Oregon Shifts Heavy Equipment Personal Property Tax Burden to Contractors starting in 2019

Large and small heavy equipment rental providers throughout the state of Oregon recently scored a huge victory when Governor Brown signed HB 4139 into law earlier last month.  The new law replaces Oregon’s existing personal property tax system for heavy equipment with a 2 percent tax on every heavy equipment rental transaction starting in 2019. While many states have either eliminated personal property tax or have exempted certain manufacturing and construction businesses from ad valorem property tax, Oregon was one of the few remaining that offered no relief or reform of any kind for heavy equipment rental providers.

Critics often cited the compliance costs associated with the business personal property tax as complex and burdensome in a way that discouraged many companies from accurately reporting. The old system was a location-based tax. This means that a company would be taxed on heavy machinery it owned based on where it was sitting on January 1 of that year. Heavy equipment rental businesses often rent their equipment out all over the state and beyond. Tracking location of constantly moving equipment for tax purposes proved difficult and also created the potential of requiring companies to pay additional tax in multiple counties or states on the same equipment where assessment dates varied.

Under the new law, the location-based tax goes away and now a sales or value-added tax of 2 percent will be collected by the heavy equipment rental business at point-of-sale and remitted to the Department of Revenue. The Department is authorized to use up to 5{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of the revenue for administrative costs needed to enforce the tax. The remaining money will distribute out to the local counties based on where each rental transaction occurred. This ensures that the heavy equipment rental businesses have a much simpler system for determining the tax they owe and local counties receive revenue based on the number of heavy equipment rental transactions occur within its borders.

Many surrounding states such as California and Idaho have adopted state and local sales taxes on similar transactions. Supporters of this change say this makes Oregon more competitive in the construction market and will attract more business in general to the state.

According to Section 3 of the new law, every heavy equipment provider will need to register with the Department of Revenue by December 15 of this year to certify that they qualify for the rental tax program and exempt them from the old ad valorem property tax system. The providers will then be required to collect the rental tax on each transaction and file a return each calendar quarter to report the tax due. The change is meant to be revenue neutral, meaning that the amount of monies paid under the new system should equal to what the providers would have been paid under the old system. Section 5 states that any amount paid by a qualified heavy equipment provider that exceeds the old tax threshold will receive a refund in the amount of the excess.

While overall this new change will likely benefit both providers and local counties alike, heavy equipment rental businesses may receive more of a windfall from this change than initially planned. This is a quirk of the Oregon law that is different from other jurisdictions. Based on how the new law is worded, the providers are tasked with merely collecting and ensuring the proper amount of tax is transmitted to the Department of Revenue. The incidence of tax is on the party renting the equipment. So, the renter will remit the new tax to the equipment rental company along with the rental price, and if the amount of tax exceeds the amount “paid” under the old system, then the providers will receive a refund of any excess.

Based on the wording of the new law, it does not appear the Oregon Legislature has thought about this windfall possibility. It remains to be seen whether any modifications to the law will address this potential for abuse. We understand that the Oregon Department of Revenue is currently working on regulations to administer this new assessment.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Special thanks to guest SYK co-author Nicholas Rogers. Nicholas is a 3L and 2019 J.D. candidate at Lewis & Clark Law School.

Grounded: Delinquent Tax U.S. & International Travel

Delinquent tax debt can now potentially ground U.S. taxpayers from international travel

Starting this year, The Internal Revenue Service (IRS) and U.S. State Department have teamed up in a manner that may affect the future travel plans of certain taxpayers that owe a large amount of money to the Treasury. In late 2015, President Obama signed the Fixing America’s Surface Transportation Act (FAST Act) to address long-term funding for surface transportation infrastructure planning and investment. Embedded deep in the law is Section 32101, which requires the IRS under § 7345 of the Internal Revenue Code (IRC), to notify the State Department of taxpayers certified to have “seriously delinquent tax debt”. Upon certification from the IRS, the State Department is then required to deny a passport application for such individuals and also potentially revoke or limit passports already issued to said taxpayers.

The IRS issued Notice 2018-01 on January 16, 2018 to explain the criteria for which taxpayers qualify and how they plan to enforce the new law.  Under § 7345(b)(1), a “seriously delinquent tax debt” is an unpaid legally enforceable, and assessed federal tax liability of an individual, greater than $51,000, subject to inflation and for which:

  • A notice of lien has been filed under IRC § 6323 and the Collection Due Process (CDP) hearing rights under IRC § 6320 have been exhausted or lapsed; or
  • A levy has been made under IRC § 6331.

The IRS calculates this $51,000 federal tax liability threshold based on an aggregate of the total amount of all current tax liabilities for all taxable years. Even if a taxpayer does not owe over $51,000 for one year, they could still end up targeted under IRC § 7345 if the total federal tax they owe across all years exceeds $51,000. This figure also includes any penalties and interest, which can accumulate rather quickly.

Taxpayers that qualify as having “seriously delinquent tax debt” but have entered into alternative arrangements with the IRS to pay should not be too concerned. IRC § 7345(b)(2) provides exceptions to taxpayers that have agreed to:

(1) An IRS-approved installment agreement,

(2) An offer in compromise accepted by the IRS,

(3) A settlement agreement with the Department of Justice, or has

(4) A pending due process hearing or,

(5) Requested innocent spouse relief

Taxpayers in Currently Not Collectible (CNC) status, in a bankruptcy proceeding or are currently in the process of obtaining one of the five exceptions also are excluded.

Before denying a passport, the State Department will first wait 90 days after receiving certification from the IRS about a taxpayer’s seriously delinquent tax debt. This time allows the taxpayer to try to resolve any erroneous certification issues, pay the full tax debt, or enter into one of the above alternative payment arrangements with the IRS. Meeting any of those requirements will require the IRS to reverse the certification within 30 days and provide notification to the State Department as soon as reasonably possible.

Most surprising to note, however, is that the IRS is not required to notify the taxpayer that they plan to certify their tax debt to the State Department. A taxpayer will likely only find out about the certification after it has already happened. The Taxpayer Advocate Service (TAS), an independent office within the Internal Revenue Service that represents the interests of taxpayers, has wholly criticized this process, citing the potential of infringing on Constitutional due process protections because the taxpayer does not have the option to contest the certification before taking place. They also question whether 90 days is enough time for taxpayers to resolve their tax liabilities, likely because taxpayers with seriously delinquent tax debt over $51,000 have more complicated issues that cannot always be resolved quickly.

Domestic travelers may also want to pay attention to whether their home state is in compliance with the REAL ID Act. This federal law passed during the Bush Administration established new federal standards for state driver’s licenses and ID cards that can be accepted by the federal government for “official purposes”, including boarding commercially operated airline flights. As of the last few years, the Department of Homeland Security has ramped up implementation of the new requirements and currently full enforcement will begin tentatively on October 1, 2020. Theoretically, if a taxpayer’s driver’s license or ID card did not meet the new federal standards, they may be required to show alternative identification that meets the new requirements. The only form of identification that currently meets the REAL ID standards for many taxpayers is a U.S. Passport. Currently, all 50 states are either in compliance or have been granted extensions but many states have passed resolutions against implementing identification cards in compliance with REAL ID.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Dynasty Disasters – Intergenerational Wealth

The Pitfalls of Intergenerational Wealth & Business Management

Running an intergenerational family-owned company can be very challenging. How do you balance present family and lifestyle goals, with operating a successful and growing company? How do you choose what is best for the family and its individual members, while also considering the future and thinking ahead to the next generation of the business?

While some family business dynasties such as the Mars Candy company and the descendants of William Randolph Hearst continue to thrive, other dynasties have crumbled. Frances Stroh was born an heiress to one of the largest beer companies in America, Stroh Brewery Company. In her new book “Beer Money: A Memoir of Privilege and Loss” she writes about her wealthy family’s downward spiral leading to the loss of their approximately 130 year brewing legacy. Ms. Stroh documents the missteps an intergenerational family-run company can make which could result in its collapse.

In a New York Times article discussing Ms. Stroh’s book, they highlight some of the unique issues that arise in intergenerational wealth and business management. For instance, in the Stroh family they chose successors of business management positions along patriarchal family lines. Instead of including women family members and outside talent, they assumed male heirs would automatically be talented and qualified in running the business.

As the Stroh family multiplied, many of the heirs relied on large annual dividends to support lavish lifestyles. Even when business profits dwindled, the dividends to heirs continued, resulting in company principle being drained.

Struggles within the nuclear family also contributed to the collapse of Stroh Brewery Company. Ms. Stroh recalled her father’s alcoholism and her brother’s drug addiction, coupled with the stress of losing the family business, causing her immediate family to unravel.

To read more about the Stroh’s struggle with intergenerational wealth management see the New York Times article.

Learn more about Frances Stroh’s book here.

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