Tax Law Alert: Pending Oregon Legislation Would Decouple Oregon from Federal Tax Reforms

SB 1528 provides, in part, that in calculating Oregon taxable income a taxpayer must add back any IRC § 199A deduction taken for federal purposes. An earlier version of SB 1528 also would have modified Oregon’s preferential tax rates for certain income reported on a Schedule K 1 (ORS 316.043) to (1) expand the regime to apply to sole proprietorships and disregarded entities, (2) disallow the preferential tax rates for income in excess of $250,000, and (3) impose other restrictions to limit the availability of the lower Oregon tax rates. These provisions were removed before Senate passage.

SB 1529 provides, in part, that in calculating Oregon taxable income a corporate taxpayer must add back any IRC § 965(c) dividends received deduction taken for federal purposes. However, the corporate taxpayer still can claim an Oregon dividends received deduction for the deemed repatriation. The addback of the federal dividends received deduction addresses a “glitch” that otherwise would have caused the deemed repatriation to result in a net reduction in Oregon taxable income. Our discussion of this issue can be found here.

SB 1529 also resolves a potential double taxation issue. In 2013, Oregon adopted a special regime (the “listed jurisdiction regime”) generally intended to tax income of corporate taxpayers with activities in tax havens by including otherwise untaxed income of their unitary subsidiaries formed in certain jurisdictions in the calculation of Oregon taxable income. The deemed repatriation for 2017 required by the recent federal tax change includes this income, creating a risk of double taxation by Oregon. SB 1529 provides a credit for 2017 for Oregon taxes previously paid because of the listed jurisdiction regime. Any unused credit can be carried forward through 2021. SB 1529 also repeals the listed jurisdiction regime beginning with 2018.

It is unclear whether SB 1528 and SB 1529 satisfy requirements of the Oregon Constitution. A bill that is a “bill for raising revenue” must originate in the House and must pass each house with a vote of at least three-fifths of all members. SB 1528 and SB 1529 both originated in the Senate, and SB 1528 passed in each house with a vote of less than 60% (SB 1529 passed each house with a vote of more than 60%). Accordingly, if each is a bill for raising revenue, neither satisfies the constitutional requirements. The Oregon Supreme Court has adopted a two-part test for determining whether a bill is a bill for raising revenue. First, the bill must bring money into the treasury. The Revenue Impact Study for each bill suggests that each satisfies this first test. Second, the revenue raised must be from the imposition of a tax (thus, for example, although a bill increasing a fee brings in revenue, it is not a bill for raising revenue because it does not impose a tax). A bill denying or disallowing a deduction arguably imposes a tax. However, the Oregon Supreme Court’s 2015 decision in City of Seattle v. Dep’t of Revenue, in which the court held that a bill repealing a property tax exemption was not a bill for raising revenue, makes the issue uncertain. Senator Boquist, Vice Chair of the Finance and Revenue Committee, reportedly plans to initiate a lawsuit to prevent SB 1528 from taking effect, and the “bill for raising revenue” issue likely will need to be resolved by the Oregon courts.