RECENT OREGON CORPORATE TAX DEVELOPMENTS
By John H. Gadon and Lewis M. Horowitz
RECENT DEVELOPMENTS IN EQUITY-BASED COMPENSATION
I. OREGON LEGISLATIVE DEVELOPMENTS.
Oregon moves one step closer to a single sales factor apportionment formula. For tax years
beginning after June 30, 2006, business income is apportioned for purposes of Oregon corporate
excise (income) tax by multiplying the corporation’s business income by a multiplier equal to
90 percent (previously, 80 percent) of the sales factor, plus 5 percent (previously, 10 percent) of
the property factor, plus 5 percent (previously, 10 percent) of the payroll factor. However, for
tax years beginning after June 30, 2006, certain forest products companies will use a doubleweighted sales factor in the formula.
For tax years beginning after June 30, 2008, all business income will be apportioned to Oregon
based solely on the sales factor.
R&D Credit Increased. For tax years beginning after December 31, 2005, and ending in 2012,
the maximum credit against corporate excise (income) tax for qualified research expenses is
increased from $500,000 to $750,000, and eligibility was materially expanded. Previously, the
credit had been limited to expenses involving computing, advanced material biotechnology,
electronic device technology, environmental technology, and straw utilization. Now the credit is
available to basic research as defined by the Internal Revenue Service, thereby opening its use to
the manufacturing sector. The credit equals 5 percent of eligible research expenses above a base
amount as defined by the IRS credit.
Mass Transit Payroll Tax. The employer payroll tax that may be imposed by mass transit
districts is increased.
Independent Contractor Definition Conformed to Federal. The definition of an “independent
contractor” for Oregon income tax purposes was amended to conform with the meaning of the
term used for computing federal income taxes.
Credit Reduction. Beginning after 2002 and before 2006, the amount of credits allowable
against the corporate excise tax is reduced by 20 percent, except for farmworker housing credits.
Reductions may be carried forward to a succeeding tax year that begins after 2005 if that tax year
is not more than three years from the date of the last year the credit could otherwise be claimed.
SUV Clawback. Individual and corporate taxpayers must add back the expense deduction taken
under IRC § 179, or the depreciation deduction taken under § 168 for certain four-wheeled
vehicles manufactured primarily for use on public streets, roads, and highways.
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ETI. The extraterritorial income exclusion related to a foreign sales corporation is no longer
allowed.
Excise tax minimum increased. Legislation also increases the minimum corporation tax due for
the privilege of doing business in the state from $10 to anywhere between $250 and $5,000,
based on sales for the tax year. S corporations must also pay a minimum tax of (i) $250 if the
S corporation has sales of less than $1 million for the tax year, or (ii) $500 for sales of $1 million
or more.
Film production credit, health care provider taxes enacted. For tax years beginning after 2004, a
film production contribution credit is allowed against Oregon corporate excise (income) tax and
personal income tax. Also, temporary taxes are imposed on (i) hospitals and programs of allinclusive care for elderly persons, and (ii) on long-term care facilities and on prepaid managed
care health services organizations that replace similar provisions contained in ORS Ch. 709.
New lodging tax enacted. Effective January 1, 2004, a new Oregon state transient lodging tax is
imposed at the rate of 1 percent on any consideration rendered for the sale, service, or furnishing
of transient lodging. This tax is in addition to any local transient lodging tax and is collected by
transient lodging providers. As reimbursement for the cost of tax collection, record keeping, and
reporting, a transient lodging provider may withhold 5 percent of the amount collected. The
returns and payment of the tax are due by the last day of the month following the end of each
calendar quarter. In general, new or increased local transient lodging taxes are prohibited.
Forest products harvest tax extended. The Oregon forest products harvest tax levied at the rate
of 67 cents per 1,000 feet, board measure, on all merchantable forest products harvested on forest
lands is extended to the 2004 and 2005 calendar years. The additional forest products harvest tax
levied for the purpose of administering the Oregon Forest Practices Act is also extended to the
2004 and 2005 calendar years with a reduction in the rate from 91 cents per 1,000 feet, board
measure, to 79 cents per 1,000 feet, board measure.
Exemption for property used as golf course expanded. The exemption from Oregon property tax
for land that is used both as a golf course and for the discharge of wastewater or sewage effluent
is expanded to include buildings or other improvements that are located on exempt land and used
in the operation of the golf course or the discharge of wastewater or sewage effluent. The
expansion of the exemption to buildings or other improvements is applicable to tax years
beginning after June 30, 1999, and before July 1, 2021. Any property tax and interest that have
been paid on behalf of buildings or other property located on exempt land for tax years beginning
before July 1, 2004, must be refunded. The exemption is available for land owned by a
municipality and leased and operated as a golf course by a nonprofit corporation.
II. ADMINISTRATIVE DEVELOPMENTS.
Nexus Definition Expanded. Effective July 31, 2003, ODOR adopted Regulations Section
150-318.020 “clarifying” that the presence of intangible property in the state creates income tax
nexus for out-of-state corporations.
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Oregon’s corporate income tax is imposed on “income derived from sources within this state,” a
term intended to cover income from activities that are insufficient to constitute “doing business”
in the state, according to the amendments.
ORS Section 317.010(4) defines “doing business” to mean any transaction or transactions in the
course of a corporation’s activities in the state. A foreign corporation whose activities in the
state are confined to purchases of personal property, and the storage thereof incident to shipment
outside the state, is not considered to be doing business unless it is an affiliate of a corporation
that is doing business in Oregon, according to the statute.
Oregon’s jurisdiction to tax foreign corporations is limited by the due process clause of the U.S.
Constitution, which requires some minimum connection between the state and the person,
property, or transaction it seeks to tax. As amended, OAR concludes that the following
“activities” satisfy this minimum connection requirement, thereby making income subject to the
Oregon income tax:
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maintaining tangible or intangible property in Oregon,
entering into franchising or licensing agreements for use of a franchise or license in
Oregon,
receiving franchise fees or royalties from Oregon sources,
selling or otherwise disposing of a franchise or license used in Oregon, or
selling or otherwise transferring tangible personal property pursuant to a franchise or
license to a franchisee or licensee within the state.
Thus, a foreign corporation with receipts from royalties, franchise fees, or the sale or transfer of
tangible personal property under franchise or license agreements may be subject to the corporate
excise tax if the corporation engages in activities that rise to the level of doing business in
Oregon.
The amendments explain that activities such as inspecting the franchisees’ businesses or records
and providing training in Oregon to franchisees subject a corporation to the corporate excise tax,
but those activities do not subject a corporation to the corporate income tax.
Examples of “income derived from sources within this state” and “doing business” provided in
the amendments include the following:
•
A corporation with only passive income from tangible or intangible property in
Oregon has “income derived from sources within this state” and is subject to
corporate income tax.
•
A corporation is “doing business” in Oregon and subject to the corporate excise tax if
it engages, through its employees or representatives, in any profit-seeking activity in
the state that is not protected by federal Public Law No. 86-272.
•
A corporation with an isolated sale of real property in Oregon has “income derived
from sources within this state” and is subject to the corporate income tax.
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Oregon Dividends-Received Deduction Clarified. Recently released OAR 150-317.267 clarifies
when corporate taxpayers may take the state’s dividends-received deduction against tax.
The amendments explain when a taxpayer may take a deduction against state tax even if the
deduction is not allowed against federal tax. Further, the amendments clarify when the tax
treatment of the deduction changed.
For tax years ending after December 31, 1987, a taxpayer corporation may deduct the following
amounts:
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70 percent of the qualified dividends received or deemed received from a corporation
of which the taxpayer owns less than 20 percent, and
•
80 percent of the dividends received from a corporation of which the taxpayer owns
20 percent or more.
Unlike the federal deduction, the state deduction is allowed for dividends received from foreign
as well as domestic corporations. Dividends received include subpart F income included under
IRC § 951. Further, dividends from tax-exempt corporations and dividends that qualify for a
limited federal deduction qualify for the full Oregon deduction, according to the amendments.
In order to take the state deduction, a taxpayer must first add back the federal deductions allowed
by IRC §§ 243 and 245 and the dividends eliminated under the federal consolidation rules. The
amendments list several exceptions to this general rule:
•
Dividends eliminated under IRC § 243(a)(3) are not added back to Oregon taxable
income if the recipient and payor corporations are both members of the same unitary
group filing a state consolidated return. If they are not members of the same Oregon
consolidated group, the 100 percent federal dividend deduction is added back to
federal taxable income, and the appropriate state dividends-received deduction is
subtracted.
•
Dividends received from a foreign sales corporation and deducted under IRC § 245(c)
are not added back because they are totally excluded from Oregon taxable income.
•
Dividends received from a related domestic international sales corporation are totally
excluded from Oregon taxable income.
•
Dividend income included in federal taxable income under the “gross-up” provisions
of IRC § 78 is not taxable in Oregon.
ODOR Lists Credits Available to S Shareholders. Business tax credits available to S corporation
shareholders were listed in Proposed Regulations Section 150-314.752. Credits that may be
claimed by S corporation shareholders include:
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voluntary removal of riparian land from farm production credit;
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on-farm processing facilities credit;
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employee and dependent scholarship program payment credit;
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first break program credit;
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individual development accounts credit;
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emission-reducing production technology or process (pollution prevention) credit;
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long-term care insurance credit;
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trust for cultural development account contributions credit;
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lending institution loans for affordable housing credit;
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energy conservation loans to residential fuel oil customers or wood heating residents
credit;
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long-term enterprise zone facilities credit;
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farmworker housing loans credit;
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contribution of computers or scientific equipment for research to education
organizations credit;
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qualified research activities credit; and
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alternative qualified research activities credit.
ODOR Rule Proposal Would Disregard Certain Intercompany Transactions. The Oregon
Department of Revenue proposed a rule on November 1, 2003, that would disregard certain
related-party transactions involving royalties for corporate tax purposes if the transactions were
entered into for purposes of tax evasion or if disallowing the transaction would more clearly
reflect taxable income.
The proposal would apply in situations where:
an intangible asset is owned by one corporation, organization, trade, or business and used by
another for a royalty or other fee;
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both the owner and the user are owned by the same entity;
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the owner and the user are not included in the same Oregon tax return; and
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the separation of ownership of the intangible asset from the user results in either tax
evasion or an unclear reflection of taxable income.
John H. Gadon has over 20 years of experience as a tax attorney, concentrating his practice on complex federal and state tax
planning, tax litigation and project finance. A substantial portion of Mr. Gadon’s practice is devoted to advising clients on state
tax issues. E-mail: gadonj@lanepowell.com
Lewis M. Horowitz has more than 18 years experience in his tax practice, where he focuses on federal and state tax laws
applicable to corporations, partnerships and LLCs. Lewis helps clients achieve their business objectives in a tax-efficient manner
through thoughtful planning and controversy resolution. E-mail: horowitzl@lanepowell.com
For more information on these or other business issues, please contact our Business Lawyers at:
Lane Powell Spears Lubersky LLP
(503) 778-2100 Portland
(206) 223-7000 Seattle
businesslaw@lanepowell.com
or visit our website at http://www.lanepowell.com
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