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