PORTLAND — Ross Stock has known since last spring his softwood 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, appears to be the largest tax hike in state history. Oregon lawmakers approved it last spring, levying a 0.57% tax on most business transactions 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 confusion 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 buyers 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 taxable 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 uncertainty 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."
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 accumulates 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:
•Businesses pay a tax of 0.57% on sales inside Oregon above $1 million. Groceries, gas, hospitals and long-term care businesses would be exempt.
•Businesses can subtract 35% of their labor or capital costs from taxable sales. Single-family homebuilders can exclude another 15% of their subcontracting labor costs.
•To offset anticipated increase in consumer prices, the plan cuts personal income tax rates by 0.25 percentage 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 Revenue 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 payments for the corporate activity tax due April 30. Legislation now under consideration could provide some flexibility in how tax collectors 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 exemptions 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 childhood 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 consumers. 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 government spending watchdogs, primarily 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 lowest business taxes to No. 15.
That's not a big enough change to have a meaningful impact on Oregon's economic trajectory, according to estimates by state economists. In a quarterly financial forecast issued Wednesday, the Oregon economists forecast 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 differently.
"There are likely to be some businesses 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 businesses with sales below $1 million. It also exempts groceries, gas, hospitals and long-term care organizations, 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, industries 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 accounting 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 straightforward 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 situations, 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 tax program and it's keeping us very busy making preparations," said Robin Maxey, the department spokesman tasked with communicating 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. Businesses, 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 something 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 to itemize it on an invoice," Wallace said.
Simply raising prices isn't always an option, though.
Fish Construction NW builds homes targeted to first-time homebuyers. The tax would have added a little more than $1,000 to the cost of each of the 20 homes Fish built last year, according to Justin Wood, the firm's vice president and co-owner.
The true cost, though, could be double that because Fish's suppliers have already raised their prices this year to reflect the tax. Wood estimates that could increase his company's costs by $40,000 altogether.
It may not be possible, Wood said, for Fish Construction to recoup those costs and still keep home prices low enough to be accessible for first-time homebuyers and eligible for government programs that support affordable housing.
"We're kind of capped on how much we can raise our sales prices and stay active in that entry-level market," said Wood, who also serves as president of the Oregon Home Builders Association.
Last-minute negotiations last year won Wood and other single-family homebuilders an exemption for 15% of their contracting costs. That's in addition to the 35% of capital and labor costs all industries may subtract from their taxable sales.
Opponents of the business tax planned to refer it to voters but their efforts collapsed within weeks last summer. A subsequent poll found supporters of the tax outnumber opponents.
Tweaking the tax
Legislators in Salem are using this winter's short session to consider modifications that would clarify the tax rules, and perhaps create exemptions for certain industries.
Two bills proposed exemptions from the tax for prescription drugs and for agricultural products. Neither of those received hearings and appear dead.
Another proposal that has been discussed at the capitol, but hasn't been written into any bill, would create an exemption from the tax for large construction projects that were already underway when lawmakers approved the tax last spring. That could benefit several projects, none more than the D1X research factory Intel is spending billions of dollars to expand in Hillsboro.
Rep. Nancy Nathanson, who heads the House Committee on Revenue considering changes on the tax, said her priority will be making "technical fixes" to the tax, not establishing broad exemptions.
"Beyond that, any policy changes would be facing a steep road uphill for this legislative session, since our first priority is preserving the new funding dedicated to preK-12 education," Nathanson, D-Eugene, said in an email to The Oregonian/OregonLive.
"I don't think there's going to be major surgery," said Sandi McDonough, CEO of Oregon Business & Industry. However, she said she does expect the tinkering underway during this session will continue for years to come.
"We've probably entered a conversation that's never going to end about how this tax works," McDonough said.
That's what happened when Washington established its own tax on revenue, known there as a business and occupation tax. The state has carved out dozens of different rates and exemptions for different industries, and makes changes every year.
Oregon Business & Industry dropped its opposition to the tax last spring after cutting a deal to blunt its impact on manufacturers, clearing the way for the tax to pass and blunting efforts to refer it to voters. The decision split the business community and McDonough said her phone rings constantly with concerns from who don't like the tax, or don't understand it.
"The truth is there wasn't one thing that was going to work in the same way for every business," she said. "That's the problem with a tax like this."