(1) The subtraction provided in ORS
317A.119 includes all labor
costs or cost inputs of a taxpayer, whichever is greater, regardless of the
place the labor cost or cost input is incurred, except for cost inputs or labor
costs that are attributable to the taxpayer's receipts from an item that is not
commercial activity. For purposes of the subtraction, a unitary group, as
determined pursuant to ORS
317A.106, must include the labor
costs or cost inputs of all members of the unitary group, regardless of where
incurred, except for expenses from transactions among members of the group as
provided in ORS 317A.119(2)(a)
for which receipts are excluded under ORS
317A.106.
(2)
Determining Costs Eligible for
Subtraction. Costs described in ORS
317A.119(2)(a) and
(b) ("ineligible costs") are not eligible for
subtraction. "Eligible costs" equals 35 percent of the greater of the excess of
total labor costs over the amount of labor costs that are ineligible costs or
the excess of total cost inputs over the amount of cost inputs that are
ineligible costs.
(a) If a
taxpayer can
reasonably determine, from
the taxpayer's books and records maintained in the
ordinary course of business, how much of its total labor costs or cost inputs
are ineligible costs or that it has no ineligible costs,
the taxpayer may
calculate the subtraction using the appropriate method under section (3),
unless otherwise permitted or required under this rule.
Example 1: South Street operates
an automotive repair shop. All but an incidental amount of South Street's
receipts are from commercial activity. South Street's labor costs are greater
than its cost inputs. All South Street's employees perform their activities
primarily for the purpose of producing receipts that are included in commercial
activity. Because South Street can reasonably determine from its books and
records that all its labor costs are attributable to commercial activity, South
Street may use the general rule in section (3) of this rule for determining its
cost subtraction.
(b) A
taxpayer who cannot reasonably determine how much of either its total labor
costs or cost inputs are ineligible costs based on its books and records may
use a reasonable method to approximate eligible costs. The taxpayer must
document the approximation method used and retain the documentation in the
taxpayer's records. Documentation must be provided to the department upon
request. The department may disallow the approximation method used by the
taxpayer under this section if the department determines the method does not
reasonably approximate the taxpayer's eligible costs.
(3)
General Rule. Computation of
subtraction for eligible costs after reduction of ineligible costs.
(a) If all the taxpayer's commercial activity
is sourced to Oregon, the taxpayer's subtraction equals its eligible
costs.
(b) If
the taxpayer has
commercial activity both within and without Oregon,
the taxpayer must apportion
the taxpayer's eligible costs as follows, unless
the taxpayer elects to use the
substitute rule under section (4).
(A) If the
corporate activity taxpayer is identical to the entity or group of entities
reporting on the apportionment schedule filed for purposes of Oregon income or
excise tax under ORS chapters 314, 316, 317, or 318, that taxpayer must
multiply its eligible costs by the apportionment factor percentage from the
taxpayer's Oregon apportionment schedule filed under ORS chapters 314, 316,
317, or 318 to calculate the subtraction amount. The taxpayer must use the
apportionment schedule filed with the most recent return covering a 12-month
period filed with the department.
(B) If a corporate activity taxpayer is not
identical to the entity or group of entities reporting on the apportionment
schedule filed for purposes of Oregon income or excise tax under ORS chapters
314, 316, 317, or 318, the taxpayer must compute its Oregon apportionment
factor percentage using the applicable apportionment method under ORS chapters
314 or 317, except as otherwise required or permitted under this rule. The
taxpayer must multiply its eligible costs by the computed apportionment factor
percentage.
(c)
Notwithstanding section (3)(b) of this rule, unitary group taxpayers with
members subject to multiple apportionment methods under ORS chapters 314 or 317
must compute the group's eligible costs as follows, except as otherwise
required or permitted under this rule.
(A)
Separate the unitary group into subgroups. Each subgroup
consists of members that use the same apportionment method under ORS chapter
314 or 317.
(B) Each subgroup must
separately determine eligible costs as required under section (2) of this
rule.
(C) Each subgroup must
separately compute their apportionment factor using the applicable
apportionment method under ORS chapter 314 or 317, except that transactions
between all unitary group members must be eliminated, regardless of whether
transactions are between or among unitary group members subject to sales factor
apportionment under ORS
314.650 or those subject to
another apportionment method under ORS chapter 314 or 317.
(D) Each subgroup must multiply its eligible
costs, as determined under section (2) of this rule, by the subgroup's
apportionment factor percentage determined under subsection
(3)(c)(C).
(E) The unitary group's
subtraction is the sum of the apportioned eligible costs of each subgroup.
Example 2: Rosslyn Inc.,
McPherson Corp., Palisades Inc., and Delta Inc. are a unitary group under ORS
317A.100(19)
and must file as a single taxpayer under 317A.106. For Oregon income tax
purposes, Rosslyn Inc., and McPherson are required to apportion using the sales
factor under ORS 314.650. Delta and Palisades are
telecommunications firms that elect to use the double-weighted sales
apportionment factor under ORS
314.650 (1999 Edition) for their
Oregon income tax return per OAR
150-314-0060. As the unitary
group members are subject to multiple apportionment methods under ORS 314, the
group must determine and apportion eligible costs under section (3)(c) of this
rule, forming two subgroups: Subgroup A includes sales and eligible costs from
Rosslyn and McPherson. Subgroup B includes Delta and Palisades. After
eliminating transactions between all unitary group members, Subgroup A,
calculates its sales factor apportionment factor pursuant to ORS
314.650, to be 11.1110%. The
eligible costs of Subgroup A, determined in accordance with section (2) of this
rule, are $2 million. After applying the apportionment factor percentage to
eligible costs, Subgroup A has apportioned eligible costs of $222,220 ($2
million x 11.1110% = $222,220).
Subgroup B, after eliminating all transactions between unitary
group members, calculates the double weighted apportionment factor pursuant to
OAR 150-314-0060, to be 41.6667%.
The eligible costs of Subgroup B, determined in accordance with section (2) of
this rule, are $1 million. After applying the double-weighted sales factor
apportionment percentage to eligible costs, Subgroup B has apportioned eligible
costs of $416,667 ($1 million x 41.6667%). The unitary group adds the
apportioned eligible costs from each subgroup to determine the group's total
subtraction ($222,220 + $416,667 = $638,887).
(4)
Substitute
Rule. A
taxpayer may, in lieu of calculating and apportioning eligible
costs as required in sections (2) and (3) of this rule, elect to approximate
and apportion eligible costs by means of the
commercial activity ratio.
(a)
Costs for commercial activity
ratio. A taxpayer's costs under the commercial activity ratio
("applicable costs") equal 35 percent of the greater of total cost of goods
everywhere or total labor costs everywhere, as those costs are determined
before application of ORS
317A.119(2)(b).
Expenses from transactions among members of a unitary group must be
excluded.
(b)
Commercial
Activity Ratio. The commercial activity ratio is a fraction, the
numerator of which is the taxpayer's commercial activity sourced to Oregon and
the denominator of which is the sum of the taxpayer's total commercial activity
everywhere plus amounts excluded under ORS
317A.100(1)(b)(Q),
ORS 317A.100(1)(b)(Y),
ORS 317A.100(1)(b)(AA),
ORS 317A.100(1)(b)(DD),
ORS 317A.100(1)(b)(EE),
ORS 317A.100(1)(b)(TT),
ORS 317A.100(1)(b)(VV),
ORS 317A.100(1)(b)(WW)(i)
and ORS 317A.123(2).
Receipts from transactions among unitary group members are not included in
either the numerator or denominator.
(c)
Subtraction. For
purposes of the substitute rule,
the taxpayer's subtraction is calculated by
multiplying the applicable costs under subsection (a) by
the taxpayer's
commercial activity ratio under subsection (b).
Example 3:
Grocery & TV Mart has $10 million of Oregon commercial activity and $70
million of everywhere commercial activity plus exclusions described in section
(4)(b) of this rule ($50 million in commercial activity and $20 million in
receipts from retail sales of groceries, excluded from commercial activity
under ORS 317A.100(1)(b)(EE)).
Almost all Grocery & TV Mart's employees assist in sales of both groceries
and televisions. Grocery & TV Mart cannot reasonably determine from its
books and records how much of its labor costs and cost inputs are attributable
to sales of groceries excluded from commercial activity under ORS
317A.100(1)(b)(EE),
and elects to use the substitute rule under section (4). Grocery & TV Mart
has an everywhere labor cost of $28 million and everywhere cost inputs of $26
million.
Grocery & TV Mart computes the Oregon subtraction as
follows:
Step 1: Determine costs for commercial activity. In this
example, labor costs are greater than cost inputs. Multiply labor costs ($28
million) by 35 percent to determine applicable costs. $28 million x 35% =
$9,800,000.
Step 2: Determine the commercial activity ratio. Oregon
commercial activity of $10 million / $70 million (everywhere commercial
activity plus required exclusions) = 14.2857% commercial activity ratio.
Step 3: Determine Grocery & TV Mart's subtraction. Total
applicable costs for commercial activity of $9,800,000 multiplied by commercial
activity ratio of 14.2857% = $1,399,999.
(5) If a unitary group is made up of members
that report cost of goods sold (COGS) for federal income tax purposes and
members that are engaged in farming operations, as defined under ORS
317A.102, that do not report
COGS for federal income tax purposes, the unitary group
taxpayer must calculate
the cost inputs as the sum of:
(1) COGS of
the members that report COGS for federal income tax purposes; and
(2) the operating expenses, excluding labor
costs, of the members that are engaged in farming operations and do not report
COGS for federal income tax purposes.
Example 4: Terra2U Enterprises is
a unitary group with 10 members. Five of those members are not farming
operations, and they report a combined $2.5 million COGS for federal income tax
purposes. The other five members are farming operations that do not report COGS
for federal income tax purposes and their combined operating expenses,
excluding labor costs, total $1.5 million. Terra2U Enterprises uses $4 million
as the cost inputs to compute its subtraction for eligible costs, as required
under sections (3) through (4) of this rule.
(6)
Fiscal Year Election.
For purposes of this rule, fiscal year means a period of 12 consecutive months
ending on the last day of any month other than December or any taxpayer or
unitary group that has made an election under IRC § 441 for a fiscal year
which varies from 52 to 53 weeks. A taxpayer or unitary group may elect to use
the taxpayer's or unitary group's most recent fiscal year information for
purposes of determining the subtraction under this rule. An election under this
section must be made on a timely filed, original return including extensions.
An election under this section is binding for and applicable to the tax year in
which it is made. This section is repealed for tax years beginning on or after
January 1, 2021.
(7)
Limitations.
(a) The
subtraction may not exceed 95 percent of the taxpayer's Oregon commercial
activity.
(b) Labor costs may not
include total compensation paid to a single employee in excess of
$500,000.
(c) Expenses from
transactions among members of a unitary group with respect to receipts that are
excluded under ORS 317A.106 and ORS
317A.100(1)(b)(FF)
are not included in the calculation of the subtraction.
(d) A unitary group required to apportion the
amount of the subtraction shall include all members of the unitary group for
purposes of determining the group's subtraction amount and apportionment ratio,
except that the unitary group may not include members excluded from the unitary
group pursuant to an election under ORS
317A.106(2).
(8)
Alternative
Apportionment. A
taxpayer may petition the department for alternative
apportionment, or the department may require alternative apportionment if the
application of sections (3) to (6) of this rule does not fairly represent the
costs of
taxpayer's
commercial activity in Oregon.
(a) A petition to use an alternative method
of apportionment under section (8) of this rule must be filed in writing with
the department. The request must be signed by the taxpayer or the taxpayer's
authorized representative and must be filed separately from the taxpayer's
return. The request must include a complete explanation of the alternative
method as well as an explanation why the application of section (3) to (6)
should not be used. Upon receipt of the request, the department will review the
request and issue a letter either authorizing or denying the request. If
denied, the taxpayer can appeal that action as provided in ORS
305.275. An alternative
apportionment method may be used only after receiving written authorization
from the department. The authorization may be revoked if, upon audit, the
department determines that the alternative method does not fairly represent the
costs of taxpayer's commercial activity in Oregon. Once an alternative method
has been authorized, that method must be used until a request to change is made
and approved by the department or until the authorization is revoked after
audit.
(b) Factors considered in
approving alternative methods of apportionment include but are not limited to
whether a modification:
(A) Will fairly and
accurately reflect the taxpayer's costs attributable to receipts from
commercial activity in Oregon; and
(B) Will effectuate an equitable
apportionment of the taxpayer's costs attributable to receipts from commercial
activity.
Notes
Or. Admin. Code §
150-317-1200
REV
15-2019, temporary adopt filed 12/30/2019, effective 01/01/2020 through
06/28/2020;
REV
11-2020, adopt filed 06/24/2020, effective
6/28/2020;
REV
23-2020, amend filed 11/30/2020, effective
12/1/2020;
REV
17-2021, amend filed 12/15/2021, effective
1/1/2022;
REV
1-2023, amend filed 01/25/2023, effective
2/1/2023;
REV
18-2023, amend filed 10/20/2023, effective
11/1/2023;
REV
8-2024, amend filed 02/28/2024, effective
3/1/2024;
REV
11-2024, minor correction filed 06/07/2024, effective
6/7/2024
Statutory/Other Authority: ORS
305.100 &
317A.143
Statutes/Other Implemented: ORS
317A.106 &
317A.119
