New Oregon Gross Receipts Tax Presents Special Challenges for Construction Projects Located in Oregon

Lewis Horowitz and Eric Kodesch | Lane Powell | June 10, 2019

Oregon has enacted a new gross receipts tax (the “Oregon CAT”), largely based on the Ohio commercial activity tax (“Ohio CAT”), but with significant differences.  We issued a legal update with a detailed summary of the Oregon CAT and its effect on businesses with Oregon-sourced receipts — for the construction industry that includes projects located in Oregon.  Generally, the Oregon CAT imposes a 0.57% tax on “taxable commercial activity” in excess of $1 million, with a subtraction for 35% of the greater of (a) “cost inputs” or (b) “labor costs,” apportioned to Oregon.  Taxable commercial activity is generally defined as Oregon-source gross receipts.  The Oregon CAT goes into effect on January 1, 2020.

The Oregon CAT could prove especially burdensome for the construction industry, particularly for general contractors and design professionals, because a substantial portion of gross revenue received often is dedicated to the payment of subcontractors, suppliers and subconsultants (who each will again pay the Oregon CAT on their Oregon-source gross receipts).  Further, the statute does not provide transition relief for contracts entered into before the Oregon CAT could be factored into bids and contract prices.  

Potential Exclusion

The Oregon CAT excludes from gross receipts, “[p]roperty, money and other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission, fee or other remuneration.”  The scope of this exclusion has not been defined for purposes of the Oregon CAT and the Oregon Department of Revenue (ODOR) may provide guidance about the exclusion. 

In Ohio, an identical exclusion may apply to amounts received by a general contractor or design professional and paid to a subcontractor, supplier or subconsultant, depending on the contractual relationships between the owner, contractor/design professional, and subcontractor/supplier/subconsultant.  Specifically, the Ohio Department of Revenue has issued administrative rules generally indicating that: 

  • A contractor’s gross receipts include amounts the contractor receives under a typical lump sum (including fixed price or GMP) contract in which the contractors bears the risks of the subcontractor/supplier costs.
  • A contractor’s gross receipts exclude amounts the contractor receives under a cost-plus contract, other than the amounts above cost (i.e., the plus factor).

The regulations interpreting and implementing the Ohio CAT do not apply in Oregon.  Nonetheless, it seems logical that the ODOR might consider the Ohio rules for guidance, at least initially.  Accordingly, the Ohio lump sum contact versus cost-plus contract distinction could serve as a foundation for Oregon regulations when developed.  ODOR will need to address these and other questions, such as whether a lump sum contract could make the contractor the owner’s agent with respect to the amount paid to subcontractors or suppliers. Of course it would be preferable to avoid this problem completely through a change in the law.   

The Oregon legislature is already considering ways to address some of the problems created by, and objections to, the Oregon CAT.  Late last week draft proposed amendments were submitted to HB 2164-1.  This bill will be the vehicle this session for “technical corrections”  Payments to subcontractors are addressed favorably in Section 1 of the proposed amendment, via a proposed revision to Section 58(1)(b) of the Act.  Specifically, proposed subsection (UU)(ii) on page 8 (italicized below) would amend the definition of “commercial activity” subject to the Oregon tax to exclude:

 “[(QQ)] (UU) Revenue received by a business entity that is mandated by contract or subcontract to be distributed to another person or entity if the revenue constitutes:

(i) [certain commissions paid to commission sales contractors such as split real estate commissions, etc., as described above]…; and

(ii) Subcontracting payments under a contract or subcontract entered into by a business entity to provide services, labor or materials in connection with the actual or proposed design, construction, remodeling, remediation or repair of improvements on real property or the location of the boundaries of real property.”

Sections 7-10 would be of particular interest if any of your contracts qualify. 

The Joint Committee on Tax Expenditures is scheduled to meet on June 14, 2019 at 8:30 a.m. to consider the proposed amendment.  You should discuss this opportunity with your government-relations team, lawyers or lobbyists to ensure that any concerns you have with the Oregon CAT are timely addressed with legislative leadership, or at least to express support for the proposed language quoted above.  The technical corrections bill is likely to move very quickly.

In the meantime, anyone involved in the construction industry should review their existing contracts to determine who may be obligated to pay for cost increases as a result of this new tax. 

Will Strict “No Damages for Delay” Clauses Be Outlawed on New York Public Construction Projects? Stay Tuned.

Peter Strniste | Robinson & Cole Construction Law Zone | July 6, 2018

For years, general contractors and trade contractors have faced very strict “no damages for delay” clauses on New York State construction projects. The tides are changing.  If signed into law, S. R. 06686, Reg. Sess. 2017-2018 (NY 2017) will require public entities to allow contractors, subcontractors and suppliers to recover for costs associated with project delays to the extent the delays were caused by the entity’s actions or inactions. Public entities would include, without limitation, any state agency, department, board, bureau, municipal corporation, school district or any instrumentality or public subdivision of the State of New York.

The proposed law would allow recovery for delay damages, despite contract language to the contrary, under the following circumstances:

  • Failure of the public entity to take reasonable measures coordinate and progress the work;
  • Extended delays attributable to the public entity in the review or issuance or orders-on-contract or field orders, in-shop drawing reviews and approvals or as a result of the cumulative impact of multiple orders on contract; which constitute a qualitative change to the project work and which have a verifiable impact on project costs;
  • The unavailability of the site for such an extended period of time which significantly affects the scheduled completion of the contract; or
  • The issuance of a stop work order relative to a substantial portion of work for a period exceeding 30 days.

The law would actually require that each contract contain a provision mirroring the Act.

The proposed legislation also outlines strict claim submittal requirements in order for a claimant to be entitled to compensation for delays. The contractor, subcontractor or supplier must provide a notice of claim for the delay to a public entity by personal service or certified mail no more than fifteen (15) days after such contractor knew the facts which form the basis of the claim. The public entity must acknowledge receipt of the notice, in writing within five (5) days. The legislation expressly precludes oral notices and provides that the failure to provide such notice will result in per se prejudice to the public entity, which under most circumstances will preclude the claim.

Claimants will also be required to certify in writing and under oath that all of the information offered in support of the delay claim is accurate and complete and being submitted in good faith. This requirement could strengthen a False Claims Act claim against anyone making a claim for delay damages without justification. The New York False Claims Act imposes liability on anyone who knowingly presents false claim, request or demand for payment to a public entity. The knowingly requirement under the False Claims Act extends beyond actual knowledge to those submitting information with a reckless disregard of the truth or falsity of the information. With the certification under oath requirement, the proposed legislation could also have the effect of deterring frivolous claims for delay damages.

Under the proposed law, the onus would be on the claimant to record and maintain diligent written records of their claim, “For any claim asserted pursuant to this title, the contractor, subcontractor, or materialman shall keep detailed written records of the costs and shall make them available for the purposes of audit and review. Failure to provide the required written notice or to maintain and furnish records of the costs of such claims shall constitute a waiver of the claim.” The proposed law would also require the claimant to provide the following documents to the public entity, upon request:

  • Description of the operations that were delayed, the reasons for the delay and an explanation of how they were delayed;
  • A detailed factual statement of the claim providing all necessary dates, locations, and items of work affected by the claim;
  • The date on which actions resulting in the claim occurred or conditions resulting in the claim became evident;
  • The names, functions and activities of each contractor, subcontractor and materialman involved in, or knowledgeable about facts that gave rise to such claim;
  • The identification of any pertinent documents, and the substance of any material oral communication relating to such claim;
  • The amount of additional compensation sought; and
  • If an extension of time is also requested, the specific number of days for which it is sought and the basis for such request as determined by an analysis of the construction progress schedule.

In addition, the law would require, upon submitting a claim, that the contractor, subcontractor or supplier certify in writing and under oath that the supporting data is accurate and complete to his or her best knowledge or belief and that any amount demanded reflects in good faith, what he or she believes to be the public entity’s liability.

We are monitoring the legislation closely and will keep our readers advised of any developments. You can also review the entire text of the legislation and check out its status here.

Ten Essential Ways to Protect Yourself During a Construction Project

P. Wesley Lambert | Brouse McDowell | August 25, 2016

[Note: This article is based upon talking points from a Webinar presentation given by P. Wesley Lambert on June 30, 2016. If you are interested in viewing the Webinar, please click the following link:https://drive.google.com/open?id=0ByL50atTp8rOZ05qc2xwaTMtajQ]

Construction projects, and by extension, construction disputes can be high stakes endeavors. At every step of the way, you have an opportunity to protect yourself, advance your case, or gain leverage over the other side. This is the case not only in litigation, but if you are in a dispute situation outside of court, or even if you are trying to negotiate a resolution to something in a situation that is not otherwise contentious.

If some basic concepts and rules are not attended to at the appropriate step along the way, your ability to win your dispute or negotiation can be compromised. The implications of not paying attention to these concepts and issues include:

• Exposure to additional damages or penalties
• Court-imposed sanctions
• The inability of your expert to testify
• Paying the other side’s attorney fees
• Losing your right to file a lien on the project
• Losing your right to file a bond claim

Below we discuss ten ways project owners and contractors can increase their odds of winning their dispute or negotiation.

1. USE A WELL-WRITTEN AND COMPREHENSIVE CONTRACT.

No matter what your role in the project is, a well-written and comprehensive agreement is essential. Your contract should address things such as scope of work, how changes to the project will be accomplished, notification provisions, and payment terms.

Identifying these things the right way on the front end can give you an advantage if a dispute arises, because the first place the parties, or the court, will look to resolve the issue is the written contract. If the written contract is drafted in your favor, or you are simply seeking to enforce terms you have complied with, you have the upper hand.

2. ESTABLISH A DOCUMENT RETENTION POLICY.

Frankly, this rule applies to all forms of litigation, not just the construction litigation context. The preservation of electronically stored information, or ESI, is more important than ever. Litigants of all sizes and revenue streams are expected to have the ability to preserve, collect and produce ESI. Some of the rules governing litigants are starting to reflect this. For example, Cuyahoga Local Rule 21.3 requires parties to meet and confer regarding the preservation and production of ESI soon after a case is filed. Similarly, recent amendments to Federal Civil Rule 37 implement a “good faith” element to preservation. If you retain documents in good faith, you may save yourself from harsher sanctions if a document goes missing and cannot be produced.

3. TRAIN YOUR EMPLOYEES TO INTERACT CORRECTLY WITH OTHERS.

Keep in mind that your employees, particularly those in a managerial role, are generally considered your agents, and what they say can bind you in certain circumstances. You want to make sure that they are well prepared to represent you in a manner that is not going to harm you in the future, such as committing to changes or deadlines that you cannot meet.

Just as importantly, train your employees on who has authority to speak for the other side. Someone without authority to do so may agree to a change or an alteration of the contract in the field that will not be enforceable if there ends up being a dispute.

4. DOCUMENT CHANGES IN YOUR PROJECT THE RIGHT WAY.

Failing to correctly document changes to the project is one of the most basic mistakes that frequently is made in the field, and it becomes impossible to unwind these mistakes in litigation. These include changes to the project scope, changes to the project timeline, or changes in price or payment terms. In almost all instances, the contract will require these changes to be in writing, and to be approved by the appropriate person – such as the project architect or construction manager. If they are not, and unless an exception applies, you are performing extra work for free, or operating under a mistaken assumption as to what your contractual rights are.

Also, on this point, you want to make sure that when you execute a change to your contract, the change covers everything. In Rabin v. Anthony Allega Cement Contractor, Inc., Franklin App. Nos. 00AP-1200 & 00AP-1241, 2001-Ohio-4057, the Tenth District Court of Appeals held: “Where the parties to a construction contract agree to a change order which they intend to provide complete compensation for a given change in the project, the party being compensated by the change order will be contractually foreclosed from seeking additional compensation related to that same project change.” The takeaway is that written change requirements must be strictly adhered to.

5. CHECK FOR APPLICABLE INSURANCE TO COVER CLAIMS MADE AGAINST YOU.

Particularly in cases where construction defects are alleged, you must remember to notify your insurer in a timely manner to preserve your rights to coverage. You should look both at your own policies, and those on which you might qualify as an “additional insured,” including policies obtained by your subcontractors. It is also important to note that your insurer’s duty to defend you against a claim is much broader than its duty to ultimately indemnify you against any damages awarded against you. This means that if a claim made against you is arguably or potentially covered by an insurance policy, you are entitled to a defense provided by the insurer, even if the insurer may not be ultimately responsible to pay for any damages awarded.

6. IF EXPERT TESTIMONY IS NEEDED, YOU NEED TO MAKE SURE THE EXPERT IS IN THE CORRECT FIELD.

Failing to hire the right expert is a mistake that is frequently made and can result in your expert’s testimony being limited by the court or precluded altogether. If the conduct of an engineer is called into question, hire a credentialed engineer to assess that conduct. If an architect’s conduct is at issue, retain an expert that is a licensed architect. Sometimes people think that these professions are close enough that experts can cross over. While you might be able to get away with it, you don’t want to run the risk that your expert’s testimony will not be accepted by the court or will be disregarded by the jury.

7. PRESERVE BOTH THE DOCUMENTARY AND PHYSICAL EVIDENCE OF YOUR CLAIM.

If you are claiming that a differing site condition requires a change to some aspect of the project, such as the scope of work, you need to give the other side an opportunity to observe that condition and document it before that condition is disturbed. Similarly, if you are claiming that a contractor has performed defective work on a project, you need to be careful about how you document the defect and preserve the other side’s opportunity to observe that defective work before you undertake any repairs.

8. PAY ATTENTION TO APPLICABLE PROMPT PAY STATUTES.

Under Ohio law, if you are a general contractor or higher-tier subcontractor, you have 10 days from the receipt of your payment from the owner or general contractor in which to pay your subcontractors. There are very limited exceptions to this rule. Failure to comply can result in harsh penalties to you that you may not have anticipated when you got into your dispute, including an 18% interest penalty on top of what you already owe, payment of the other side’s attorneys’ fees, and payment of court costs. Importantly, you cannot require a subcontractor to waive its prompt-payment rights in your contract with them.

9. PAY ATTENTION TO TIME LIMITS TO PRESERVE YOUR BOND CLAIMS.

If you are seeking payment for amounts owed to you by another contractor on a project, you will want to see whether that contractor was required to obtain a bond as part of their contract. However, contractors frequently fail to consider whether there are time limitations within which they must assert a claim on a bond.

For example, on federal projects covered by the Miller Act, you must generally wait 90 days after you last provided labor or materials to the project to file suit. However, your suit must be filed within one year after you last provided labor and materials. This one-year limitations period will be strictly enforced. For state projects, there are frequently limitations imposed by “Little Miller Act” statutes.

10. COMPLY WITH TIME LIMITATIONS IN THE APPLICABLE MECHANICS’ LIEN STATUTES.

Under Ohio law, you are required to provide a Notice of Furnishing within 21 days after you first provide labor or materials to a project. If you wait longer, you may lose your lien rights to labor or materials provided prior to you serving the notice.

Similarly, on most commercial projects, to protect your lien rights, you must file your lien within 75 days after your work is completed. You ordinarily cannot extend this time period by doing things like ministerial repair work. Failing to preserve your lien rights can critically impair your ability to receive a favorable resolution to a payment dispute.

Not preparing for a dispute in advance will hurt your ability to win. It is important to preserve your arguments and leverage points so you can use them when the opportunity arises.