Ballot Measure 104: Oregon Gets Down & Dirty With What It Means To Raise Revenue

Vote - Oregon Ballot Measure 104

All summer we have been talking about the fallout from the Supreme Court’s decision in South Dakota v. Wayfair. We analyzed the opinion when it came out; we looked at the initial state responses in August; and we looked at one of the early Federal proposals in September. It’s been an exciting ride!

One of the things we’ve come to realize is that the Wayfair decision signals a convergence of the disparate state nexus thresholds for different types of tax. Correctly or not, the Commerce Clause and Due Process nexus thresholds for sales tax and income tax regimes are converging around the idea that a taxpayer needs to have “minimum contacts” with a taxing jurisdiction and must “purposefully avail” themselves of the jurisdiction’s economic market. Thanks to Public law 86-272 (codified at 15 USC §§ 381-384), nuance still exists in the areas of sales of solicitation of sales of tangible personal property. Also, the requirements of internal and external consistency help limit the deleterious impact of having thousands of taxing jurisdictions each doing their own thing.

The challenge, of course, is that there isn’t a good definition of how to distinguish a “fee” from a “tax.”

Because there are all of these limitations and restrictions on a state’s ability to tax activity within its borders (however that may be defined), states in the last few years have been relying more and more heavily on “fees.” The challenge, of course, is that there isn’t a good definition of how to distinguish a “fee” from a “tax.”

Much like obscenity, jurists tend to think that they should be able to identify a fee when they see it (apologies to Justice Stewart). However, it’s not that simple. A fee payment may be defined as a “fixed charge” or “a sum paid or charged for a service.” From practical perspective, what this means is that specific line items in a governmental budget need to be tied to a charge or schedule of charges. Taxes, on the other hand, are typically understood to be general assessments to pay for government services. Taxes are subject to constitutional limitations. It remains to be seen if the same restrictions apply to fees.

The Oregon Constitution, Article I, §32 states: “No tax or duty shall be imposed without the consent of the people or their representatives in the Legislative Assembly; and all taxation shall be uniform on the same class of subjects within the territorial limits of the authority levying the tax.”  At Article IV, §25(2), the Oregon Constitution states: “Three-fifths of all members elected to each House shall be necessary to pass bills for raising revenue.” Courts have generally limited the impact of this to legislation defined as tax increases. There are no corollaries for fees. Certain things, such as state level professional licensure and county inspection services seem directly tied to benefits provided in a way that would be difficult to capture with what we commonly think of as a tax. The bigger issue comes when a fee looks a lot like a tax assessment in disguise.

For example, when the City of Tigard decided that it wanted to enter into a massive water project with the City of Lake Oswego, it was able to enact a rate increase in the guise of a fee to pay for that project. What this meant in practical terms was a hypothetical, impoverished baby lawyer who had only paid $85 every other month for water/sewer service now had to pay that same amount every month. When that hypothetical baby lawyer contacted the City of Tigard to ask why this wasn’t funded through a separate property tax assessment, which would have been more appropriate, she was told that the City didn’t have to go that route so it didn’t. As an aside, it was a pretty facile and not very satisfying answer to provide to a beleaguered, hypothetical baby tax lawyer.

Oregon’s Nonconformity

This long-simmering issue has come to a head in the debate over Ballot Measure 104 (“Measure 104”), on the November 6, 2018 ballot. This would add a definition to the Oregon Constitution’s §25 of “raising revenue” to include changes to tax exemptions, credits, and deductions that result in increased state revenue, as well as the creation or increase of state taxes and fees. Interestingly, the impetus for this measure doesn’t seem to be primarily fee increases. Rather, it was Oregon’s nonconformity with the Tax Cuts and Jobs Act’s addition of IRC 199A, which in most cases decreased the effective tax rate on pass through entities.

A recent article by Oregon Public Broadcasting highlights some of the issues associated with Measure 104, including the challenges involved in our system of conformity to the federal definition of taxable income. The authors correctly highlighted the issue that an opt-out of a federal tax exemption could be construed in Oregon as legislation to raise revenue. Therefore, the legislation specifically opting-out of the federal exemption may be seen as revenue raising and subject to a 3/5 majority approval requirement.

Proponents of Measure 104 have argued that politicians have created a climate that is not friendly to taxpayers because it is not predictable how much a taxpayer will have to pay over to state government from one year to the next. Opponents of Measure 104 have made a variety of arguments that mostly seem to come back to “if you pass this, it will tie the hands of legislators to do what needs to be done.” It may be that both sides are correct. At the end of the day, Oregon voters will have to decide how much they trust the politicians (that they elected) to protect both their wallets and the various things that the state does.

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.

Life after Wayfair: The States Begin to Respond

We wrote our initial analysis of South Dakota v. Wayfair on June 21, 2018. Since the Supreme Court issued its Wayfair, we have heard from clients with sales into sales tax-imposing jurisdictions who are concerned about what this means for their businesses.

Many states already had tax systems that would require a seller with no physical presence in their state to collect sales tax, which was the core issue in Wayfair. Other states (for example, Louisiana, North Dakota, and Vermont) adopted systems that would only go into effect if Wayfair was decided in a way that eliminated the physical presence requirement that the earlier Quill Corp. case had endorsed. Not all states had taken proactive measures to implement sales tax economic nexus. Some states are adopting additional, parallel nexus tests in the wake of Wayfair.

California, for example, did not adopt sales tax economic nexus thresholds prior to Wayfair. As it’s a significant market state for many companies, we have eagerly awaited guidance from state revenue authorities about what it will do following Wayfair. The California Department of Tax and Fee Administration (“DTFA”) accidentally posted draft rules containing guidance that requires retailers to register with the DTFA if they deliver $100,000 or more of products into California or if they sell tangible personal property into California in 200 or more separate transactions. These are the same thresholds adopted in Wayfair. This inadvertent guidance also said that the effective date of the rules would be August 1, 2018.  California pulled the guidance off its website, so we don’t know what the final thresholds are going to be as of this date.

Washington, on the other hand, did adopt economic nexus standards prior to the issuance of the Wayfair decision. What they’ve chosen to do, post-Wayfair, is layer one on top of the other. The Washington Department of Revenue published guidance on July 1, 2018, that leaves them with a two-prong nexus regime. The first prong is essentially the same thresholds as South Dakota – Retail vendors must collect and remit sales tax if they have $100,000 of sales into Washington or engage in 200 or more transactions. These requirements are effective for periods October 1, 2018 and subsequent. However, due to economic nexus standards already in place in Washington, there is a second prong whereby, if a vendor does not rise to the level of activity of the first prong with the state, but has a mere $10,000 of sales into the state, the vendor must either: (1) collect and remit sales tax to the state or (2) comply with use tax notice and reporting requirements (i.e., disclosure of Washington customers to the Department of Revenue to aid in use tax compliance initiatives).

We expect that as other states adopt nexus standards similar to that in the Wayfair decision, we will also see some variation in the effective date of such legislation.  Most of the states that have adopted legislation already seem to advocate for prospective application. Essentially, they pick a date and the new standards apply for transactions after that date.  However, because some states have explicitly said that they will apply their taxing authority to the full extent of the law, the specter of retroactive application still exists. This means, that a state could assess a vendor for failing to collect sales tax on a transaction that occurred prior to the issuance of the Supreme Court’s Wayfair decision. While this seems unfair, we’ve seen application of nexus standards for income tax retroactively in several jurisdictions. We will continue to update you as these new rules evolve.

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.