On November 6, 2018, Portland voters passed Measure 26-201, which imposes a 1% gross receipts tax on “large retailers.” The tax applies to revenue from all retail sales of property and services, not specifically exempted. The tax will apply to tax years beginning on or after January 1, 2019.
The tax, which is structured as a “surcharge” to the existing Portland business license tax (a 2.2% net income tax), applies to “large retailers,” which are generally defined as businesses with both (i) more than $1 billion in “retail sales” from all U.S. locations, and (ii) $500,000 or more in Portland “retail sales,” in the prior year. Utilities, businesses not engaged in retail sales in Portland, credit unions, and cooperatives are not subject to the tax.
A “retail sale” is a “sale to a consumer for use or consumption, and not for resale.”
TAX BASE—LIMITED DEDUCTIONS
The surcharge tax is generally imposed on a large retailer’s “gross revenue from retail sales.” However, the following amounts are deducted in computing the revenue subject to tax:
1. Portland business license tax paid; and
2. Retail sales of (a) “qualified groceries” (SNAP-eligible food products), (b) medicines and- drugs, regulated by the FDA as such, and (c) health care services, including health insurance (“Exempt Sales”).
1. The Surcharge Tax Applies to Revenue from Retail Sales of Intangibles and Services as Well as Tangible Personal Property.
Except as noted above, the surcharge tax applies to gross revenue from all retail sales of property and services. Large firms providing (i) banking or financial services, (ii) legal, accounting, engineering, or consulting services, or (iii) insurance services, other than health insurance, may be impacted, particularly if they have significant Portland operations.
2. “Retail Sales Within the City” Are Not Limited to Sales from Physical Store Locations.
The surcharge tax is not limited to revenue from sales at physical stores in Portland. While the Measure does not specify a sourcing method for determining where sales occur, Portland applies a destination sales rule to apportion income from sales of tangible personal property for the general business license tax. Under the rule, sales of tangible personal property shipped or delivered to Portland customers, including online sales, are generally Portland sales. Receipts from sales of services and intangibles, on the other hand, are sourced under the general business license tax using the cost-of-performance method.
3. Whether a Retailer Meets the $1 Billion of Retail Sales Test Appears To Be Based on Where the Seller Is Located, Not Where the Customer Is.
The test is based on “retail sales from all locations in the United States where the taxpayer does business,” rather than retail sales “within” the United States. If the test is based on the location where the seller is located, then sales from U.S. locations to customers in non-U.S. locations could be included. However, under the language of the Measure, it would be difficult to argue that sales from non-U.S. locations to customers located in the U.S. should be included.
4. Affiliated Groups and Consolidated Returns.
The Measure does not address the treatment of corporations that are part of affiliated groups filing consolidated Portland business license tax returns. In the case of a national retailer that files a consolidated Portland business license return that includes all retail subsidiaries, it generally makes no difference in computing the retailer’s business license tax liability if the retailer’s Oregon stores and online sales operations are (i) included in the same corporation as the retailer non-Oregon operations, or (ii) in separate corporations.
It may make a difference for the surcharge tax. The Measure defines a “large retailer” as a “business” and makes no reference to the form of entity or type of tax return filed. In determining whether a business is a “large retailer,” each “business” may need to be analyzed separately.
5. Tax Computation.
If, solely for purposes of estimating a retailer’s potential surcharge tax, one starts with the retailer’s Portland business license tax apportionment factor (sales), the tax may be estimated as follows:
- Whether a retailer is a “large retailer” is based on sales from the prior year. If the numerator of a retailer’s prior year’s apportionment factor was less than $500,000, or the denominator of the factor was $1 billion or less, the surcharge tax should not apply. If the numerator of the factor was $500,000 or more, and the denominator was greater than $1 billion, the retailer should proceed to the next step.
- The retailer should deduct (i) items that are not “retail sales” (e.g., rental income), and (ii) sales from non-U.S. locations from the apportionment factor for the prior year. If, after these adjustments, either threshold is not met, the surcharge tax should not apply. If both thresholds are met, the retailer should make the same adjustments to the current year’s apportionment factor numerator and proceed to the next step.
- The retailer should deduct the amount of Exempt Sales and Portland business tax paid from the current year’s adjusted apportionment factor numerator. The surcharge tax generally would be 1% of the current year’s adjusted numerator.
There are a number of other significant questions regarding how the Measure will be interpreted and tax applied. The city is expected to provide guidance on at least some of these issues. If you would like to know more about the surcharge tax, how it might affect your business, or options to plan for it, please contact one of our Oregon tax partners: John Gadon, firstname.lastname@example.org, 503.778.2130, and Eric Kodesch, email@example.com, 503.778.2107.