Effective January 1, 2018, Oregon joins the nationwide trend to market-sourcing sales. that could impact the amount of income taxable in Oregon.
Why look at this now? Making sure your business has the right data to support this change and planning for a potentially drastic year over year changes to Oregon taxable income helps the business be ahead of the game. Also given this is part of a much broader trend among states moving to market-based sourcing and economic nexus, now may be the time for a holistic look at your overall state tax profile.
Market-Based Sourcing (Senate Bill 28)
Previously, for determining Oregon’s share of a business’ income taxable by the state, receipts from services and intangible property were sourced based on cost of performance. For Oregon-based businesses, this often meant all or nearly all of its income was taxable by the state based on the location of its operations. Likewise, out-of-state businesses often had very little Oregon taxable income if operations were not in-state.
Now, with market-based sourcing, sales of services are Oregon sales if the services are delivered in the state, and receipts from intangible property are Oregon sales to the extent the intangible property is used in the state.
While these rules may seem simple, this is not always true as trying to match sales data produced by a business’ sales and operational functions may not necessarily easily line up with the specific state definition, and how that state definition applies to a specific revenue stream is not always so clear.
Oregon joining the trend to market-based sourcing also does not necessarily simplify its multistate tax filings, as different states define a business’ market inconsistently. Oregon’s new rule is based on the model provisions by the Multistate Tax Commission (“MTC”). However, that only means its definition will be consistent with those states that similarly model their rule. To put it concisely, do not expect that the rules in Oregon will be the same as the rules in other “market-based” states like California.
Receipts Included in the Sales Factor (House Bill 2273)
Oregon not only changed what state sales may be sourced to, it also changed which receipts are included in that determination.
The definition of “sales” for apportioning taxable income to the state now includes all receipts from transactions in the regular course of business. While Oregon always had a specific occasional sale exclusion, this new definition broadens the type of sales that are excluded for apportionment purposes because those are not in the regular course of business.
The new definition of “sales” also excludes all receipts from hedging/securities, even for financial-related businesses, and amounts related to property acquired as an agent or held in trust. Thus, the sales for apportionment purposes may only include net gains from brokered transactions rather than gross receipts.
These exclusions could mean that substantial income items or revenue streams are not included in the apportionment factor and, accordingly, could be sourced to Oregon based on other aspects of a business’ Oregon activity.
Time for a State Tax Tune-Up
Looking at these Oregon changes is smart for a business to address. Looking at these changes through a broader lens of overall state tax changes is smart business.
Understanding both how these rules have been interpreted in other states, and the practical ways businesses have applied market-based sourcing, we can help you figure out what these changes mean for your business in Oregon and across the country.