Extras on Excise: Oregon Tax on New Vehicle Sales Holds Up Against Constitutional Challenge


The Oregon Supreme Court recently ruled that the privilege tax imposed on vehicle dealers, enacted in 2017 as part of major Oregon transportation legislation, is not subject to Article IX, section 3a of the Oregon Constitution, and thus is constitutional. Industry trade organizations and vehicle dealers had challenged the constitutionality of the new law because of how the tax revenue is being allocated, but they also argued that the tax will result in either higher prices for the consumer or lower profitability, neither of which is good for business.

H.B. 2017 included a new tax on vehicle dealers “for the privilege of engaging in the business of selling taxable motor vehicles at retail” in Oregon. The tax is 0.5 percent of the retail price of new motor vehicles, and dealers are permitted, but not required, to collect the tax from purchasers. As such, purchasers are not considered taxpayers as it pertains to the privilege tax.

The new law includes a section that confers original jurisdiction to determine the constitutionality of the privilege tax to the Oregon Supreme Court; challengers were required to file a petition for judicial review within 30 days of the bill’s effective date. Petitioners contended that the privilege tax actually imposes a tax “on the ownership, operation or use of motor vehicles,” the revenue from which must be “used exclusively for the construction, reconstruction, improvement, repair, maintenance, operation and use of public highways, roads, streets and roadside rest areas in [Oregon]” per the provisions of Article IX, section 3a of the state Constitution. Monies from the privilege tax are slated to be deposited to the Zero-Emission Incentive Fund and the Connect Oregon Fund, not the State Highway Fund. State law stipulates that the tax will be repealed if the court finds that it is subject to Article IX, section 3a.

The court disagreed with the petitioners’ characterization of the privilege tax, writing “the text [of Article IX, section 3a] indicates that taxes ‘on the ownership, operation, or use of motor vehicles’ are limited to taxes levied on the status of ownership, and do not include taxes levied on actions—like a sale—that an owner may take.” The court determined that the drafters “knew how to refer to taxes levied on, or measured by, sales, and they did so in paragraph (1)(a) [of the Oregon Constitution], with respect to motor vehicle fuels, but not in paragraph (1)(b), with respect to motor vehicles,” counting this as further evidence that Section 3a was not intended to apply to taxes measured by sales of motor vehicles.

The court also found that legislative history establishes Article IX, section 3a is only intended to apply to special highway user taxes, such as fuel taxes, ownership taxes (vehicle title and registration fees), vehicle operation taxes (driver’s license fees), use taxes (such as ton mile taxes), and other similar taxes. Further, it found no legislative history to support the argument that Article IX, section 3a has a broader reach and “applies to all taxes based on a ‘status or activity involving a motor vehicle.’”

Oregon can now move forward with plans to use privilege tax revenue to pay for various clean transportation projects and to promote electric vehicle ownership.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think privilege tax revenues should be used for Oregon’s highway fund instead of electric vehicle programs?

Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.