State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Oregon Enacts Legislation Adopting Market-Based Sourcing, Altering Unitary Group Determination In Oregon s legislative session this year, several laws were enacted that will impact Oregon taxpayers, including: replacement of the cost-of-performance (COP) method with marketbased sourcing for sales of intangible property and services; an update of key apportionment terminology to conform to the Multistate Tax Compact; a narrowing of Oregon s sales definition for sales factor purposes; alteration of the unitary group determination; and updating the Internal Revenue Code (IRC) conformity date. Efforts to enact a gross receipts tax failed to gather the necessary support, although such a tax could appear on Oregon s 2018 general election ballot. Market-Based Sourcing Adopted For tax years beginning on or after January 1, 2018, S.B. 28 replaces the COP sourcing methodology with market-based sourcing for purposes of determining the sales factor applicable to intangible property and services, as used in the corporate excise or income tax apportionment calculation. 1 As amended, companies are taxed based only on the proportion of sales they make in Oregon, rather than where they have a plurality of costs, as under the state s prior COP apportionment standard. 2 The Oregon market-based sourcing provisions are largely based on the Multistate Tax Compact. 3 In general, sales other than sales of tangible personal property are sourced to Oregon if the taxpayer s market for sales is in the state. 4 The legislation provides the following limited guidance for determining whether a taxpayer s market for sales is in the state: For service receipts, the taxpayer s market is in Oregon to the extent the service is delivered to a location in the state. 5 For the rental, lease or license of intangible property, the taxpayer s market is in Oregon to the extent the property is used in the state. 6 Intangible property used to Release date August 3, 2017 States Oregon Issue/Topic Corporate and Personal Income Taxes Contact details Nisha Mathew Seattle T 206.398.2445 E nisha.mathew@us.gt.com Patrick Shine Seattle T 206.398.2485 E patrick.shine@us.gt.com Jamie C. Yesnowitz Washington, DC T 202.521.1504 E jamie.yesnowitz@us.gt.com Chuck Jones Chicago T 312.602.8517 E chuck.jones@us.gt.com Lori Stolly Cincinnati T 513.345.4540 E lori.stolly@us.gt.com Priya D. Nair Washington, DC T 202.521.1546 E priya.nair@us.gt.com www.grantthornton.com/salt 1 Ch. 549 (S.B. 28), Laws 2017, enacted July 3, 2017. 2 OR. REV. STAT. 314.665(4); OR. ADMIN. R. 150-314-0435. 3 Multistate Tax Compact Art. IV.17. 4 OR. REV. STAT. 314.665(4). 5 S.B. 28, 2(1)(c). This location of service approach is similar to market-based sourcing provisions adopted in Pennsylvania and Alabama. 6 S.B. 28, 2(2)..
Grant Thornton LLP - 2 market goods or services is deemed to be used in Oregon if the goods or services are purchased by a consumer in the state. 7 For the sale of intangible property, the taxpayer s market is in Oregon to the extent the property is used in the state. 8 Intangible property sales that are contingent on the productivity, use or disposition of the intangible property are treated as the rental, lease or licensing of intangible property. 9 Contract rights, government licenses or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area are deemed to be used in Oregon if the geographic area includes all or part of the state. 10 All other intangible property not described above is excluded entirely from the sales factor. 11 If receipts from services or intangibles cannot be assigned to a particular state, taxpayers may reasonably approximate the state or states of assignment. 12 The market-based sourcing provisions do not apply to financial institutions and public utilities that apportion income under Or. Rev. Stat. Sec. 314.280. 13 Apportionment Terminology Updated For purposes of Oregon s corporate excise or income tax apportionment, H.B. 2275 redefines income subject to apportionment to align with the Multistate Tax Compact. 14 Specifically, the legislation replaces the terms business income and nonbusiness income with apportionable income and nonapportionable income. 15 These changes apply to tax years beginning on or after January 1, 2018. 16 Sales Definition Narrowed for Apportionment Purposes For tax years beginning on or after January 1, 2018, H.B. 2273 narrows the state s definition of sales for purposes of determining how to calculate a corporation s sales factor. 17 Currently, all gross receipts that are not allocated pursuant to Oregon law are included in the Oregon sales factor. 18 Under the amended definition, these gross receipts must be received from transactions and activity occurring in the regular course of business to be included in the Oregon sales factor. 19 Accordingly, under this definition, occasional 7 Id. 8 S.B. 28, 3. 9 S.B. 28, 2(3)(b). 10 S.B. 28, 2(3)(a). 11 S.B. 28, 2(3)(c). 12 S.B. 28, 2(4). 13 S.B. 28, 4(1). 14 Ch. 43 (H.B. 2275), Laws 2017, enacted May 15, 2017. 15 OR. REV. STAT. 314.610(1), (5). Apportionable income means: (i) income arising from transactions and activity in the regular course of the taxpayer s trade or business; (ii) income arising from the acquisition, management, employment, development or disposition of tangible and intangible property if related to the operation of the taxpayer s trade or business; and (iii) any other income that is apportionable under the U.S. Constitution and is not allocated. Nonapportionable income is all income other than apportionable income. 16 H.B. 2275, 12. 17 H.B. 2273, Laws 2017, enacted Aug. 2, 2017. 18 OR. REV. STAT. 314.610(7). 19 Id.
Grant Thornton LLP - 3 and incidental sales of property are excluded from the Oregon sales factor. In addition, several distinct types of sales are excluded from the Oregon sales factor, including: Receipts from hedging transactions and from the disposition of securities; 20 Property or money received or acquired by an agent or similar actor that is greater than the recipient s commission, fee or other remuneration; 21 Amounts received from others and held in trust by the taxpayer; 22 and Other exceptions designated by rule by the Oregon Department of Revenue. 23 Unitary Group Determination For tax years beginning on or after January 1, 2018, S.B. 30 removes the state s statutory prohibition on considering non-u.s. corporations for purposes of making a unitary determination. 24 In making the determination of whether two or more corporate affiliates included in the same consolidated federal return are engaged in a unitary business, the Department will be allowed to consider any corporation that is owned or controlled directly or indirectly by the same interests, including foreign affiliates. 25 Currently, whether two or more corporations in the same federal consolidated return are engaged in a unitary business is determined by making reference only to corporations that are doing business in the United States and are subject to federal income tax. 26 IRC Conformity Updated S.B. 701 conforms Oregon s corporate and personal income taxes to the IRC as amended on December 31, 2016 (previously, December 31, 2015). 27 The new conformity date applies to transactions or activities occurring on or after January 1, 2017 in tax years beginning on or after January 1, 2017. 28 If a refund is due for a tax year beginning before January 1, 2017, because of any retroactive treatment from the amendments, the refund will be paid without interest. 29 Taxpayers must file amended returns to claim refunds due as a result of the conformity date change. 30 If a deficiency is assessed against a taxpayer for a tax year beginning before January 1, 2017, because of any retroactive treatment from the amendments, then any interest or penalty assessed with respect to the deficiency is canceled. 31 Commentary Oregon s newly enacted legislation includes several significant corporate excise and income tax changes that taxpayers should consider. Most notably, Oregon is following the state trend of switching from the COP method to market-based sourcing for sales of intangible 20 OR. REV. STAT. 314.610(7)(a)(A). 21 OR. REV. STAT. 314.610(7)(a)(B). 22 OR. REV. STAT. 314.610(7)(a)(C). 23 OR. REV. STAT. 314.610(7)(b). 24 Ch. 181 (S.B. 30), Laws 2017, enacted May 30, 2017. 25 OR. REV. STAT. 317.705(3)(c). 26 Id. 27 Ch. 527 (S.B. 701), Laws 2017, enacted June 29, 2017, amending OR. REV. STAT. 314.011(2)(b); 316.012; 317.010(7). 28 S.B. 701, 27(1). 29 S.B. 701, 27(3)(b). 30 S.B. 701, 27(3)(c). 31 S.B. 701, 27(3)(a).
Grant Thornton LLP - 4 property and services. The Oregon market-based sourcing legislation generally follows the language of the Multistate Tax Compact, but it notably does not include the Compact s throwout rule. 32 In 2015, the Oregon Supreme Court interpreted the COP standard using a transactional approach rather than the operational approach. 33 For large companies with numerous service transactions, this approach can be difficult to apply because the costs must be determined for each individual sale to customers. The adoption of market-based sourcing will align Oregon s sourcing methodology with the Compact. Because the market-based sourcing statute provides little detail, the Department likely will draft regulations and technical releases (which could be in line with the Multistate Tax Commission s model regulations on the subject) to provide additional guidance. The change to market-based sourcing shifts the tax burden to out-of-state companies providing services or intangibles to Oregon customers. The new market-based sourcing standard presents an opportunity for Oregon-based taxpayers that sell intangible property or services outside the state to re-evaluate their apportionment factor. With an increasing number of states adopting market-based sourcing rules and the lack of uniformity in the application of such rules, taxpayers continue to face the challenge of accurately sourcing revenue among the states. In addition, the narrowing of amounts included in the Oregon sales factor may result in a vastly different composition of a taxpayer s sales factor on a prospective basis, which in some cases could have a very positive or negative impact on total Oregon tax liability. The possible enactment of a gross receipts tax has garnered considerable attention. However, the governor and legislative leaders recently announced that consideration of a gross receipts tax would be put on hold until 2019, stating that it has become clear that the Legislature will not have the necessary support to achieve structural revenue reforms this session. 34 In January 2017, legislation was introduced that would impose a gross receipts tax, which mirrored the Ohio Commercial Activity Tax, and would have imposed a 0.7 percent tax on gross receipts. 35 However, the legislation did not make it past the committee stage. In November 2016, Oregon voters rejected a similar gross receipts tax on the ballot in Measure 97. 36 However, Oregon voters may have another opportunity at a gross receipts tax in 2018. The public-sector union has filed Initiative Petition 27, which would impose a 32 See Multistate Tax Compact Art. IV.17(c). Under the Compact, if the taxpayer is not taxable in a state to which a receipt is assigned, or if the state of assignment cannot be determined or reasonably approximated, the receipt is excluded from the denominator of the receipts factor. 33 See AT&T Corp. v. Department of Revenue, 358 P.3d 973 (Or. 2015). For a discussion of this case, see GT SALT Alert: Oregon Supreme Court Requires Use of Transaction-Based Approach to Calculate Cost of Performance for Sales Factor Purposes. 34 Press Release, Oregon Governor s Office, June 22, 2017. 35 H.B. 2230, introduced in Oregon House on Jan. 9, 2017. 36 For further information, see GT SALT Alert: State Efforts to Raise Revenue Find Success with Voters on Some Ballot Initiatives and GT SALT Alert: Oregon Gross Receipts Tax Will Be Considered by Voters in November.
Grant Thornton LLP - 5 multi-tiered gross receipts tax and, if the requisite number of signatures are collected, would appear on the 2018 general election ballot. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.