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Oregon CAT: DOR Issues Draft Labor Cost Subtraction Rules

February 25, 2020

Overview

On February 18, 2020, the Oregon Department of Revenue (“DOR”) issued draft rule OAR 150-317-1220. The rule can be broken down into three parts:

  • Definitions for purposes of the labor cost subtraction under OAR 150-317-1200;
  • Items that are not included in the labor cost subtraction under OAR 150-317-1200; and
  • An example.

Definitions for Purposes of the Labor Cost Subtraction under OAR 150-317-1200

The rule provides an “employee” is “any individual who performs services for another individual or organization having the right to control the employee as to the services to be performed and as to the manner of performance.” OAR 150-316-0225(5). It also provides an “employee” is not: (1) a partner in a partnership who receives guaranteed payments or distributive income; (2) a member in a limited liability company who receives guaranteed payments or distributive income; (3) a statutory employee as described in Internal Revenue Code Section 3121(d)(3); or (4) an independent contractor as described in ORS 670.600.

Additionally, the rule provides “compensation” is defined as “compensation, whether current or deferred, and whether in cash or in kind, received or to be received by an employee, a former employee or the employee’s legal successor for services rendered to or for an employer, including reimbursements received by or for an individual for medical or education expenses, health insurance premiums or employee expenses or on account of a dependent care spending account, legal services plan, any cafeteria plan described in IRC 125 or any similar employee reimbursement.” See ORS 317A.100(1)(b)(H).

Items That Are Not Included in the Labor Cost Subtraction under OAR 150-317-1200

The rule provides compensation in excess of $500,000 paid to any single employee and payroll taxes, including, but not limited to, Social Security, Medicare, and federal unemployment, are not included in the labor cost subtraction, as calculated under OAR 150-317-1200.

Example

Finally, the rule provides an example illustrating a company’s labor costs calculation in a scenario in which some of its employees make in excess of $500,000. The example highlights the principle that “labor costs” means total compensation of all employees, not to include compensation paid to a single employee in excess of $500,000.

If you have any questions or comments about the CAT, please do not hesitate to contact Dan Eller or Alee Soleimanpour.

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