SALEM — Two lawsuits challenging Oregon tax law have the potential to blow a big hole in the state budget.
One suit targets Measure 67 and could open the door for some corporations to erase or reduce their higher tax bills from the 3-year-old ballot measure.
The other lawsuit challenges an obscure state tax law that has resulted in higher taxes for some multistate corporations.
The price tag for the Measure 67 case is low by budget standards: about $6 million to $12 million a year after an initial hit of $20 million in refunds for prior years.
But legislative analysts project that losing the other case, filed by Health Net Inc., would cost the state about $100 million a year in lost revenue, plus refunds.
Health Net, a California-based insurance company with operations in Oregon, filed the case in July in the Oregon Tax Court. The company argues that a multistate tax compact that Oregon joined in the 1960s trumps newer state laws that differ from it. The provisions of the multistate compact would be more favorable to Health Net — and many other businesses in Oregon — than the newer state law.
Challenge in early stage
The challenge is still in a very early stage and could take years to resolve, but officials are keeping a nervous eye on it because of the amount of money involved. In a very similar case, a state appeals court in California ruled against the state, siding with The Gillette Co. Lawyers for the California Franchise Tax Board say in their appeal to the state Supreme Court that upholding the lower court’s decision would cost the state up to $750 million in refunds.
Multistate corporations pay state income taxes based on complex formulas that try to determine what share of the corporation’s business can be attributed to each state. Oregon and 17 other states have signed on to the Multistate Tax Compact, an agreement created in 1967 to standardize the formula and a variety of other state tax laws.
The compact says the formula should give equal weight to the share of a corporation’s payroll, property and sales within the state. But the Oregon Legislature has deviated from the compact, basing the formula solely on a corporation’s sales within the state.
The change benefits corporations like Nike Inc. and Intel Corp., which employ thousands in Oregon but get only a tiny fraction of their sales from here. It harms corporations like Health Net, which has substantial sales to its Oregon policyholders but has most of its payroll and property in California.
Losing the Health Net case would mean the state takes in roughly $100 million less each year from a variety of corporations, said Chris Allanach, a senior economist in the Legislative Revenue Office. The Legislature could change the law to get around the case, but the state would owe refunds to affected companies for three tax years.
“As an Oregon taxpayer, Health Net believes we are due a refund and we await the court’s decision,” said Brad Kieffer, a company spokesman.
For comparison, the Oregon State Police gets about $111 million a year from the state general fund.
In the Measure 67 case, Con-Way Inc. argues that it should be allowed to use a business energy tax credit to offset its tax liability, which rose from $10 to $75,000 once the tax measure passed. The state argues that the corporate minimum tax is a tax floor that should be paid regardless of any offsetting tax credits.
The state tax court ruled in favor of Con-way, a Michigan-based trucking company with operations in Portland. The state has appealed.
State Rep. Vicki Berger, a Salem Republican, said she’ll introduce legislation to clarify that tax credits can be used to offset corporate minimum taxes hiked under Measure 67.
“It was rather quickly done, hastily done, and these kinds of questions were never vetted as it went rushing through the building,” she said of the tax measure.
Comcast in court
A third tax-court case has significant implications for local-government budgets. The Oregon Supreme Court will hear oral arguments next month in a case brought by Comcast Corp., which is challenging the Department of Revenue’s decision to label Comcast a communications company rather than a cable-television provider. The vagaries of a 1970s-era law mean Comcast would pay higher taxes as a communications company than as a cable provider.
The tax court ruled in Comcast’s favor. If the Supreme Court upholds the ruling, local governments will owe substantial refunds to Comcast and other Internet companies.
Gov. John Kitzhaber’s office is trying to broker a compromise that would update the laws for the Internet age.
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