Understanding the Metro Tax in Portland

Portland, Oregon's Metro region has introduced a new tax, colloquially known as the "Metro tax," which significantly impacts both businesses and individuals within its boundaries. Approved by voters, this supportive housing services income tax aims to fund crucial services for those experiencing or at risk of homelessness. This article delves into the intricacies of this tax, its implementation, and its broader financial context within the Metro region.

What is the Metro Tax?

The Metro tax is a 1% income tax implemented on January 1, 2021. It applies to both business net income and the taxable income of Metro residents and nonresidents who earn income sourced within the Metro region. The primary objective of this tax is to generate revenue for supportive housing services, addressing a critical social need within the community.

Implications for Businesses

Businesses operating within the Metro region need to be aware of several key provisions:

• Threshold: Businesses with total receipts exceeding $5 million from all sources (both inside and outside Metro boundaries) are subject to the tax.
• Tax Rate: The tax is 1% of the Metro-sourced net income.
• Minimum Tax: A minimum tax of $100 applies annually for any business subject to the tax.
• Pass-Through Entities: Partnerships, S corporations, and other pass-through entities are required to remit the tax.
• Sole Proprietorships and Disregarded Entities: These are not taxed as separate entities. Instead, the tax liability falls on the sole proprietor or the owner of the disregarded entity, to be paid under personal income tax statutes.

Calculation and Taxation Method

Understanding how the Metro tax is calculated is crucial for compliance. The tax base generally starts with Oregon taxable income, with adjustments for specific surcharges and local net income taxes. A notable difference from some other local taxes is that the Metro tax does not limit the compensation deduction for owners.

Apportionment and Sourcing Rules

The Metro tax employs a single-sales factor apportionment method. This means that the tax liability is primarily determined by the proportion of sales attributable to the Metro region. The sourcing rules for tangible personal property (TPP) and other receipts largely mirror those used by the City of Portland for its Business License and Business Income taxes. However, these rules can differ significantly from Oregon state sourcing rules.

For the sale of TPP, apportionment is generally not permitted unless a jurisdiction outside of Metro could legally tax the seller. This is determined by whether the seller's activities outside Metro exceed the protections of Public Law (PL) 86-272. When apportionment is allowed, the 'throwback' rule does not apply.

The sourcing of TPP sales is defined as occurring within Metro when the property is "delivered or shipped to a purchaser within the District regardless of the free-on-board (FOB) point or other conditions of sale." This definition, particularly when interpreted through Portland's Business Tax Administrative Rule (BTAR) 610.93-2A, which Metro tax code directs conformity with, means that the point of pickup can determine the sourcing of the sale. This can lead to a sale being included in the Metro tax numerator but not the Oregon state numerator, and vice versa.

For sales of non-TPP and other income-producing activities, Metro utilises the income-producing activity rule, often referred to as the cost of performance. This contrasts with Oregon's market sourcing, potentially creating different tax liabilities for the same transaction depending on the jurisdiction.

Implications for Individuals

Individual taxpayers also face new obligations under the Metro tax:

• Income Thresholds: Single filers are subject to the tax on income exceeding $125,000, while joint filers are taxed on income over $200,000.
• Oregon Residents: Subject to the tax on their entire Oregon taxable income.
• Part-Year Residents: Must prorate their income based on their residency periods within the Metro region.
• Nonresidents: Taxed on income sourced within Metro, including wages for work performed there and income from pass-through entities.
• Pass-Through Income: Individuals may subtract income from a pass-through entity if that income has already been taxed by Metro.

Administrative Provisions

Several administrative rules are in place to ensure the collection of the Metro tax:

• Withholding: For 2021, businesses were required to offer withholding to employees in writing as soon as their payroll systems could accommodate it. For 2022, withholding became mandatory for all employees working in Metro who earn at least $200,000 annually.
• Estimated Tax Payments: Businesses anticipating a tax liability of $1,000 or more must make quarterly estimated tax payments on April 15, June 15, September 15, and December 15.

Draft tax return forms are anticipated to be released to aid in compliance.

Metro Boundary Considerations

A critical aspect of the Metro tax is understanding its geographical boundaries, which do not strictly align with county lines. The Metro district encompasses parts of Clackamas, Multnomah, and Washington Counties. It is essential for both businesses and individuals to verify whether their residence, business location, or delivery points fall within these specific Metro boundaries.

Businesses with distributed operations, including remote workers, must meticulously track revenues generated from services provided both inside and outside the Metro area. Similarly, businesses selling TPP should review their activities beyond Metro's limits to ascertain compliance with PL 86-272. Individuals contemplating a change in residency should carefully document their actions to establish a new domicile and ensure adherence to residency rules.

Potential Legal Challenges

The implementation of the Metro tax has not been without its potential legal hurdles. Oregon Revised Statutes (ORS) 268.505 places limitations on certain local jurisdictions. Questions have arisen regarding whether this statute restricts Metro's authority to tax pass-through entities and whether Metro must adhere to Oregon's apportionment methodologies, which include market sourcing. Metro has initiated legal proceedings to seek a judgment confirming its authority in these areas, facing potential opposition from a coalition of business and trade organizations.

Metro's Property Tax Funding

Beyond the new income tax, it's informative to understand how Metro funds its operations through property taxes. Unlike many local governments, property taxes constitute a minority of Metro's total annual funding, accounting for 29 percent. These funds are primarily allocated to specific projects approved by voters.

Operating Funds

Metro levies a permanent rate of 9.66 cents ($0.0966) per $1,000 of assessed value for its general operating levy, which contributes 5 percent of its overall operating revenue. Additionally, voter-approved measures have established temporary levies. For instance, a measure approved in 2013 and renewed in 2016 dedicated 9.6 cents ($0.096) per $1,000 of assessed value to improving water quality, removing invasive weeds, and restoring natural areas. This levy was in effect until June 2023.

The remainder of Metro's operating funds are derived from enterprise revenues, excise taxes from facility users, state and federal grants, and other sources.

Capital Projects

Since 2006, Metro has funded significant capital projects through voter-approved bond measures. These bonds are repaid by property owners through additional property tax assessments until the bonds are fully paid. As of the 2019-20 tax year, property owners within Metro paid a total of 48 cents ($0.48) per $1,000 of assessed value to support three key voter-approved capital projects:

1. Purchase of Natural Areas: Measure 26-203 (2019) provided $475 million for preserving natural areas, protecting wildlife, and improving water quality, including funds for local parks and community grants. A portion of this measure, 19 cents ($0.19) per $1,000 of assessed value, funded bonds expected to be fully paid in 2026. This continues the legacy of prior measures that enabled significant land and river frontage acquisition.

2. Oregon Zoo Capital Improvements: Measure 26-96 (2008) allocated $125 million for improvements to the Oregon Zoo, focusing on animal welfare, conservation education, and water conservation. This project is funded by 9 cents ($0.09) per $1,000 of assessed value, with bonds expected to be fully paid in 2028.

3. Affordable Housing: Measure 26-199 (2018) authorized $652.8 million to fund affordable housing initiatives for low-income families, seniors, veterans, and people with disabilities. Property owners contribute 20 cents ($0.20) per $1,000 of assessed value for this purpose, with bonds anticipated to be fully repaid by 2039.

Key Takeaways

The Metro tax introduces a new layer of complexity for taxpayers in the Portland region. Businesses must carefully assess their receipts and sourcing to determine liability, while individuals need to be mindful of income thresholds and residency rules. Understanding the specific boundaries of the Metro district and the nuances of apportionment and sourcing rules is paramount for accurate compliance. Furthermore, the funding mechanisms for Metro's operations, particularly through property taxes for capital projects and environmental initiatives, highlight the region's commitment to voter-approved public services.

For those requiring assistance in navigating the Metro tax or understanding its broader implications, consulting with a tax professional is highly recommended.

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