Change in Oregon Apportionment Could Mean Lower State Tax for Service Companies
Author: Sonia Thannickal, CPA | Tax Senior at Delap
With all the news about the Federal tax reform, you may have missed that Oregon also passed a new law, Senate Bill 28, that has already taken effect.
Effective for tax years beginning on or after January 1, 2018, for sales other than tangible personal property, Oregon has changed the way apportioned taxable income is calculated. This can have a dramatic impact on Oregon tax for service companies. In most cases, the impact will be beneficial.
Prior to 2018, Oregon was a Cost of Performance (“COP”) state for purposes of apportioning revenues from services. Revenue was apportioned to the state where the income-producing activity is performed. If the activity was performed across many states, the revenue was apportioned entirely to the state that had the greatest proportion of the income-producing activity. This was determined by the costs incurred to generate the service revenue.
Service revenue apportioned to Oregon under this methodology may also be apportioned to states using market-based apportionment depending on where the customer received the benefit of the service. This could result in higher blended state apportionment for a service provider based in Oregon with customers outside of the state.
New to Oregon in 2018, market-based sourcing apportions service revenue based on where the customer receives the benefit of the service provided. The location of where the service revenue is performed is no longer relevant for apportioning income to Oregon.
Oregon will no longer tax income from services performed from Oregon where the customer is located outside of Oregon. This change allows Oregon companies to stop paying tax twice on certain sales of services to out of state customers.
For example, if a service is performed in Oregon and the customer is in Washington (Market Based), under the old law when Oregon was a Cost of Performance state, the revenue would be sourced to both Washington and Oregon resulting in tax in both states. Under the new law, the sale would only be sourced to Washington, reducing the overall state tax to the company.
In today’s environment of Market-Based sourcing, you may be unknowingly establishing nexus in other states.
As you start this new year, be sure to keep track of where your customers are receiving the benefit of the services that you provide. Properly maintaining this information could help reduce your state tax in 2018.
If you have any questions about the Oregon law change, please contact our team today.