20 February 2020 Portland clean energy surcharge, as well as other taxes, may apply to real estate industry Under new rules issued by the Revenue Division of the City of Portland (Division), the Clean Energy Surcharge (CES) may apply to gross receipts generated by real estate businesses operating in Portland, Oregon. On November 6, 2018, Portland voters approved Ballot Measure 26-201 (the Portland Clean Energy Community Benefits Initiative 2018), which imposes a 1% "surcharge"1 on the Portland revenues of certain large retailers to fund clean renewable energy projects and job training. On February 21, 2019, the Portland City Council passed two ordinances amending the Portland City Code (Code) to incorporate the CES.2 The CES is imposed on "large retailers" and measured by their Portland "retail sales." These terms are broadly defined to encompass many activities not commonly considered retail activity. The Code defines a "large retailer" as an entity with gross revenue both exceeding $1 billion nationally and $500,000 in Portland.3 A "retail sale" is defined as a "sale to a consumer for use or consumption."4 The Division has adopted rules to implement the CES. (Adopted rules are available here.) In Portland Business Tax Administrative Rule (BTAR) 500.19-4, the Division interprets "retail sales" for purposes of the CES as including "all goods-producing or service-providing business activity." The rule provides examples of certain interest income and sales of real property as "retail sales" subject to the CES. EY is aware that certain industry groups may be challenging the CES ordinance and rules on state constitutional grounds. We are monitoring this and other developments closely. Due to the Division's broad interpretation of the term "retail sales," many forms of gross receipts generated by real estate businesses, such as sales of real estate, interest income, and rents from real estate, are all potentially subject to the CES. The Division has interpreted an "incidental" sale of real property as not subject to CES. By implication, this could mean that sales of real estate by entities in the real estate industry could be subject to CES. The Division has not yet published guidance on whether a stock sale or the sale of a partnership interest may be subject to the CES. The CES may be partially passed on to consumers, but the tax paid by the consumer is considered a retail sale subject to the CES.5 The administration of the CES with respect to complex, multi-tiered structures remains unclear. Contractors and subcontractors also are subject to the CES. Contractors will likely look to pass on, directly or indirectly, the CES. There are certain exemptions for wholesalers and subcontractors. Businesses in the real estate industry also may be subject to Portland's pay ratio surtax and the Oregon Corporate Activity Tax (CAT). In general, Portland's pay ratio surtax applies to publicly traded companies that report a CEO-to-median worker compensation ratio of at least 100:1, but less than 250:1 on their U.S. Securities and Exchange Commission disclosures.6 The surtax equals 10% of a company's Portland income tax liability, increased to 25% if the CEO-to-median worker compensation ratio is 250:1 or greater.7 Taxpayers in the real estate industry with Oregon state activity may also be subject to the newly imposed CAT, which took effect January 1, 2020, and is measured by gross receipts in Oregon with limited deductions.8 For more information on the Oregon CAT, see Tax Alert 2019-0940.
1 Although described as a surcharge, the CES is administered as a separate gross receipts tax, unlike other Portland surcharges, such as the school funding surcharge (which simply increases the net income tax rate) and the pay ratio surtax (which is imposed as a percentage of net income tax liability). See generally, Portland City Code Section 7.02.500. 2 See City of Portland, Ordinance 189389; City of Portland, Ordinance 189390; see also Portland City Code Section 5.04; 7.02; 7.07. 5 BTAR 500.19-6. Because the CES is imposed on the retailer, the act of a consumer paying the tax on behalf of the retailer is itself considered a retail sale subject to CES. Therefore, there is tax on the amount of tax paid by the consumer. Document ID: 2020-0411 | ||||||
