OREGON Multistate Taxation and E-Commerce. John H. Gadon

Transcription

1 OREGON Multistate Taxation and E-Commerce John H. Gadon Lane Powell Spears Lubersky LLP 601 S.W. Second Avenue, Suite 2100 Portland, Oregon (503) I. Oregon and the Internet. Oregon does not impose any tax on Internet access or transactions conducted over the Internet. In addition, Oregon has no sales or use tax. As discussed further below, Oregon does impose a net income tax on businesses with a sufficient presence in the state. II. The Internet Tax Freedom Act ( ITFA ). P.L A. ITFA was enacted by Congress on October 21, The purpose of ITFA was to establish a national policy against states interfering with interstate commerce on the Internet. B. ITFA expires in October, C. ITFA prohibits: 1. Taxes on Internet access; 2. Multiple taxes on electronic commerce; and 3. Discriminatory taxes on electronic commerce. In order to avoid being considered a discriminatory tax, the tax must meet these guidelines: a. The tax on an item sold in e-commerce must be the same as if the item had been sold at a physical retail outlet. b. The tax may not impose a tax collection obligation on a party other than the buyer or the seller. c. The tax may not treat an Internet service provider ( ISP ) as a telecommunications company. THIS MATERIAL IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CREATE AN ATTORNEY-CLIENT RELATIONSHIP LANE POWELL SPEARS LUBERSKY LLP

2 D. ITFA contains a grandfather clause that prohibits only new taxes on Internet access. ITFA 1101(a). Twelve states are permitted to continue imposing sales and use taxes on Internet access under a grandfather clause. As Oregon does not impose a sales or use tax, the grandfather clause is irrelevant to Oregon. E. Certain Telecommunications Taxes Permitted. ITFA does not prohibit telecommunications franchise fees. ITFA 1104(9). F. Internet contacts do not create nexus. ITFA prohibits state and local governments from using Internet-based contacts as a factor in determining whether an out-of-state business has a substantial nexus with the taxing jurisdiction. ITFA 1104(2)(B). 1. Internet contacts include such items as the presence of a web site on a computer server located in-state and the flow of data of the Internet into the taxing state. G. Possibility of Renewal. New legislation has been proposed to extend the tax moratorium imposed by ITFA. III. Oregon Taxes on Corporate Income. A. Oregon Corporation Excise Tax. Oregon imposes a net income tax on corporations doing business or authorized to do business in Oregon. ORS , , B. Oregon Corporation Income Tax. Corporations with Oregon-source income but that are not considered to be doing business in Oregon and that are not authorized to do business in Oregon are subject to the Oregon Corporation Income Tax. ORS (1). C. Rate of Tax. Both the excise tax and the income tax are imposed at a rate of 6.6 percent on income apportioned to Oregon. ORS , D. Tax Treatment of Various Entities. 1. Corporations. For purposes of Oregon corporation excise and corporation income tax, corporation has the same definition as it does under the Internal Revenue Code. ORS (1). 2. Partnerships. Partnerships are generally not subject to either the Oregon corporation excise or the corporation income tax. ORS However, individual partners are. 2

3 a. Exceptions. To the extent that a partnership is taxed as a corporation for federal income tax purposes, it will generally be so taxed for Oregon tax purposes. ORS , Furthermore, to the extent that a partnership is subject to tax at the partnership level for federal income tax purposes, the amount subject to tax at the federal level will generally also be subject to tax in Oregon to the extent that the amount is apportioned or allocated to Oregon. ORS S Corporations. In general, S corporations are not subject to Oregon corporate excise or income tax. ORS , However, S corporation shareholders are subject to Oregon income tax. 4. Limited Liability Companies. A limited liability company is classified for Oregon corporation excise and income tax purposes in the same manner as the company is classified for federal income tax purposes. ORS E. Doing Business in Oregon. In general, corporations are considered to be doing business in Oregon for corporate excise tax purposes when they engage in any profit-seeking activity in the state. OAR (4)(1). For example: 1. The taxpayer is doing business in Oregon if the taxpayer maintains a place for engaging in business in Oregon. OAR (4)(1), Example 1; 2. The taxpayer is doing business in Oregon is the taxpayer sells tangible personal property in Oregon and maintains a stock of goods or place of business in Oregon. OAR (4)(1), Example 2; 3. A foreign corporation is engaged in business in Oregon if it has employees providing those services in Oregon. OAR (4)(2); and 4. A foreign corporation is doing business in Oregon if the corporation provides in-state repair and warranty services through an independent contractor for a direct marketing computer company, advertised as part of the company s standard warranty or as an option that can be separately purchased. OAR (4)(5), Example 4. F. Oregon and Nexus: Physical Presence/Exploitation of Local Market Test. The Oregon Supreme Court has held that: To establish nexus, it is necessary to show that the taxpayer has, in the conduct of his business, taken advantage of the economy of the taxing state to produce the income which is subjected to tax. This is readily seen where, as in the instant case, the taxpayer s property itself is employed in the taxing state to produce 3

4 income. Nexus may be found even where neither property nor personnel of the taxpayer is employed within the taxing state if it can be said that the state substantially contributes to the production of the taxpayer s income. American Refrigerator Transit Co. v. State Tax Comm n, 238 Or. 340, 347, 395 P.2d 127, 131 (Or. 1964) (taxpayer rented railroad refrigerator cars on a per-mile basis; the cars passed through Oregon and were occasionally repaired in Oregon). G. P.L In General. P.L generally bars state income taxation of interstate businesses whose only contact or nexus with the taxing state is through salesmen or independent contractors who solicit orders of tangible personal property in-state for out-of-state approval and fulfillment. 2. Scope of P.L Only sales solicitations and activities that are entirely ancillary to requests for purchases (i.e., those that serve no independent business function other than their connection to the solicitation of orders) are protected by P.L Wisconsin Department of Revenue v. Wrigley, 505 U.S. 214 (1992). 3. Oregon Caselaw Regarding the Scope of P.L a. P.L does not protect an out-of-state corporation whose instate sales representatives not only solicited business but also regularly collected and remitted initial deposits on orders to the home office and occasionally made collections of delinquent accounts. Herff Jones Co. v. State Tax Comm n, 247 Or. 404, 430 P.2d 998 (Or. 1967). b. An out-of-state brewery that maintained beer kegs in Oregon, which were used by retailers in dispensing the brewer s beer, was not able to claim the protection offered by P.L Olympia Brewing Co. v. Dep t of Revenue, 266 Or. 309, 511 P.2d 837 (Or. 1973). c. The presence of a single out-of-state employee providing services in Oregon beyond sales solicitation may be sufficient to subject a foreign corporation to Oregon state income tax. Briggs & Stratton Corp. v. Commission, 3 Or. Tax 174 (1968). In the Briggs & Stratton case, the employee s duties included not only supervisory sales solicitation but also providing engineering advice to the taxpayer s customers, inspecting the customer s facilities, instructing customers on proper service techniques, training customer personnel, and resolving customer complaints. 4

5 The court held that the taxpayer s activities in Oregon exceeded those allowed by P.L , and therefore the taxpayer was not exempt from taxation under the statute. Id., at 180. d. Oregon and the Multistate Tax Commission ( MTC ). Oregon is a Compact Member of the MTC, and generally comports with the MTC s interpretation of the activities which may be engaged in without losing the protection of P.L as well as those activities which cause the protection to be lost. OAR (2). H. Apportionment. A taxpayer s business income is apportioned to Oregon using a three-factor formula consisting of property, payroll, and a double-weighted sales factor. ORS ; OAR (3). 1. Property. The property factor is calculated as follows: Average value of the taxpayer s real and tangible personal property owned or rented and used in Oregon during the tax period Average value of all of the taxpayer s real and tangible personal property owned or rented and used during the tax period ORS (1); OAR (1)-(A). a. Property owned by the taxpayer is valued at its original cost. ORS (2); OAR (2)-(A). b. Property rented by the taxpayer is valued at 8 times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from sub-rentals. ORS (2); OAR (2)-(B). c. The average value of property is determined by averaging the values at the beginning and the ending of the tax period, but when necessary the taxpayer may be required to average monthly values during the tax period. ORS (3); OAR (3). 2. Payroll. The payroll factor is calculated as follows: Total amount of compensation paid in Oregon during the tax period Total compensation paid everywhere during the tax period ORS (1); OAR (1) (2). 5

6 a. Compensation includes wages, salaries, commissions, and any other form of remuneration paid to employees for personal services, including guaranteed payments that are made as compensation for services to a partnership. ORS (3); OAR (1)(4). b. Compensation is generally deemed to be paid in Oregon if any one of the following tests is met: i. the individual s service has been performed entirely within Oregon; ii. iii. the individual s service is performed both within and without Oregon, but the service performed outside Oregon is incidental to the individual s service within Oregon; or some of the service is performed in Oregon and: (1) the base of operations or the place from which the service is directed or controlled is in Oregon, or (2) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed but the individual s residence is in Oregon. OAR (2)(3). 3. Sales. The sales factor is calculated as follows: Total sales of taxpayer in Oregon during tax period Total sales of taxpayer everywhere during tax period ORS (1); OAR (1)-(A). a. Sales of tangible personal property are generally deemed to occur in Oregon if: i. the property is delivered or shipped to a purchaser (other than the United States government) within Oregon; or ii. the property is shipped from some place of storage in Oregon and the purchaser is the United States government or the taxpayer is not taxable in the state of the purchaser. OAR (2)-(A), (B). 6

7 Sales Throwback Rule. Sales of tangible personal property will be attributed to Oregon if, under the facts described under (ii), above, the state of the purchaser would not have jurisdiction to tax the Oregon seller on net income under the Constitution and P.L OAR (2) (A)(6)(b). Under the Throwback Rule, an Oregon seller is a seller who ships property from an office, store, warehouse, factory, or other place of storage in Oregon. OAR (2)-(A)(6). b. Sales of other than tangible personal property occur in Oregon if: i. the income-producing activity is performed in Oregon, or ii. the income-producing activity is performed both in and outside of Oregon and a greater proportion of such activity is performed in Oregon than in any other state, based on costs of performance. OAR (4). I. Sourcing and Allocation Issues. Oregon generally conforms to the Uniform Division of Income for Tax Purposes Act ( UDITPA ) provisions regarding the allocation of non-business income from rents and royalties from tangible personal property, capital gains, interest, dividends, and patent and copyright royalties. ORS IV. Local Taxes. A. Multnomah County Business Income Tax ( MCBIT ). 1. In General. Multnomah County (which includes the City of Portland) imposes a business tax on net income from business done within the county. MCC (A). a. Doing Business Defined. Doing business means engaging in any activity in pursuit of profit or gain, including the activities of officers, employees, or agents. MCC b. Presumption of Doing Business in County. There is a presumption that an entity is doing business in Multnomah County if the entity: i. Advertises or professes to be doing business in the county; ii. Delivers goods or provides services within the county; 7

8 iii. iv. Owns, leases, or rents property in the county which is used in a trade or business; Engages in any activity that involves the gain from the holding or selling of property in the county that is not otherwise exempt from MCBIT; or v. Engages in any activity for the pursuit of gain that is not otherwise exempt from MCBIT. MCC Rate. The rate of tax is 1.45 percent. MCC (A). 3. Apportionment. Income is apportioned to Multnomah County based on a single sales factor. The numerator is the taxpayer s total gross sales from business activity in the county during the tax year, and the denominator is the taxpayer s total gross sales from business activity everywhere during the tax year. MCC (B). 4. Entities Subject to Tax. MCBIT is imposed on persons, corporations, partnerships, S corporations, limited liability companies, limited liability partnerships, estates, and trusts. MCC (A). The individual partners, shareholders, members, or beneficiaries are not subject to the tax on income earned by the relevant entity. Id. 5. Taxable Income. a. Corporations. The net income of a corporation for MCBIT purposes is the net income as reported to the state for corporation income or excise tax purposes, before any allocation or apportionment for out-of-state operations. MCC Net income also does not include deductions for net operating loss carryforwards or carrybacks. Id. b. Other Entities. Partnerships, S corporations, limited liability companies, limited liability partnerships, family limited partnerships, estates and trusts are liable for the business tax and not the individual partners, shareholders, members or beneficiaries. MCC (A). The income of these entities includes all income received by the entity including ordinary income, interest and dividend income, income from sales of business assets and other income attributable to the entity. Id. 6. Owners Compensation Deduction. MCBIT limits the deductibility of compensation paid to owners, general or limited partners, or controlling shareholders (collectively, the Owners ). A deduction is allowed up to 75% of the amount paid to each Owner by the entity. MCC (A). 8

9 The deduction is capped at $50,000 per Owner, indexed for inflation (currently, $53,000). Id. A controlling shareholder is any person who is the beneficial owner of 5 percent of the outstanding voting stock or securities of the taxpayer. Admin. Rule A. Stockholders, spouses, parents and children are generally aggregated into one controlling shareholder, unless the spouse, parent, or child controls more than 5 percent of the stock. Id. Professional corporations that are partners of a partnership are disregarded for purposes of this calculation, and each shareholder of a professional corporation-partner is considered to be a partner of the partnership. Admin. Rule A. 7. Administration. The tax is administered by the City of Portland Bureau of Licenses. MCC , (A). 8. Conformity with Oregon Law. MCBIT generally conforms to Oregon corporate excise and income taxes. MCC (A). B. Portland Business License Tax In General. All persons doing business in the City of Portland are subject to the Business License Tax. PCC Rate of Tax. The tax is imposed at the rate of 2.2 percent of net income from business done within the City of Portland. PCC , (B). There is a minimum tax of $100. PCC , Conformity to MCBIT. In general, the Portland Business License Tax conforms to the terms of MCBIT. a. Apportionment. Income is apportioned to the City of Portland based on a single factor fraction. The numerator is the taxpayer s total gross sales from business activity in the city during the tax year, and the denominator is the taxpayer s total gross sales from business activity everywhere during the tax year. PCC (B). b. Owners Compensation Deduction. The Portland Bureau License Tax employs the identical Owners Compensation Deduction as MCBIT. PCC The Portland Business License Tax is also referred to as the License Fee. 9

10 V. E-Commerce: Unique Characteristics and Compliance. A. Hot Issues. 1. Apportionment. Oregon is considering adopting a single-sales factor apportionment system or a super-weighted sales factor apportionment system. B. MTC Voluntary Disclosure Program. 1. Oregon is a Participant. Oregon is a Compact Member of the MTC and is a participant in the voluntary disclosure program created by the MTC s National Nexus Program. MTC, News and Views, 1999, NY 99-1 (March 31, 1999). 2. Operation of Program. Through this program, multistate businesses may anonymously approach Oregon to propose settlement of potential income/franchise tax liabilities arising from past activities within Oregon. 3. Benefits. Taxpayers benefit by resolving potential state tax disputes before Oregon issues prior year assessment of taxes, interest and penalties. Multistate resolution saves time and money, and the Commission staff performs most of the work at no cost to the taxpayer. 4. Non-Disclosure of Identify Even if Proffer Rejected by State. To encourage voluntary compliance through this program, the Commission has adopted a policy where the Commission will not disclose the identities of taxpayers who voluntarily enter into settlements with those states that do not accept the taxpayer's proffer. 10