Corporate Close-Up: Oregon Follows MTC in Adopting Market-Based Sourcing and Apportionable Income Definition

The Oregon legislature has overhauled the state’s apportionment scheme in the last few months, moving the state away from cost of performance sourcing and the traditional UDITPA business income definition towards the MTC’s revised UDITPA mechanisms of market-based sourcing and apportionable income.

With S.B. 28, Oregon has enacted market-based sourcing for receipts from other than sales of tangible personal property for tax years beginning on or after Jan. 1, 2018. Receipts from services and intangibles, in particular, are sourced to Oregon if the taxpayer’s market for the sale is in the state. Determining the market for a sale depends on the type of receipt. However, where the state of assignment can’t be determined the statute provides a mechanism for reasonably approximating the appropriate state.

For receipts from services, a taxpayer's market is in Oregon if and to the extent the service is delivered to a location in the state. What exactly this means depends in large part on regulations that will be issued by the Oregon Department of Revenue. Oregon is widely expected to follow the MTC’s recently issued model regulations, so taxpayers seeking guidance should look for the release of draft regulations.

Sourcing receipts from intangibles is more complicated and turns on whether the intangible property is used in Oregon. Following the MTC’s model statute, intangibles are classified into several groups depending on whether the intangible property generates rental or royalty income or whether the property is disposed of completely.

Oregon distinguishes between intangible property that is rented, leased, or licensed where the property is utilized in marketing a good or service to a consumer. In such case, property is used in the state if the good or service is purchased by a consumer in Oregon.

For intangible property that is sold, the state of primary assignment depends on whether the receipt is either a contract right, government license, or similar intangible property that authorizes the holder of the property to conduct business activity in a specific geographic region or instead is dependent or contingent on the productivity, use, or disposition of the intangible property.

In the case of a contract right or similar property based on a geographic region, the property is used in Oregon to the extent the specified geographic area includes all or part of the state.

In conjunction with the move to market-based sourcing, Oregon has adopted through H. B. 2275, definitions of "apportionable income" and "non-apportionable income" to replace traditional definitions of "business income" and "nonbusiness income" for tax years beginning in 2018.

The term "apportionable income" means:

  • income arising from transactions and activity in the regular course of the taxpayer's trade or business;
  • income arising from the acquisition, management, employment, development, or disposition of tangible and intangible property if the acquisition, management, employment, development, or disposition is related to the operation of the taxpayer's trade or business; and
  • any other income that is apportionable under the Constitution of the United States, but that is apportioned rather than allocated under the laws of [Oregon].

Additionally, apportionable income includes any income that would be allocable to Oregon under the Constitution of the United States, but that is apportioned rather than allocated pursuant to the laws of Oregon. And, correspondingly, non-apportionable income means all income other than apportionable income.

In conjunction with the move to apportionable income, Oregon has removed the functional test by revising its definition of gross receipts to align it with the MTC’s model statute in H.B. 2273. For tax years beginning on or after Jan. 1, 2018, Oregon defines sales as all gross receipts of the taxpayer not otherwise allocated under Oregon law and that are received "from transactions and activity occurring in the regular course of the taxpayer’s trade or business, except [] receipts from hedging transactions and from the maturity, redemption, sale exchange, loan or other disposition of cash or securities."

The Oregon Legislature added its own additional qualifications — excluding receipts derived from "property or money received or acquired by an agent, intermediary, fiduciary or other person acting in a similar capacity on behalf of another in excess of the recipient’s commission, fee or other remuneration." Additionally, amounts held in trust and received by others are also excluded from sales.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will Oregon adopt the MTC’s model regulations for market-based sourcing?

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