Payroll Factor; In General

# (1)

(1) The payroll factor of the apportionment formula for each trade or business of the taxpayer includes the total amount of compensation paid by the taxpayer in the regular course of its trade or business during the tax period.

# (2)

(2) The total amount "paid" to employees is determined upon the basis of the taxpayer's accounting method. If the taxpayer has adopted the accrual method of accounting, all compensation properly accrued is deemed to have been paid. Notwithstanding the taxpayer's method of accounting, at the election of the taxpayer, compensation paid to employees may be included in the payroll factor by use of the cash method if the taxpayer is required to report such compensation under such method for unemployment compensation purposes.

# (3)

(3) The compensation of any employee on account of activities which are connected with the production of nonapportionable income is excluded from the factor.

Example 1:

The taxpayer uses some of its employees in the construction of a storage building which, upon completion, is used in the regular course of taxpayer's trade or business. The wages paid to those employees are treated as a capital expenditure by the taxpayer. The amount of such wages is included in the payroll factor.

Example 2:

The taxpayer owns various securities which it holds as an investment separate and apart from its trade or business. The management of the taxpayer's investment portfolio is the only duty of Mr. X, an employee. The salary paid to Mr. X is excluded from the payroll factor.

# (4)

(4) The term "compensation" means wages, salaries, commissions, and any other form of remuneration paid to employees for personal services. Guaranteed payments representing compensation for services to a partnership are considered remuneration paid to employees for personal services. Other than this exception relating to guaranteed payments, payments made to an independent contractor or any other person not properly classifiable as an employee are excluded.

# (5)

(5) Guaranteed payments which represent a return of capital, interest paid on a capital account, or for any purpose other than compensation for services are excluded. Only amounts paid directly to employees are included in the payroll factor. Amounts considered paid directly include the value of board, rent, housing, lodging, and other benefits or services furnished to employees by the taxpayer in return for personal services, provided that such amounts constitute income to the recipient under the federal Internal Revenue Code. In the case of employees not subject to the federal Internal Revenue Code, e.g., those employed in foreign countries, the determination of whether such benefits or services would constitute income to the employees is made as though such employees were subject to the federal Internal Revenue Code.

# (6)

(6) The term "employee" means (1) any officer of a corporation, or (2) any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee. Generally, a person will be considered to be an employee if he is included by the taxpayer as an employee for purposes of the payroll taxes imposed by the Federal Insurance Contributions Act; except that, since certain individuals are included within the term "employees" in the Federal Insurance Contributions Act who would not be employees under the usual common-law rules, it may be established that a person who is included as an employee for purposes of the Federal Insurance Contributions Act is not an employee for purposes of this rule.

# (7)

(7) In filing returns with this state, if the taxpayer departs from or modifies the treatment of compensation paid as used in returns for prior years, the taxpayer must disclose in the return for the current year the nature and extent of the modification.

# (8)

(8) If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the treatment of compensation paid, the taxpayer must disclose in its return to this state the nature and extent of the variance.

# (9)

(9) The denominator of the payroll factor is the total compensation paid everywhere during the tax period. Accordingly, compensation paid to employees whose services are performed entirely in a state where the taxpayer is immune from taxation are included in the denominator of the payroll factor.

Example 3:

A taxpayer has employees in its state of legal domicile (State A) and is taxable in State B. In addition the taxpayer has other employees whose services are performed entirely in State C where the taxpayer is immune from taxation by Public Law 86-272. As to these latter employees, the compensation will be assigned to State C where their services are performed (i.e., included in the denominator-but not the numerator-of the payroll factor) even though the taxpayer is not taxable in State C.

[Publications: Contact the Oregon Department of Revenue to learn how to obtain a copy of the publication referred to or incorporated by reference in this rule pursuant to ORS 183.360(2) and 183.355(1)(b).]