Mayor Sam Adams recently announced a tax amnesty for scofflaws who have so far succeeded in not rendering unto the City/County what they owe in business income taxes. While I am not a big fan of amnesty programs, as they reward the wrong behavior and the wrong taxpayers, it is not surprising that businesses and property owners who have “nexus” within the City/County find themselves out of compliance with the tax code. Some do so deliberately, while others may simply be blissfully unaware of their tax obligations.
This is because the City/County tax code, unlike its counterparts among other municipalities, taxes only certain businesses and individuals. It relies on a very narrow tax base, and thus has an extremely high flat rate of 3.65%. It is essentially a payroll tax on successful business owners, and an income/capital gains tax on successful property owners.
But more importantly, the tax punishes privately held companies who do business within City/County borders while rewarding public companies doing the same. How can this be? Well, here’s a real life example from my CPA practice: Locally owned company with 3 shareholders, nets $4 million before owner salaries, and $1 million after owner salaries. In my example, none of the shareholders actually live within the City/County boundaries. What is their City of Portland/Multnomah County Business Tax? The total tab will be $136,500. If this same business were to be bought out by a publicly traded company, and management salaries were the same, the business would now have a tab of $36,500. In this example, that’s a $100,000 punishment for the locally owned company. Outrageous, no?
This strange phenomenon takes place because wages over $87,000 paid to more than 5% owners are “added back” to business net income to determine the tax. Basically, you have a payroll tax on owners who pay themselves more than $87,000 per year, a tax that is not paid by companies who do not have more than 5% owners.
Further, the filing requirements imposed by the City are highly invasive (and perhaps illegal?). Taxpayers who owe no tax whatsoever to the City/County are still required to provide copies of their individual tax returns, along with related Schedules C, D, and E, even though they have no income to report. The TriMet tax, administered by the State of Oregon has no such requirements. If you don’t owe the tax, you simply don’t file.
But, this is not so with the City/County. I have clients who fear their personal financial details are now sitting on some City employee’s desk, and that information that is required by federal law to be kept in strict confidence is being exposed to those who have no need (or right?) to see such information.
But worst of all, the City/County tax is neither a fair tax nor a simple tax. It relies on a narrow tax base (unfair) and it is one of the most complex and arcane municipal tax codes I have ever encountered. A fairer and simpler tax would be a payroll tax/self-employment tax similar to the TriMet tax. It could have a very low rate because of its broad tax base, and would be extremely simple to administer by simply tacking it on to the Oregon quarterly OQ filing.
A broader tax base would also help to discourage local businesses from the practice of fleeing the City/County boundaries to escape the tax. Regardless of what City leaders may say about this practice, every CPA I know has experience with clients who have relocated out of the City/County boundaries to avoid the tax.
In the meantime, if you own property or do business within the City/County borders and have not been filing your tax returns, now is the time to find out if the amnesty program can help you get into compliance.
Update June 20, 2012: This just in from my tax law reporting service:
“Oregon—Income Tax: Portland Confidentiality Provision Amended
Portland has amended its provision regarding confidentiality of business license tax taxpayers to provide that, in addition to existing prohibitions, it is unlawful for any Portland employee, agent, or elected official or any person who has acquired information to divulge, release, or make known in any manner identifying information about any taxpayer applying for tax amnesty, unless otherwise required by law. Ordinance No. 185312, City of Portland, effective May 9, 2012″
So, what is the penalty for unlawfully disclosing taxpayer information? From the City Code:
Contrast this to the penalty on IRS employees for unlawful disclosure of federal tax information (which is the same information the City employees have about its licensees):
“Penalties for Unauthorized Disclosure-Internal Revenue Code
Internal Revenue Code Sections 7213 and 7431 describe the penalties for unauthorized disclosure of federal information.
Under Section 7213 of the Internal Revenue Code, a governmental actor’s unauthorized disclosure is a felony that may be punishable by a $5,000 fine, five years imprisonment or both. Under Section 7213A of the Internal Revenue Code, the unauthorized inspection of federal tax information is punishable by a $1,000 fine, one year imprisonment or both. Section 7431 of the Internal Revenue Code permits a taxpayer to bring suit for civil damages in a U.S. District Court, including punitive damages in cases of willful disclosure or gross negligence, as well as the cost of the action.”
As you can see, City employees are subject to far less punishment than IRS employees who unlawfully disclose the exact same confidential information.