Tax Administration Policy - Application of Public Law 86-272 to Business Taxes
Public Law 86-272 (P.L. 86-272) is a federal law that provides a business making interstate sales of tangible personal property protection from state and local income taxes when its activities within a state are limited to solicitation of sales (or activities entirely ancillary to solicitation of sales) of tangible personal property. This is an interstate law.
The City of Portland, Multnomah County, and Metro (Tax Jurisdictions) apply this law on an intrastate basis for tax years beginning prior to January 1, 2023. This means that P.L. 86-272 protections apply to a business, for these tax years, unless a business’ activities within the Tax Jurisdictions exceed solicitation of sales (or activities entirely ancillary to solicitation of sales) of tangible personal property.
The Tax Jurisdictions adopted market-based sourcing of sales for apportionment purposes for tax years beginning on or after January 1, 2023. To extend market-based sourcing to its fullest extent, the Tax Jurisdictions adopted the interstate application of P.L. 86-272 for tax years beginning on or after January 1, 2023. This means that P.L. 86-272 protections only apply to a business, for these years, when its activities in Oregon do not exceed solicitation of sales (and activities entirely ancillary to solicitation of sales) of tangible personal property. A business with nexus in the Tax Jurisdictions, whose activities exceed solicitation of sales (or activities entirely ancillary to solicitation of sales) of tangible personal property anywhere within the State of Oregon, is not protected by P.L. 86-272 from taxation by the Tax Jurisdictions.
The term “Throwback Sales” relates to the sourcing of certain sales for inclusion in the numerator of the sales factor for apportionment purposes. If a business sells product to customer located in a state or location where the business is not taxable, those sales are included in the numerator of the sales factor under the Throwback Sales treatment. The Throwback Sales treatment normally applies to sales of tangible personal property.
The Tax Jurisdictions do not use the Throwback Sales treatment for apportionment. Before a business can apportion its income, it must be subject to taxation by another jurisdiction outside the Tax Jurisdiction(s). When it is established that a business is subject to tax by another jurisdiction, even if that jurisdiction chooses not to impose a tax, a business can apportion its income. Once a business can apportion its income, sales to a customer outside the Tax Jurisdiction(s) are not included in the numerator of the sales factor based on Throwback Sales treatment. The following examples apply to tax years beginning on or after January 1, 2023.
Example 1: Braxton Mfg. Corp. (Braxton), a Multnomah County-based business, manufactures and sells mining equipment only to customers outside of Oregon. Braxton’s activities don’t exceed the protections provided by Public Law 86-272 and is not subject to tax outside of Multnomah County. Braxton is not allowed to apportion its income. All of Braxton’s income is Multnomah County income.
Example 2: Assume the same facts as in Example 1 except that Braxton has a new customer with a mining operation in Prairie City, Oregon, which is outside Multnomah County. Braxton’s activities outside Oregon are protected from taxation by Public Law 86-272, which applies on an interstate basis. Although Prairie City doesn’t impose an income tax, Braxton’s activities in Oregon are not protected from taxation by Public Law 86-272. Braxton is subject to taxation by Prairie City so Braxton can apportion its income between Multnomah County and other state or local jurisdictions. Since Braxton can apportion its income throwback treatment does not apply. No throwback sales are included in the numerator of the sales factor from sales to customers outside of Multnomah County.
Example 3: Ajax Window Company (Ajax) is a Medford-based business. Ajax sells primarily to construction and remodel businesses throughout northern California, Oregon, Washington, and Idaho. Ajax has sales representatives traveling throughout these states, including Portland, whose sole activity is the solicitation of sales. Ajax ships its product from its Medford operations to customers using common carrier. Public Law 86-272 applies to interstate activity and provides no protection between jurisdictions in Oregon. Ajax must file a Portland Business License Tax return. The numerator of the sales factor will include the sales to customers that are in and/or receive product at a location within Portland.
Example 4: Petersen Fruit & Vegetable Company (Petersen) is a California business. It only takes customer orders at its California headquarters for produce by telephone and through its website. Petersen sells to customers within Metro. Most orders for produce are shipped from Petersen’s warehouse in Woodburn, Oregon which is located outside of Metro. The Woodburn warehouse and related activities exceeds Public Law 86-272 protections in Oregon. As a result, Petersen must file a Metro business income tax return. The numerator of the sales factor will include all sales to customers that are in and/or receive produce at a location within Metro regardless of the point of origin.
04/12/2023 Thomas Lannom