A recent Oregonian headline read "City Sues for Business Taxes — Portland takes a no-holds-barred approach." The article concerned a large tax bill being assessed to an attorney for failure to file a City of Portland/Multnomah County ("Mult/PDX") tax return. Each business owner with any activity in Multnomah County or Portland needs to evaluate his or her risk exposure related to the metropolitan area’s business taxes. This is particularly true for lawyers who have offices outside of the city but come into the city to perform services and do trial work.
Many attorneys and other professionals who come into the Portland area to perform services are unaware that Multnomah County and the City of Portland have business taxes that may require them to file tax returns with the county and city.
Law firms with offices inside the county or city generally know there is a filing requirement, but might not understand that they may be able to pay taxes on less than 100 percent of their income.
In the context of service providers, a potential taxpayer is generally a self-employed individual or an entity (through activities of its employees) performing services within Multnomah County or the City of Portland.
There are several exemptions from filing, but there are generally only two exemptions that would normally apply to a service provider:
1. Gross Receipts under $25,000. This exemption applies to individuals or entities that have total gross receipts of less than $25,000 for any tax year. This exemption is based on total gross receipts everywhere, not just gross receipts in the county or city.1 To qualify, the taxpayer must file either an Initial or Annual Exemption Request form with the county and city and provide substantiation that gross receipts were less than $25,000. An entity would generally attach page 1 of its federal tax return; a self-employed attorney would attach a copy of Schedule C of Form 1040. This exemption form should be filed for each year in which a taxpayer meets the exception.
2. De Minimus Activity. Personal services performed within the county or city area are generally considered sufficient contact to create the need to file a tax return. An exception to this general rule applies when the business grosses less than $2,500 in personal service income from the business activities within the county or city and there are 10 or fewer business-related physical contacts within Multnomah County/City of Portland within a 12-month tax year. If only a small portion of a single income-producing activity (i.e., only a portion of the revenue from a contract for legal services) is performed within Multnomah County or the City of Portland, that activity may also be "de minimus" if it meets the above requirements.
So if an attorney or firm performs legal services in Multnomah County and/or the City of Portland on anything but a very limited and exceptional basis, and has total gross receipts of more than $25,000, the attorney is required to file an annual return. There is a minimum fee of $100 per year due with the City of Portland tax return.
It should be noted that both the City of Portland and Multnomah County taxes are filed using a single form, but the income is apportioned (see below), and the tax and fee liabilities are computed separately. As a result of filing the "Mult/PDX" return, the city will issue the taxpayer a business license.
Apportionment of Income
Service providers who perform services both within and outside of the pertinent metropolitan area can apportion income and pay taxes only on the portion of their computed income apportioned to Multnomah County and City of Portland. Apportionment of income2 is done by applying a ratio based on gross receipts in county and city divided by total gross receipts everywhere times computed taxable income. For example, if the gross receipts in the county and city were $100,000 and the total gross receipts were $500,000, the apportionment percentage would be 20 percent ($100,000/$500,000). If the computed taxable income were $260,000, then the Multnomah County/City of Portland apportioned taxable income would be $52,000 ($260,000 x 20 percent).
To compute the apportionment percentage you must be able to determine gross receipts attributable to "Mult/PDX." Service revenue is apportioned based on the underlying cost of producing that revenue. To determine the source of the activities that give rise to the revenue, you must review the total costs associated with generating that revenue and then use those relative costs within and without the county and city to proportionately separate the revenue into "Mult/PDX" and non-"Mult/PDX" revenue. Note that the revenue generated could be $100,000, but the actual costs could be more or less than the amount billed. This can be very important in a contingent fee case where there may be no direct relationship between the revenue and the underlying costs — the total costs of bringing the case to trial could be much higher or lower than the revenue received by the attorney.
The bulk of costs in any billing are associated with professional time billed to the contract. You must determine what portion of professional fee costs are generated within the county and city. Time records must be kept to determine where the services were performed. There is no other effective way to determine where to apportion these costs. The time evaluated in this analysis should be direct time charged to a contract, and not indirect time.
The hours worked within and outside of Multnomah County or the City of Portland need to be determined for each person’s time in the contract. Then those hours are multiplied by the billing rate of that person to determine the underlying costs associated with the revenue. A person’s billing rate is generally the best measure of the underlying costs. The administrative rule associated with apportionment only discusses the cost of service and does not provide a method of apportionment except based on hours worked; however, discussions with county and city auditors confirm that for attorneys, multiplying the billing rate by the hours worked is an appropriate way to determine the cost of service.
Other costs in the contract should be analyzed to determine where those costs should be apportioned. If these additional costs are substantial, they could be used in addition to costs associated with the costs of professional time to determine the underlying costs of generating the income. Costs such as copying and various other direct costs that are billed to a client would normally be apportioned to the location of the law office where the costs were incurred.
If an attorney or firm reports revenue as net of "recovered costs" billed through directly to a client, those recovered costs would not be analyzed to determine the source of the revenue (since they were included in gross billings, but then gross billings are reduced by recovered costs to determine revenues).
Once the above analysis has been performed to source the underlying costs, you can apportion the revenue.
Determining the Apportionment Ratio
Once you have determined the source of the revenue, there are two ways to determine the apportionment ratio. You may choose the method which results in the lowest potential tax liability.
1. Hourly Method. This method allows you to log each hour of service provided within the taxable area (see discussion about timekeeping below in the Taxable Area discussion). Total gross income is apportioned to the taxable area by multiplying total gross income generated during the year by the ratio of the cost of hours of service (hours times billing rates) performed within the taxable area to total cost of hours of service performed during the year.
Example: During the current year Law Firm X has two attorneys, Linda and Steve. The attorneys perform services both inside and outside the taxable area. Linda has a billing rate of $260, while Steve’s billing rate is $230. Each of the attorneys should prepare a daily log showing total hours worked and total hours worked within the taxable area. At the end of the year, the following hours were worked and the cost of service (COS) was determined (see table).
Since 70 percent of the cost of service ($720,300/$1,029,000) was related to services performed within the taxable area, 70 percent of the revenue would be apportioned to the county and city. Total gross income is then apportioned to the taxable area by multiplying total gross income by the ratio determined above. Assume that Law Firm X generated $1,000,000 of gross revenue during the year. Gross income apportioned to the taxable area would be $700,000 ($1,000,000 x 70 percent).
2. Project-by-Project Method. Revenues from services can be analyzed on a project-by-project basis to determine where the services were performed. Revenue is analyzed using the cost-of-service approach (see Method 1), but the analysis is completed on a client-by-client or project-by-project basis.
*If services are performed completely within a taxable area, all income from that client should be apportioned to the taxable area.
*If services are performed both inside and outside the taxable area and more services are performed inside the taxable area than outside the taxable area, then all services are deemed to occur inside the taxable area and all income from that client should be apportioned to the taxable area.
*If services are performed both inside and outside the taxable area and fewer services are performed inside the taxable area than outside the taxable area, then all services are deemed to occur outside the taxable area and none of the income from that client should be apportioned to the taxable area.
*If services are performed completely outside a taxable area, none of the income from that client should be apportioned to the taxable area.
Example: Law Firm Y performs services in Salem with a cost of service of $40,000 (outside the taxable area) and a cost of service of $50,000 in the City of Portland for one particular client. Income received from that client will be 100 percent apportioned to the City of Portland (and Multnomah County), because more of the cost of service was performed for the client inside the taxable area ($50,000) than outside the taxable area ($40,000). (Conversely, if the numbers were reversed, none of the income would be apportioned to the county and city, because more of the cost of service for the client would be outside the taxable area than inside.)
Note that it is possible to have zero apportionable income to the county or city using this method, but the firm would still be required to file a business tax return and pay the $100 minimum fee since it was doing business in there.
Recordkeeping & Taxable Area — Boundaries by Zip
All services performed within Multnomah County are not necessarily within the City of Portland, so you must keep separate records for each. You would want to keep the process as simple as possible. For example, if your office were in the City of Portland, you would generally only be concerned about time outside of the city. So the easiest recordkeeping system would be to have a separate code for Multnomah County (in the county but not in the city) and another separate code for "Oregon" (for Oregon, but outside of both the City of Portland and Multnomah County). Any time entry without a special location code would be considered to have occurred in the office and within the taxable area. If you are doing business in other states you need to track time in those states to appropriately deal with those states’ tax requirements. For example, you need to track time spent in the state of Washington so you can file Business and Occupation (B &O) tax returns.
Most taxpayers use zip codes to determine whether goods and/or services were provided within or outside the taxable area. The City of Portland website provides a schedule of zip codes for the City of Portland and Multnomah County at: www.portlandonline.com/licenses. The zip code screen can be found by clicking on the "BL/MCBIT" tab, then select the "Zip Codes — in City" or "Zip Codes — in County" links.
How to Start Filing
If you have failed to file in the past and want to correct delinquent filings prior to an audit, then you generally have two choices.
1. Voluntary Compliance Policy. A compliance policy allows you to bring your filing requirements current by filing for either: 1) the current year and the preceding three years; or 2) the current year and all prior years. Based upon which of the two options you choose, the penalties may be waived or reduced for tax years of returns filed. You cannot enter the voluntary compliance program if you have filed returns or if you have received a notice from the county or city. To get more information on this policy, go to www.portlandonline. com/licenses, Home header and click on the Voluntary Compliance Policy link on the right-hand side of the webpage.
2. Start filing with the current year. Instead of making up past filings, you could file an application and start filing with the current year. The problem with this approach is that you have to state on the application when you started doing business in Multnomah County and the City of Portland. If you state that you started doing business in a prior year, you are potentially liable for taxes and penalties for all prior years. If you state that you began doing business in the current year and the taxing authorities determine that this statement is incorrect, you may be liable for past taxes and penalties. Note: You cannot use the voluntary compliance policy program once you file a regular application.
If you just started performing services in the county and/or city this year, go to www.portlandonline.com/licenses and select the BL/MCBIT header, and then the link to Forms, Applications and Renewals.
1. Multnomah County Code Sec. 12.400©; City of Portland Code Sec. 7.02.400(C).
2. See Administrative Rule 610.93-4, found online at www.portlandonline.com/licenses on the tab labeled "BL/MCBIT."
ABOUT THE AUTHOR
Mark Clift is a certified public accountant with McDonald Jacobs P.C.in Portland. He can be reached by telephone at (503) 227-0581.
© 2005 Mark Clift