Applying Costs of Performance to Apportion Service Income: Massachusetts and Oregon Courts Reach Differing Conclusions


Recent decisions from two different state judicial bodies differ on how to apply costs of performance to a telecommunications company’s receipts from sales of services. These two cases demonstrate how states are applying – and misapplying – this long-standing apportionment method.

On June 8, 2011, the Massachusetts Appellate Tax Board (the Board) issued its written decision1 in favor of AT&T regarding whether receipts from its interstate and international telecommunication services should be included in the Massachusetts sales factor numerator. AT&T Corp. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports, 2011-524. The Board accepted the taxpayer’s position that its income-producing activity was the business of providing a national, integrated telecommunications network that was operated and managed in New Jersey. Rather than requiring AT&T to provide evidence supporting the apportionment of each and every transaction, the Board accepted AT&T’s evidence of costs associated with revenue streams and apportioned categories of income rather than individual transactions (referred to as the Operational Approach).

Twenty days later, on June 28, 2011, the Oregon Tax Court (the Tax Court) issued its decision against AT&T on whether its receipts from interstate and international communications services should be included in the Oregon sales factor numerator. AT&T Corp. v. Department of Revenue, Oregon Tax Court, TC 4814. On nearly identical facts and applying similar statutory law, the Tax Court rejected the Operational Approach and required AT&T to provide evidence supporting its apportionment of each and every transaction (referred to as the Transactional Approach).

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