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About The Observer. (La Grande, Or.) 1968-current | View Entire Issue (Feb. 27, 2020)
THURSDAY, FEBRUARY 27, 2020 THE OBSERVER & BAKER CITY HERALD — 3B BUSINESS & AG LIFE Oregon business tax greeted with confusion By Mike Rogoway The Oregonian/OregonLive PORTLAND — Ross Stock has known since last spring his soft- wood lumber mill in Toledo would be subject to Oregon’s new $1 billion business tax. Nine months later, though, he still doesn’t know what it will cost him. The new corporate activity tax, which went into effect Jan. 1, ap- pears to be the largest tax hike in state history. Oregon lawmakers approved it last spring, levying a 0.57% tax on most business trans- actions within the state. However, they left the details to the Oregon Department of Revenue, and to future legislatures. That means business managers such as Stock still are puzzling over what the tax will cost them and how to plan their investments. And they have to figure it right away — the first payments are due at the end of April. “There’s a lot of accounting con- fusion just because nobody else has a tax like this in the United States,” lamented Stock, general manager at Western Cascade Industries. His sawmill typically employs 85 and produces 60 million board-feet a year, mostly sold to Southern California. Accountants tell Stock they just don’t know how the tax will apply to milled lumber he sells to buy- ers out of state. Some of the sales nominally take place in Oregon, but many of them go straight to builders in California. And he’s not sure whether those sales are tax- able or not. The answer matters a great deal. Stock estimates the impact of the new tax could vary by hundreds of thousands of dollars, depending on how the tax applies to those sales and how his suppliers pass along their own costs from the new tax. That’s an enormous amount of un- certainty that will have profound implications for his business, one way or another. “We’re happy to live by the rules. We don’t even know what the rules are,” Stock said. “We don’t want to be at a competitive disadvantage. We don’t even know how to avoid that.” Unchartered territory Business owners, accountants and lawyers all over Oregon are scratching their heads over the new corporate activity tax. It’s unusual in several ways, taxing revenue rather than profits and providing few industry exemptions. That’s by design. Lawmakers crafted a tax with a low rate, just 0.57%, that applies equally to just about every industry. The idea was a small tax, spread broadly, would have relatively little impact on any one business and be relatively straightforward to administer. From the outset, some industries — construction and manufacturing, among others — warned the tax would weigh disproportionately on their activities because it applies at each stage of the supply chain. The cumulative effect, known as pyramiding, means the tax accu- mulates for products as they move from manufacturer to supplier to the end buyer. Many states have corporate taxes higher than Oregon’s. Some, including Washington, levy a tax on revenue. Oregon’s tax is modeled on a similar tax in Ohio, but that tax was a replacement for other business taxes. Oregon layered its tax on top of existing corporate taxes. “Even for seasoned taxpayers, you don’t have an equivalent in other states,” said Mike Stober, director of government affairs for Oregon Business & Industry, the state’s largest business association. “This is uncharted territory for everybody,” he said. Corporate Activity Tax The new business tax aims to raise $1 billion a year for schools. Here’s how it works: •Businessespayataxof0.57% on sales inside Oregon above $1 million. Groceries, gas, hospitals and long-term care businesses would be exempt. •Businessescansubtract35% of their labor or capital costs from taxable sales. Single-family home- builders can exclude another 15% of their subcontracting labor costs. •Tooffsetanticipatedincreasein Photo by Andrew Selsky/AP File Photo The 2019 Legislature created the Corporate Activity Tax to raise approximately $1 billion a year for education in the state. “We’re happy to live by the rules. We don’t even know what the rules are. We don’t want to be at a competitive disadvantage. We don’t even know how to avoid that.” — Ross Stock, Toledo softwood lumber mill owner consumer prices, the plan cuts per- sonal income tax rates by 0.25 per- centage points for the lowest three of the state’s four tax brackets. Businesses large and small still are awaiting definitive word from the Oregon Department of Reve- nue on which sales, specifically, the state believes are subject to the tax. The department didn’t post its first temporary rules until December and now has 17 altogether. Final rules will come later this year. Businesses, though, have to make decisions now. They owe taxes quarterly, with the first pay- ments for the corporate activity taxdueApril30.Legislationnow under consideration could provide some flexibility in how tax col- lectors treat businesses that pay too little while the rules are still evolving. Lawmakers in Salem are using the short legislative session to weigh additional changes that could clarify the situation — or muddy the waters further. And big industries are lobbying for exemp- tions that could save them millions of dollars. The corporate activity tax will boost state education spending by about 17% and add hundreds of millions of dollars for early child- hood education programs. Districts around Oregon are now planning how to spend the windfall, aiming to lower class size and to boost support for struggling students and for kids from diverse backgrounds who have historically benefitted less from the state’s educational programs. A unique tax Though the Legislature levied the tax on businesses, economists say companies will inevitably pass some portion of the tax on to con- sumers. So lawmakers cut Oregon’s personal income tax at the same time they raised business taxes, hoping to offset higher prices they anticipate some retailers will pass on to consumers. Oregon companies have long enjoyed some of the nation’s lowest business taxes, according to govern- ment spending watchdogs, primar- ily because the state doesn’t have a sales tax. The corporate activity tax will change the equation — but not dramatically. The “pro-growth” Tax Foundation estimates Oregon will fall from No. 8 in the nation for low- est business taxes to No. 15. That’s not a big enough change EO Media Group file photo Agriculture and other industries remain puzzled over Oregon’s new corporate activity tax. to have a meaningful impact on Oregon’s economic trajectory, according to estimates by state economists. In a quarterly financial forecast issued Wednesday, the Or- egon economists predict the impact on personal income, employment, population and investment to be less than 0.1%. However, the state economists warned that different businesses will experience the tax quite differ- ently. “There are likely to be some busi- nesses or sectors that experience large impacts from the (tax), or where pyramiding increases prices to a larger degree,” they wrote in their quarterly forecast, “while other businesses or sectors see relatively few impacts.” The tax applies only to sales within Oregon and exempts busi- nesses with sales below $1 million. It also exempts groceries, gas, hos- pitals and long-term care organiza- tions, and offers partial exemptions for labor and capital costs and for single-family homebuilders. In general, industries likely to feel the greatest impacts are those that sell their products within Oregon — especially those that also draw their raw materials from producers inside the state that are also subject to the tax. And since the new tax is levied in sales, rather than income, indus- tries with thin profit margins will feel the pinch especially hard. For all that, though, businesses and accountants say the biggest issue right now is that businesses don’t understand the tax – or don’t know that it’s coming at all. “The uncertainty is the biggest challenge we’ve been dealing with,” said Blake Seabaugh, a senior manager at the Portland account- ing firm Perkins & Co. He said his firm’s clients understand the tax conceptually but aren’t clear on the nuances of how it will be enforced. “It’s really impacting businesses’ ability to forecast for future hiring of employees, future fixed-asset purchases, investments in their own businesses,” Seabaugh said. Pass it on? The tax applies to sales within Oregon, which sounds straightfor- ward in principle. In practice it can be difficult to figure out just what counts. Take milk, for example. A dairy farm might sell its milk to a dairy processor who also serves several other farms, and sells to businesses both inside and outside Oregon before the milk ends up in cartons or packages of cheese on grocery shelves. The Department of Revenue’s temporary rules call on farmers to use a formula based on their historical sales to determine what portion of the farm’s milk is subject to the tax. The department is working out rules for dozens of such situa- tions, issuing periodic updates and touring the state to outline its plans and collect feedback from companies. An e-mail list with updates on the tax has more than 4,600 subscribers, a big number but still a small fraction of the 40,000 businesses the state believes are subject to the tax. “It is a brand-new, very large “The uncertainty is the biggest challenge we’ve been dealing with. It’s really impacting businesses’ ability to forecast for future hiring of employees, future fixed-asset purchases, investments in their own businesses.” — Blake Seabaugh, senior manager at Portland accounting firm Perkins & Co. tax program and it’s keeping us very busy making preparations,” said Robin Maxey, the department spokesman tasked with communi- cating about the tax. More than 4,600 businesses have signed up for a Department of Revenue mailing list for updates on the tax. The department toured the state last fall. “One of the big things is: Can I pass that on to my customers?” said Sean Wallace, another of Perkins’ senior managers. And that answer, like so much about the tax, isn’t clear. Business- es, of course, can charge customers whatever the market will bear – but how they describe the charges can matter a great deal. “It’s not a sales tax. It’s not some- thing that the consumer is subject to,” Wallace said. So companies could face legal liability if they describe the additional charge as a tax. “I would advise them to just increase pricing rather than try See Tax / Page 4B
