On October 2, the Oregon Supreme Court ruled that property used by a taxpayer to provide cable television and Internet access services was subject to central assessment for property tax purposes, and therefore its intangible assets were subject to tax.1 The primary issue in the case was whether the taxpayer’s services qualified as “data transmission services” which are statutorily subject to central assessment. The Court declined to rule on whether the Oregon Department of Revenue’s maximum assessed value (MAV) of the taxpayer’s property violated a statutory three-percent cap2 and remanded the case to the Oregon Tax Court to decide this issue.
Background
Oregon property is typically taxed based on its assessed value, which is the lesser of the property’s real market value (RMV) or its MAV. In Oregon, like many states, real and tangible property are generally subject to local property tax assessment by the appropriate county assessor, who determines the taxable value of the property on an annual basis.
Central assessment was historically developed as a means to address the task of valuing the property of a business located in multiple taxing jurisdictions. It was especially designed to remedy perceived problems with local assessors favoring their own jurisdictions when valuing their assessable portions of the multi-jurisdictional property. Consequently, certain types of property are subject instead to central assessment by the state, which determines the value of the taxable property as a whole.
In Oregon, the Department centrally assesses property with an Oregon situs used to provide delineated services. Specifically, providers of “communication” services are statutorily subject to central assessment,3 and “communication” includes “data transmission services by whatever means provided.”4
While central assessment generally means that property tax is calculated on a statewide basis, in Oregon it also means that the value of intangible assets is includible in the assessable base.5 In contrast, local assessment of personal property in Oregon does not include intangible property.6 As a result, central assessment of an Oregon business often results in a higher taxable value of the property subject to tax than local assessment.
The taxpayer at issue provided cable television, Internet access and voice over Internet protocol (VOIP) services to its customers. Many of the major tangible, personal, and real properties owned by the taxpayer, some of which are located in Oregon and subject to property tax, are used in some manner to provide all of these services. For years prior to 2009, the Department treated the taxpayer’s property as subject to local assessment. For tax year 2008, the taxpayer’s locally assessed MAV was approximately $434 million. Beginning with the 2009 tax year, the Department computed the value of the taxpayer’s property owned and used in Oregon using central assessment. For tax year 2009, the RMV and MAV of the taxpayer’s real, personal, and intangible property owned and used in Oregon and subject to property tax was computed to be more than $1.1 billion.
The taxpayer disputed the 2009 central assessment of its property used to provide Internet access and cable television services, contesting the Opinion and Order issued by the Department. The initial result of this dispute was a Tax Court proceeding, where the Tax Court found that the taxpayer’s Internet access service, but not its cable television service, is a data transmission service subject to central assessment.7 However, the taxpayer used the same property in providing both services, and the Tax Court determined that the primary use of the property was to provide cable television service. Since the primary use of the property was not communication, the Tax Court determined that the property was not subject to central assessment. Both parties appealed the decision to the Oregon Supreme Court. While the Department contended that both the Internet access service and cable television service were data transmission services, the taxpayer believed that neither was.
Oregon Supreme Court Ruling
To determine whether the taxpayer was subject to central assessment, the Oregon Supreme Court focused on whether the Oregon property was used by the taxpayer to provide “communication services.” As noted above, the term “communication” specifically includes “data transmission services by whatever means provided.”8
To determine the meaning of the undefined term “data transmission service,” the Supreme Court considered multiple definitions and analyzed its plain meaning, technical meaning and legislative history. The Department’s position was that the taxpayer was subject to central assessment because its cable television and Internet access services were “data transmission services.” Further, the Department purported that as long as a service provides the means to transmit data to and between the customer and others, it is a “data transmission” service. The taxpayer, however, argued that the term “data transmission services” was limited to the private line intracompany data transmission services provided by point-to-point microwave transmissions. Both parties agreed that this type of communication was the reason the phrase was added to the law in 1973.9 The taxpayer relied heavily on the legislative history of this term to support its argument.
The Court ultimately rejected the taxpayer’s argument, writing that “the legislature opted to expansively reach all data transmission services, without regard to the use to which the data is put.” The Court also noted that the language “by whatever means provided” following “data transmissions services” in the relevant statute was indicative that such services were technology-neutral in terms of the means or medium of transmission.
Finally, the Court concluded that “data transmission services are services that provide the means to send data from one computer or computer-like device to another across a transmission network.” By applying this definition to the taxpayer’s business, the Court found that both the taxpayer’s Internet access and cable television services are data transmission services. Finding that the Internet and cable television services offered by the taxpayer met the technical definition of “communication services,” the Court determined that the related property is subject to central assessment.
As a means to narrow the interpretation of the term “data transmission services” or distinguish such term from the services that the taxpayer provided, the taxpayer put forth several additional arguments. Specifically, the taxpayer argued that: (i) because cable television was not mentioned in the legislative hearing debating the addition of the relevant language to the statute, the legislature could not have intended to include cable television in the definition of “data transmission services;” (ii) because the legislature could not foresee the existence of the Internet access services, such services should not be subject to central assessment; and (iii) interpreting “data transmission services” too broadly would lead to unconstitutional results. The taxpayer envisioned that magazines, newspapers, radio stations, and other content providers would be considered to be “data transmission services” because they communicate information, and so these businesses would also be subject to central assessment.
Responding to these arguments, the Court found that: (i) the cable television service offered in 1973 by the taxpayer was far different from the service now offered by the taxpayer under that name; (ii) while the legislature had not foreseen the specific availability of Internet access services it intended the flexibility for its terms to apply to future technology; and (iii) the taxpayer’s fears of an overbroad reading of the term “data transmission services” were unfounded, as “data transmission services” only includes transmitting coded electronic information between computer and computer-like devices. In this context, a provider is publishing data but is not providing the service of transmitting the data so that consumers can access it. The taxpayer and companies like it provide the service of transmitting data and will be subject to central assessment, but according to the Court, taxpayers simply engaged in providing content will not be subject to central assessment.
Maximum Assessed Value
The taxpayer further challenged the Department’s MAV on its centrally assessed property because the amount assessed for the 2009-2010 tax year exceeded a statutory three percent cap established by the passage of Measure 50 in 1997.10 Measure 50 was enacted in part to provide statutory limits to annual assessment increases in order to provide taxpayers with some degree of certainty regarding the amount of property tax due.
As specified in Measure 50, the first MAV for each property was set in the 1997-98 tax year; in that year, the MAV was the property’s 1995-96 RMV minus 10 percent. After the 1997-98 tax year, the increase in the MAV was limited to three percent annually, except in the case of certain events relating to the specific property. One such property event, which the Department argued applied to the taxpayer, is where “the property is new property or new improvements to the property.”11 The taxpayer disagreed and believed that the three percent annual cap applied to its property. Given that the Tax Court had not substantively considered the issue because it had ruled that the property was not subject to central assessment, the Supreme Court declined to rule on this issue and remanded it to the Tax Court for further consideration.
Commentary
This ruling will affect many similarly situated businesses in Oregon, beginning with the 2009-2010 tax year, as the Department treated cable television and Internet access services as “communication” services and added the taxpayer along with 125 other companies to the central assessment roll. The inclusion of intangible property in the assessed value of its property dramatically increased the taxpayer’s tax bill and presumably did the same to many of the other companies that were added to the central assessment roll. However, the potential tax consequences to the taxpayer and similar companies could be significantly mitigated if upon remand, the Tax Court rules that the three percent cap added by Measure 50 applies.
It is interesting to note that the Court did limit the applicability of its decision to certain information content providers. As long as content providers such as publishers do not serve as the specific providers of content to consumers via transmission, such providers should not be subject to central assessment. For example, an online newspaper that may generate information but is not responsible for technically transmitting the content to consumers should not be affected. Only the company that provides the transmission of the content from the newspaper to consumers (for example, the company providing Internet access and cable services) may meet the requisite definitions to be subject to central assessment.