On November 8, 2016, Oregon voters will vote to approve or reject Measure 97 (formerly, Initiative Proposal 28) that would implement a new 2.5 percent gross receipts tax on certain C corporations doing business in Oregon. If approved by voters, this new tax would be effective for tax years beginning on or after January 1, 2017.
Currently, Oregon’s corporate excise (income) tax is imposed at a rate of 6.6 percent on corporate income less than $1 million and 7.6 percent on corporate income greater than $1 million. Oregon also imposes a minimum tax. Corporate taxpayers pay the greater of the income tax or the minimum tax. Oregon’s minimum tax is imposed on each corporation (or affiliated group of corporations) that files an Oregon corporate tax return based on its Oregon-sourced sales. The current minimum tax is a tiered structure based on Oregon-sourced sales, ranging from $150 on $0 to $500,000 of Oregon-sourced sales to $100,000 on $100,000,000 or more of Oregon-sourced sales. The minimum tax due is capped at $100,000 annually for corporations with total Oregon-sourced sales of $100 million or more. Oregon-sourced sales are determined using the same methodology for calculating Oregon’s sales factor numerator for apportionment purposes.
Measure 97 would modify Oregon’s minimum tax structure. Specifically, for C corporations (S corporations, limited liability companies, and partnerships would not be subject to the tax) with more than $25 million in Oregon sales, Measure 97 would impose a minimum tax ($30,001) plus a 2.5 percent tax on all Oregon-sourced sales in excess of $25 million. For those corporations with more than $25 million in Oregon sales, the minimum tax would no longer be capped. This new tax would substantially increase the minimum tax paid by corporations with more than $25 million in Oregon sales. For example, a corporation with $45 million in Oregon sales currently pays a $30,000 minimum tax, but Measure 97 would require a $530,001 minimum tax, computed as $30,001 plus $500,000 (2.5 percent of the $20 million excess).
Measure 97 would not change how corporations determine Oregon-sourced sales. As discussed above, Oregon-sourced sales are determined using the same methodology for calculating Oregon’s sales factor numerator for apportionment purposes. In Oregon, sales of tangible property are sourced based on the destination and those sales that are not taxable in another state are “thrown back” to Oregon and treated as Oregon sales. Sales of “other than tangible personal property” are Oregon sales if the income-producing activity is performed in Oregon or the income producing activity is performed both in and out of Oregon and a greater proportion of the income-producing activity is performed in Oregon, based on costs of performance.
If Measure 97 is enacted, corporations should carefully consider the methodology employed in sourcing Oregon sales, especially sales from other than tangible personal property. Like many other states that continue to statutorily require costs of performance sourcing, Oregon is no stranger to controversy. Most notably, in AT&T Corp. v. Dep’t of Rev., No. TC 4814 (Ore. Tax Ct. 2011), aff’d No. TC-RD 4814 (Or. Sup. Ct. Sept. 11, 2015), the Oregon Tax Court adopted the transactional approach (as opposed to an operational approach) to analyze AT&T’s costs of performance incurred in providing telecommunications services and concluded that the relevant income-producing activity was each individual call that originated and terminated in Oregon (rather than AT&T’s entire operational infrastructure). The Oregon Department of Revenue has aggressively pursued taxpayers on audit arguing that AT&T’s narrow transactional approach essentially converts costs of performance sourcing to market (or, customer-based) sourcing. Taxpayers should continue to fight the Department’s stance with respect to computing Oregon-sourced sales because not only is the AT&T case limited in its applicability to AT&T and its specific facts, without a change in law (which, notably, was proposed but rejected in 2013), the Department lacks the authority to require a market-based sourcing approach.