In 2018 and 2019, the City of Portland, Oregon, and Oregon State passed tax laws imposing new or modified gross receipts taxes on businesses. These tax increases could hit trucking and logistics firms especially hard, creating new challenges for companies that operate in the state.
The tax provisions, called the Clean Energy Surcharge (CES) and Oregon Corporate Activity Tax (CAT), respectively, have more differences than similarities. That means trucking and logistics firms doing business in Portland and Oregon may need to review several facets of their operations, including apportionment, cost allocation, and accounts payable functions, to make sure they aren’t overpaying their taxes.
Following is an overview of both taxes and steps trucking and logistics firms can take to make sure they aren’t overpaying.
Background
In November 2018, Portland, Oregon, voters passed Measure 26-201, the Portland Clean Energy Community Benefits Initiative 2018. As a result, City of Portland taxpayers with total gross worldwide receipts exceeding $1 billion and Portland gross receipts exceeding $500,000 are subject to a 1% gross receipts tax on receipts attributable to Portland. The tax, called the Clean Energy Surcharge (CES), is effective January 1, 2019.
Initially, Portland voters passed a measure imposing the tax on business entities with United States receipts exceeding $1 billion. When the Portland City Council enacted the measure, however, it increased the population of taxpayers subject to the new tax by changing the threshold from US receipts to total worldwide receipts. While there’s doubt regarding the Portland City Council’s authority to expand the scope of the tax, this article will analyze the tax law as enacted, rather than the measure the voters approved.
In June 2019, Oregon Governor Kate Brown signed into law House Bill (HB) 3427A, which imposes a Corporate Activity Tax (CAT) on all businesses with receipts sourced to Oregon. The tax is effective January 1, 2020.
Implications
While both the CES tax and the CAT are nominally assessed on gross receipts, there are significant and potentially costly differences between both the net receipts subject to tax and the apportionment of those receipts to Portland or Oregon. As with all taxes imposed on gross receipts or modified gross receipts, businesses operating with lower margins are hit especially hard.
Portland Clean Energy Surcharge
The City of Portland (City) describes its CES tax as a “surcharge on the retail sales within Portland of certain large retailers.” The tax, however, isn’t a surcharge, but is instead an entirely new tax. It applies to many business receipts not generally considered to be retail sales, and, in the case of trucking companies, it applies to receipts earned outside Portland.
Portland lies largely within Multnomah County (County), and both the City and the County impose a business license tax on apportioned net income. The license tax has been in place for many years. The City Revenue Division administers the business license taxes for both the City and the County and will also administer the CES.
The new tax is projected to increase costs to businesses and Portland consumers by $35 million to $79 million per year. The tax is effective January 1, 2019, and it applies to receipts earned in tax years beginning on or after January 1, 2019. While estimated payments are required for the CES in the same manner as required for the business license tax, according to Portland Chapter 7.02.500(f)(4) Business License Law, the City won’t impose underpayment interest or penalties for failure to make estimated penalties for the 2019 tax year.
Apportionment Approach
The City and the County employ a single sales factor to apportion the net income base and define the denominator of the factor with reference to the Oregon sales factor rules.
Although billed as a 1% surcharge, the CES is an entirely new tax of 1% on gross receipts from retail sales. The statute defines retail sales broadly, as sales, including services, to a consumer for use or consumption, and not for resale, according to Portland Chapter 7.02.100(AA) Business License Law. This definition encompasses not just services typically thought of as retail, such as home landscaping and other personal services, but also business-to-business services, including trucking and logistics.
Portland’s rules for determining sales earned within Portland increase the burden on trucking and logistics companies.
Trucking Companies
Freight carriers that merely drive through Portland without a pick up or delivery in the city don’t have receipts attributed to Portland. However, carriers that either pick up or deliver freight in Portland must attribute 50% of the gross receipts from those freight movements to Portland. Interstate carriers generally can reduce the 50% attribution to 25% through use of a reasonable methodology, such as mileage apportionment, according to a City of Portland Business Tax Administrative Rule 610.93-7.
An interstate carrier, therefore, must pay the gross receipts tax on a minimum of 25% of the total revenues—not net income—from any freight movement with a Portland origin or destination. This assignment provision, coupled with the high gross receipts tax rate, appears to be unique.
Layered with Portland’s existing Heavy Vehicle Use Tax, Portland’s tax structure can add a significant burden to freight carriers.
Logistics Companies
The sourcing rules for logistics companies located in Portland are even more punitive. A service business must assign receipts using an income-producing activity rule, according to Portland City Code 7.02.610(D)(2). Receipts from brokerage services, for example, are assigned to Portland if the broker operates in Portland. If the broker operates both inside and outside Portland, receipts are assigned to the city based on the hours spent by the broker within the city, not based on the location of the customer, as stated by City of Portland Business Tax Administrative Rule 610.93-4A.
Oregon Corporate Activities Tax
Oregon’s new CAT tax is titled the Corporate Activity Tax, however it applies to essentially all forms of business, including individuals, partnerships, limited liability companies, and trusts. The CAT is imposed on all sales, not just retail sales, and is effective on January 1, 2020. The Oregon Department of Revenue has confirmed that the CAT is a calendar-year tax.
Although several other states, including Hawaii, Kentucky, Nevada, New Mexico, Ohio, Texas, and Washington, impose a tax on gross receipts or modified gross receipts, Oregon’s mechanism for determining the CAT base is unique.
The CAT base comprises two elements: Oregon-sourced sales and an apportioned deduction. Like the Texas Margins Tax, a taxpayer may deduct 35% of either its cost of goods sold or compensation. Unlike the Texas Margins Tax, however, a taxpayer won’t apportion its net margin to Oregon. Instead, a taxpayer will first assign receipts to Oregon and then apportion its deduction using its Oregon sales factor.
The resulting apportioned base, less a $1 million exclusion, is subject to CAT at 0.57%. While certain taxpayers use a three-factor apportionment formula, trucking and logistics companies will use Oregon’s statutory single sales factor formula.
Trucking Businesses
For a trucking business, the assignment of receipts and apportionment of its deduction is relatively straightforward. Oregon employs mileage-based apportionment for trucking companies, so the receipts assigned to Oregon will generally be equal to the receipts in its Oregon sales factor numerator. A trucking business will then apportion 35% of its cost of goods sold or labor cost using its Oregon sales factor and compute CAT on the balance exceeding $1,000,000.
Logistics Businesses
The calculation is more nuanced for logistics businesses and other service providers. For tax years beginning on and after January 1, 2018, Oregon requires market sourcing for service providers. In computing the sales factor, sales made to jurisdictions where the entity isn’t taxable are thrown out of the denominator. The CAT base calculation, which sources receipts but apportions the deduction, could yield anomalous results for service entities subject to throw out.
Similar considerations apply to sellers of tangible personal property (TPP). Oregon employs throwback for calculating the sales factor numerator of sellers of TPP. However, for the CAT, sellers of TPP include only Oregon-destination sales as Oregon receipts, which will exclude throwback. Sellers of TPP based in Oregon without operations in other states will presumably be subject to throwback, so their Oregon numerator will be higher than their Oregon-sourced sales.
Logistics businesses may want to carefully review Oregon’s regulation for sourcing sales of other-than-tangible personal property. The regulation provides detailed examples and guidance regarding when a taxpayer may use principles of reasonable approximation to determine Oregon-sourced receipts, according to Oregon Administrative Rule 150-314-0435.
Oregon Use Tax
Oregon’s CAT is a pyramiding gross receipts tax, similar to Washington’s Business and Occupations tax. It’s designed to apply at each step of a transaction, with no exclusions for wholesale sales.
To prevent vendors from avoiding the tax by delivering property to Oregon businesses outside Oregon, the CAT contains a provision requiring Oregon taxpayers to increase their Oregon gross receipts by the value of any property brought into Oregon within one year of purchase. This could have significant implications for trucking businesses that purchase equipment through a nationalized program and then deploy to individual states as needed.
The CAT law contains an exception to this rule if the taxpayer can demonstrate that avoiding Oregon tax wasn’t the purpose for the transaction structure. Any business that purchases property and equipment outside Oregon should document its business purpose for doing so.
Additional Considerations
Accounting for Receipts
Both the CES and the CAT are assessed on gross receipts. Trucking and logistics businesses may have industry-specific accounting methods that could either gross up their receipts or reduce them.
For example, a logistics business may act as either principal or agent on a given contract, and it would record customer receipts on a gross or net basis, accordingly. Logistics businesses required to prepare financial statements under Generally Accepted Accounting Principles (GAAP) generally must review contracts to determine the gross versus net treatment. With both the CES and CAT based on gross receipts, even businesses that aren’t subject to GAAP will want to carefully review their contract terms to make sure items are correctly categorized.
Trucking businesses that impose fuel surcharges or provide customer discounts face a similar analysis. Fuel surcharges, for instance, could be an offset to fuel expenses as opposed to a separate revenue line.
Structuring
Oregon, like most states, follows the federal treatment of pass-through entities (PTEs), according to Oregon Revised Statutes Section 63.810. Portland, however, taxes entities that aren’t disregarded, such as limited liability companies that file federal partnership returns, according to Portland City Code 7.02.100(T) and (DD). Under current law, the $1 billion per $500,000 thresholds would apply to each taxable entity.
A business with investments in partnerships that include the distributive share of net income and apportionment factors from the partnerships should evaluate its apportionment in light of this new tax. Structuring opportunities may exist to reduce its overall Portland tax burden.
Sale for Resale
Portland provides a limited exception for services sold in the same manner as goods. A logistics business that purchases transportation may resell its transportation services to its customers.
However, providing documentation to the carrier could allow the carrier to avoid this burden. Although the logistics business may owe the tax on its total receipts, the additional layer of tax imposed on the underlying carrier could be eliminated.
Alternative Apportionment
Like many jurisdictions, Portland and Oregon allow taxpayers to request alternative apportionment if the statutory apportionment provisions don’t clearly reflect income earned in the city or state, according to Portland City Code 7.02.610(F) and Oregon Administrative Rule 150-314-0086. Taxpayers should make this request before filing a return.
Inconsistencies and Complications
The inconsistencies between Portland and Oregon apportionment rules as applied to both trucking and logistics businesses mean that a business could be subject to the CAT but not the CES, or even the CES but not the CAT. Further, the differences in computing the tax base could lead to unanticipated results.
Like Portland’s CES, Oregon’s CAT applies in addition to the existing tax on apportioned net income. Coupled with Portland’s existing taxes, including a surcharge for public companies with executive compensation exceeding city-approved ratios, a business could be subject to as many as the following seven taxes:
- Oregon CAT
- Oregon net income tax or minimum tax
- Portland license tax
- Multnomah license tax
- Portland CES
- Portland CEO surcharge
- Portland Heavy Vehicle Use Tax
We’re Here to Help
Trucking and logistics businesses often operate in high gross revenue, low net margin environments that make receipts and margins taxes costly. This multilayered tax regime increases the need for trucking and logistics businesses to carefully examine their Oregon locations, activities, and potential liabilities.
For more information about how the Portland CES or Oregon CAT may affect you or your business, contact your Moss Adams Professional.