STATES like Oregon are opening the door to corporate tax planning.
Each state taxes companies doing business in the state only on income from sources inside the state. Most states use a weighted three-factor formula to figure out how much income to allocate to the state. The three factors are the portion of a company’s total sales, property and payroll that are in the state. If all states used the same approach, then most income earned by a corporation would end up parceled out among the states in which it does business, and it would be taxed somewhere.
However, Oregon is moving to a single factor for allocating income — it will look just at the portion of a company’s sales that occur in the state — in the hope of attracting companies that sell most of their products outside Oregon. A company that has lots of employees but few sales in Oregon would have little income to report there. However, because its property and payroll are largely in Oregon, it would also have less income to report in other states. Until May this year, Oregon double-weighted the sales factor. Since May, it has given 80% weight to sales and 10% weight to each of property and payroll.
The governor signed a bill in late August to move to 90% weighting for sales and 5% each for property and payroll as a transition to using sales as the sole factor. The change solely to sales will take effect in July 2006.