In the second article in a series on the Portland area’s unusual tax structure, we explore the challenges taxpayers and practitioners face navigating the local income tax regime. We also consider the legal exposure these taxes present to the State of Oregon and recommend the legislature play air traffic controller in pursuing a more uniform state and local tax system.
Currently, Portland small business owners operating as passthrough entities must navigate up to seven income taxes between city, county, regional, state, and federal governments — each defining income differently. These businesses are also often subject to state and local taxes on gross receipts, payroll, and property, adding further compliance and payment hurdles. While the five local taxes reference Oregon taxable income as the starting point in some way, when the local ordinances and administrative rules are considered, these taxes bear little similarity or uniformity to the state’s income tax provisions.
There are numerous differences between the state and local income tax rules and definitions, but two stand out prominently. First, Portland’s local income taxes do not follow the state and federal personal and corporate income structure, requiring owners of passthrough entities to report their business income on the owner's individual tax filing. Meanwhile, Portland requires all businesses, regardless of their formation, to pay tax as an entity, requiring a completely different set of rules defining income. If the business is an s-corporation or partnership, the business pays tax on its income and the owner pays tax on their distributive share of operating income, requiring a complicated and ineffective deduction to separate personal and business income not required for any other tax.
The second difference explained in our article regards throwback sales. Oregon is among the 21 states with a throwback policy, requiring taxpayers to source out-of-state sales to Oregon if they are not taxable in the purchaser’s state. One of the bright spots with the Portland area business taxes is they do not require throwback in the computation of income. Unfortunately, that local policy does not apply universally. If a business is below certain gross receipts thresholds and only pays tax through the local personal income tax, they must include throwback sales in their income. It is odd and impracticable — not to mention constitutionally suspect — to apply a throwback requirement arbitrarily based on a taxpayer’s size.
The sheer number of taxes, the variations between the state and local taxes, and the variations between the local taxes themselves make the Portland area’s tax system extremely cumbersome for taxpayers. Under the U.S. Constitution, states are responsible for the regulatory burdens imposed by their political subdivisions. In addition to challenging the constitutionality of the local tax regime, a complaint could include the state’s failure to manage its political subdivisions, requiring state attorneys to defend against a constitutional challenge. This is despite the state’s tax system not being the core issue in the complaint.
Oregon lawmakers are considering legislation, HB 2548, requiring local jurisdictions to align their tax structure and rules to the state’s definition of income. We argue that if a jurisdiction piggybacked on state laws, the complicated nature of calculating and complying with these taxes would ease significantly. Notably, the legislation would not affect a locality’s authority to impose or collect its taxes; rather, it would mandate uniformity and more consistent rules across all jurisdictions.