion.
(iv) Examples: Unless otherwise stated, assume in each of these examples, where relevant, that the customer is not a related party and that the safe harbor set forth at section (4)(d)(C)(i)(III) of this rule does not apply.
(5) License or Lease of Intangible Property.
(a) General Rules.
(A) The receipts from the license of intangible property are in Oregon if and to the extent the intangible is used in Oregon. In general, the term “use” is construed to refer to the location of the taxpayer’s market for the use of the intangible property that is being licensed and is not to be construed to refer to the location of the property or payroll of the taxpayer. The rules that apply to determine the location of the use of intangible property in the context of several specific types of licensing transactions are set forth at sections (5)(b)-(e) of this rule. For purposes of the rules set forth in section (5) of this rule, a lease of intangible property is to be treated the same as a license of intangible property.
(B) In general, a license of intangible property that conveys all substantial rights in that property is treated as a sale of intangible property for purposes of this rule. See section (6) of this rule. Note, however, that for purposes of sections (5) and (6) of this rule, a sale or exchange of intangible property is treated as a license of that property where the receipts from the sale or exchange derive from payments that are contingent on the productivity, use, or disposition of the property.
(C) Intangible property licensed as part of the sale or lease of tangible property is treated under this rule as the sale or lease of tangible property.
(D) Nothing in section (5) of this rule is to be construed to allow or require inclusion of receipts in the sales factor that are not included in the definition of “sales” pursuant to ORS 314.610 (Definitions for ORS 314.605 to 314.675)(7) or related rules, or that are excluded from the numerator and the denominator of the sales factor pursuant to Oregon Laws 2017, chapter 549, section 2(3)(c). For examples of the types of intangibles that are excluded pursuant to ORS 314.610 (Definitions for ORS 314.605 to 314.675)(7), see OAR 150-314-0425 (Sales Factor; Definition of Gross Receipts). For examples of the types of intangibles that are excluded pursuant to Oregon Laws 2017, chapter 549, section 2(3)(c), see section (6)(d) of this rule. So, to the extent that the transfer of either a security, as defined in OAR 314-0425(9), or business “goodwill” or similar intangible property, including, without limitation, “going concern value” or “workforce in place,” may be characterized as a license or lease of intangible property, receipts from such transaction must be excluded from the numerator and the denominator of the taxpayer’s sales factor.
(b) License of a Marketing Intangible. Where a license is granted for the right to use intangible property in connection with the sale, lease, license, or other marketing of goods, services, or other items (i.e., a marketing intangible) to a consumer, the royalties or other licensing fees paid by the licensee for that marketing intangible are assigned to Oregon to the extent that those fees are attributable to the sale or other provision of goods, services, or other items purchased or otherwise acquired by consumers or other ultimate customers in Oregon. Examples of a license of a marketing intangible include, without limitation, the license of a service mark, trademark, or trade name; certain copyrights; the license of a film, television, or multimedia production or event for commercial distribution; and a franchise agreement. In each of these instances the license of the marketing intangible is intended to promote consumer sales. In the case of the license of a marketing intangible, where a taxpayer has actual evidence of the amount or proportion of its receipts that is attributable to Oregon, it must assign that amount or proportion to Oregon. In the absence of actual evidence of the amount or proportion of the licensee’s receipts that are derived from Oregon consumers, the portion of the licensing fee to be assigned to Oregon must be reasonably approximated by multiplying the total fee by a percentage that reflects the ratio of the Oregon population in the specific geographic area in which the licensee makes material use of the intangible property to regularly market its goods, services, or other items relative to the total population in that area. If the license of a marketing intangible is for the right to use the intangible property in connection with sales or other transfers at wholesale rather than directly to retail customers, the portion of the licensing fee to be assigned to Oregon must be reasonably approximated by multiplying the total fee by a percentage that reflects the ratio of the Oregon population in the specific geographic area in which the licensee’s goods, services, or other items are ultimately and materially marketed using the intangible property relative to the total population of that area. Unless the taxpayer demonstrates that the marketing intangible is materially used in the marketing of items outside the United States, the fees from licensing that marketing intangible will be presumed to be derived from within the United States.
(c) License of a Production Intangible. If a license is granted for the right to use intangible property other than in connection with the sale, lease, license, or other marketing of goods, services, or other items, and the license is to be used in a production capacity (a “production intangible”), the licensing fees paid by the licensee for that right are assigned to Oregon to the extent that the use for which the fees are paid takes place in Oregon. Examples of a license of a production intangible include, without limitation, the license of a patent, a copyright, or trade secrets to be used in a manufacturing process, where the value of the intangible lies predominately in its use in that process. In the case of a license of a production intangible to a party other than a related party where the location of actual use is unknown, it is presumed that the use of the intangible property takes place in the state of the licensee’s commercial domicile (where the licensee is a business) or the licensee’s state of primary residence (where the licensee is an individual). If the department can reasonably establish that the actual use of intangible property pursuant to a license of a production intangible takes place in part in Oregon, it is presumed that the entire use is in this state except to the extent that the taxpayer can demonstrate that the actual location of a portion of the use takes place outside Oregon. In the case of a license of a production intangible to a related party, the taxpayer must assign the receipts to where the intangible property is actually used.
(d) License of a Mixed Intangible. If a license of intangible property includes both a license of a marketing intangible and a license of a production intangible (a “mixed intangible”) and the fees to be paid in each instance are separately and reasonably stated in the licensing contract, the department will accept that separate statement for purposes of this rule. If a license of intangible property includes both a license of a marketing intangible and a license of a production intangible and the fees to be paid in each instance are not separately and reasonably stated in the contract, it is presumed that the licensing fees are paid entirely for the license of the marketing intangible except to the extent that the taxpayer or the department can reasonably establish otherwise.
(e) License of Intangible Property where Substance of Transaction Resembles a Sale of Goods or Services.
(A) In general. In some cases, the license of intangible property will resemble the sale of an electronically-delivered good or service rather than the license of a marketing intangible or a production intangible. In these cases, the receipts from the licensing transaction are assigned by applying the rules set forth in sections (4)(c)(B)(ii) and (iii) of this rule, as if the transaction were a service delivered to an individual or business customer or delivered electronically through an individual or business customer, as applicable. Examples of transactions to be assigned under section (5)(e) of this rule include, without limitation, the license of database access, the license of access to information, the license of digital goods (see section (7)(b) of this rule), and the license of certain software (e.g., where the transaction is not the license of pre-written software that is treated as the sale of tangible personal property, see section (7)(a) of this rule).
(B) Sublicenses. Pursuant to section (5)(e)(A) of this rule, the rules of section (4)(c)(B)(iii) of this rule may apply where a taxpayer licenses intangible property to a customer that in turn sublicenses the intangible property to end users as if the transaction were a service delivered electronically through a customer to end users. In particular, the rules set forth at section (4)(c)(B)(iii) of this rule that apply to services delivered electronically to a customer for purposes of resale and subsequent electronic delivery in substantially identical form to end users or other recipients may also apply with respect to licenses of intangible property for purposes of sublicense to end users. For this purpose, the intangible property sublicensed to an end user shall not fail to be substantially identical to the property that was licensed to the sublicensor merely because the sublicense transfers a reduced bundle of rights with respect to that property (e.g., because the sublicensee’s rights are limited to its own use of the property and do not include the ability to grant a further sublicense), or because that property is bundled with additional services or items of property.
(C) Examples: In these examples, unless otherwise stated assume that the customer is not a related party.
(6) Sale of Intangible Property. Assignment of Receipts. The assignment of receipts to a state or states in the instance of a sale or exchange of intangible property depends upon the nature of the intangible property sold. For purposes of section (6) of this rule, a sale or exchange of intangible property includes a license of that property where the transaction is treated for tax purposes as a sale of all substantial rights in the property and the receipts from transaction are not contingent on the productivity, use, or disposition of the property. For the rules that apply where the consideration for the transfer of rights is contingent on the productivity, use, or disposition of the property, see section (5)(a) of this rule.
(a) Contract Right or Government License that Authorizes Business Activity in Specific Geographic Area. In the case of a sale or exchange of intangible property where the property sold or exchanged is a contract right, government license, or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area, the receipts from the sale are assigned to a state if and to the extent that the intangible property is used or is authorized to be used within the state. If the intangible property is used or may be used only in this state, the taxpayer must assign the receipts from the sale to Oregon. If the intangible property is used or is authorized to be used in Oregon and one or more other states, the taxpayer must assign the receipts from the sale to Oregon to the extent that the intangible property is used in or authorized for use in Oregon, through the means of a reasonable approximation.
(b) Sale that Resembles a License (Receipts are Contingent on Productivity, Use, or Disposition of the Intangible Property). In the case of a sale or exchange of intangible property where the receipts from the sale or exchange are contingent on the productivity, use, or disposition of the property, the receipts from the sale are assigned by applying the rules set forth in section (5) of this rule (pertaining to the license or lease of intangible property).
(c) Sale that Resembles a Sale of Goods and Services. In the case of a sale or exchange of intangible property where the substance of the transaction resembles a sale of goods or services and where the receipts from the sale or exchange do not derive from payments contingent on the productivity, use, or disposition of the property, the receipts from the sale are assigned by applying the rules set forth in section (5)(e) of this rule (relating to licenses of intangible property that resemble sales of goods and services). Examples of these transactions include those that are analogous to the license transactions cited as examples in section (5)(e) of this rule.
(d) Excluded Receipts. Receipts from the sale of intangible property are not included in the sales factor in any case in which the transaction does not give rise to sales within the meaning of ORS 314.610 (Definitions for ORS 314.605 to 314.675)(7). In addition, in any case in which the sale of intangible property does result in sales within the meaning of ORS 314.610 (Definitions for ORS 314.605 to 314.675)(7), those sales are excluded from the numerator and the denominator of the taxpayer’s sales factor if the receipts are not referenced in Oregon Laws 2017, chapter 549, section 2(3)(a) or (b). The sale of intangible property that is excluded from the numerator and denominator of the taxpayer’s sales factor under this provision includes, without limitation, the sale of a partnership interest, the sale of business “goodwill,” the sale of an agreement not to compete, or similar intangible property.
(e) Examples.
(7) Special Rules.
(a) Software Transactions. A license or sale of pre-written software for purposes other than commercial reproduction (or other exploitation of the intellectual property rights) transferred on a tangible medium is treated as the sale of tangible personal property, rather than as either the license or sale of intangible property or the performance of a service. In these cases, the receipts are in Oregon as determined under the rules for the sale of tangible personal property set forth under ORS 314.665 (Determination of sales factor)(2) and related rules. In all other cases, the receipts from a license or sale of software are to be assigned to Oregon as determined otherwise under this rule (e.g., depending on the facts, as the development and sale of custom software, see section (4)(c) of this rule, as a license of a marketing intangible, see section (5)(b) of this rule, as a license of a production intangible, see section (5)(c) of this rule, as a license of intangible property where the substance of the transaction resembles a sale of goods or services, see section (5)(e) of this rule, or as a sale of intangible property, see section (6) of this rule).
(b) Sales or Licenses of Digital Goods or Services. In general. In the case of a sale or license of digital goods or services, including, among other things, the sale of various video, audio, and software products, or similar transactions, the receipts from the sale or license are assigned by applying the same rules as are set forth in sections (4)(c)(B)(ii) or (iii) of this rule, as if the transaction were a service delivered to an individual or business customer or delivered through or on behalf of an individual or business customer. For purposes of the analysis, it is not relevant what the terms of the contractual relationship are or whether the sale or license might be characterized, depending upon the particular facts, as, for example, the sale or license of intangible property or the performance of a service. See sections (5)(e) and (6)(c) of this rule.
[Publications: Contact the Oregon Department of Revenue to learn how to obtain a copy of the publication referred to or incorporated by reference in this rule pursuant to ORS 183.360 (Publication of rules and orders)(2) and 183.355 (Filing and taking effect of rules)(1)(b).]
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Nov. 24, 2020