Oregon statutes state a taxpayer’s market for sales is in Oregon: “In the case of the sale of a service, if and to the extent the service is delivered to a location in this state”.
You must look to Oregon administrative rules (OAR 150-314-0435) to really figure out what that means. In general that means Oregon uses a Market-Based sourcing rule as opposed to the prior concept of sourcing revenue to the place the service was performed. The administrative rule also provide examples that are useful in interpretation. We have only used a few select examples for this communication.
This outline is meant to provide a summary of the rules and is not all-inclusive. The rules provide a tiered approach where you are to use the primary approach when possible and if that information isn’t reasonably available you can the look to the next alternative approach. Special rules also applied to related-party transactions.
This outline will cover 1) Professional Services, 2) Architecture and Engineering Services, and 3) In-Person services. The sourcing rules also differ depending whether your client is an individual or a business client. The OAR also includes other types of service revenue not part of this communication (i.e.: license or lease of intangible property, services delivered electronically and more).
1 – Professional Services
Professional Services are services that require specialized knowledge and in some cases require a professional certification, license, or degree. Some types of professional services that are physically provided in person may be considered “In-Person” services. Examples are carpentry, certain medical and dental service.
When professional services are provided to an individual, the sales are assigned to the customer’s state of primary residency. If the state of primary residency can’t be determined, then sales are assigned to the state of the customer’s billing address. If you derive more than five percent of your gross receipts from one customer, you must identify the customer’s state of residency.
Revenue should be first be assigned to the state where the contract of sale is principally managed by the customer. That location is the location which an employee or other representative of the customer is serving as the primary contact in respect to the day-to-day execution and performance of the contract. If that is not reasonably determinable, then the revenue should be assigned second to the customer’s place of order or third to the customer’s billing address. If you derive more than five percent of your gross receipts from a customer, you must identify the state in which the contract is principally managed by the customer.
For a large volume of transactions, a taxpayer may assign sales receipts based on the customer’s billing address in any taxable year in which the taxpayer engages in substantially similar services with more than 250 customers (either individuals or businesses).
Example: Law Corp provides legal services to several multistate business clients. In each case, Law Corp knows the state in which the agreement for legal services that governs the client relationship is principally managed by the client. In one case, the agreement is principally managed in Oregon and the receipts are assigned to Oregon. In other cases the agreement is principally managed in another states, the revenue is not Oregon receipts. In the case of receipts that are assigned to Oregon, the receipts are assigned to Oregon even if the legal documents related to the service are mailed to another state or the litigation or legal matter that is the underlying predicate for the services is in another state.
Example: Design Corp is based outside Oregon. They provide graphic design and similar services. Design Corp enters into a contract at a location outside Oregon with an individual customer to design fliers for the customer. Assume that Design Corp does not know the individual customer’s state of primary residence and does not derive more than five percent of its receipts from this customer. All of the design work is performed outside Oregon. Receipts from the sale are in Oregon if the customer’s billing address is in Oregon.
2 – Architecture & Engineering
Receipts from the sales are assigned to the state where the real estate or tangible property improvements are located. This is true whether the customer is an individual or a business. In certain situations these service might be treated as professional services and receipts allocated under those rules.
3 – In-Person Services
In-Person services are services that are physically provided in person by you/your business, and you perform those services where the customer or the customer’s real or tangible property is located. The location where those services are provided by you or by a third-party contractor is where the receipts are assigned. Some examples of In-Person services include repair services, cleaning services, plumbing, carpentry, construction, pest control, landscaping, medical and dental services, entertainment, training or lessons. Various professional services, including legal, accounting, financial and consulting services, and other similar services, although they may involve some amount of in-person contact, are not treated as In-Person services.
If the service is performed with respect to the customer’s real estate or tangible personal property located in Oregon, the service is treated as received in Oregon.
If the service is performed with respect to the customer’s tangible personal property and the tangible personal property is to be shipped or delivered to the customer, the service is treated as received in Oregon if the property is shipped or delivered to the customer in Oregon.
Example: Salon Corp has retail locations in Oregon and in other states where it provides hair cutting services. The receipts from sales of services provided by Salon Corp’s in-Oregon salons are Oregon receipts. The receipts of sales of services provided by Salon Corp’s locations outside Oregon, even when provided to residents of Oregon, are not Oregon receipts.
Example: Camera Corp provides camera repair services at an Oregon retail location to walk-in clients. In some cases, Camera Corp repairs a camera at a facility that is in another state. The repaired camera is then returned to the customer at Camera Corp’s Oregon location. The receipts from the sale are Oregon receipts. This would be true if the camera was mailed by the customer to the Corp’s out-of-state facility and mailed back to the customer in Oregon.
In closing, this is a summary, and you should consult with your tax advisor about your specific situation and types of revenue and how to determine whether or not the receipts are considered Oregon receipts.
McDonald Jacobs P.C.