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. 

How To File A Complaint With The Oregon Division of Financial Regulation About Your Delaying, Denying and Bad Treating Insurance Company

Daniel Veroff | Property Insurance Coverage Law Blog | May 10, 2019

When Oreganians are mistreated by their insurance companies, they can turn to the state government for help. Oregon’s Division of Financial Regulation has the authority to accept and investigate complaints by consumers.

Filing a consumer complaint can be done on the Division’s website and is an easy process. The website includes a fillable form that asks some basic questions about the insurance at issue. It then asks for a description of the issues, and for the insured’s thoughts on what would constitute a fair resolution.

According to the Division, most complaints are resolved within 60 days. The Division states:

Once we receive a complaint, an advocate will:

• Let you know in writing that we received your complaint

• Send a copy of your complaint to the insurance company, agent, or both

• Obtain a detailed response from the company, agent, or both

• Analyze the response and any supporting documents (the company or agent must respond within three weeks)

• Determine whether more information is needed or there is a possible violation

• Advise you of our findings.

The Division’s website also cautions as to what it can and cannot do in response to a compliant:

Oregon also offers a neat tool on its website for searching to find complaint comparable to yours.1 If you find that your insurance company is treating many customers the same way, you may be able to use that as leverage against your insurance company or with the Division to get extra help. The website also has other information about past complaints that can be helpful, including annual summaries.2

To contact the Division, you can go onto their website, the links in the footnotes, or contact as follows:

Phone: 888-877-4894 (toll-free)

If you are not certain of your insurance claim rights or if you have questions about your policy benefits, please do not hesitate to call Merlin Law Group attorneys.

The Skyscrapers of the Future Will Be Made of Wood

David J. Petersen | Tonkon Torp. | September 6, 2018

On August 8, the Oregon Building Codes Division approved a new state building code called a Statewide Alternate Method. The new code authorizes the construction of wood buildings taller than six stories, which was the previous limit. Taller wood buildings have been made possible by technological advances with cross-laminated timber. CLT, as it is known, is constructed by layering perpendicular sheets of solid lumber and adhering them together. It is similar to plywood, but much thicker, creating the necessary structural support for a high rise building. 

CLT has numerous advantages over steel, masonry and concrete. It is lighter and more flexible, which provides excellent seismic resilience, reduces the need for deep foundations and shortens construction time. The base material is easily adaptable to different uses by adding or removing layers to create the desired thickness and strength. As a wood product it sequesters carbon and can be sourced from a renewable, sustainable resource. Materials can be prefabricated off site, potentially lowering construction costs. Disadvantages include current higher production costs and weak sound insulation properties. While an increased risk of fire may seem logical, in fact CLT has been shown to have equal or better fire resistance than other non-carbon based construction materials.

CLT is in common use in Europe, and the largest CLT building currently in existence is Dalston Lane, a mixed use complex in Hackney in the U.K., with towers as tall as 10 stories. The Framework Building, a mixed retail, office, and residential tower to be constructed in Portland’s Pearl District, would have topped Dalston Lane at 12 stories, but due to development challenges the project is currently on hold. Portland also hosts the USA’s first CLT building, the four-story Albina Yard.

Despite the temporary setback of the Framework project and the manufacturing defects recently found in CLT used in a project at Oregon State University, CLT has loads of promise as the high-rise construction material of the future. By using sustainably-sourced wood or wood that would otherwise go to waste (much CLT in the market today is made from pine beetle-infested trees), the carbon footprint of new high-rises can be reduced significantly. As costs come down, as they do with all successful new technologies, expect to see CLT structures rise near you.

Before skyscrapers first touched the sky in New York and other cities over 100 years ago, most buildings were built of wood. The structural limitations and fire risk of wood kept buildings short, to perhaps five or six stories at most. Steel and concrete allowed architects to blow past those limitations. Now, with the advances made possible by CLT, our built environment is on the verge of completing a full circle to the space age wood structure of the future.

Oregon Anti-Indemnity Statute Voids Sub-sub’s Duty to Indemnify Sub for the Sub’s Own Negligence

Amandeep S. Kahlon | Buildsmart | August 7, 2018

The Ninth Circuit Court of Appeals recently upheld the application of Oregon’s anti-indemnity statute to a contractual indemnity provision requiring a sub-subcontractor’s insurer to indemnify the subcontractor for the subcontractor’s own negligence. In First Mercury Insurance Company v. Westchester Surplus Lines Insurance Company, Multnomah County contracted with a general contractor for the renovation of a bridge. The general contractor hired a subcontractor to furnish materials including reinforced decking. The subcontractor, in turn, contracted with a sub-subcontractor to manufacture the decking material. The sub-subcontract required the sub-subcontractor to indemnify the subcontractor for the subcontractor’s own negligence in causing damage to a third party—in this instance, the County.

After the project was completed, several defects in the bridge were discovered, including cracks in the decking. When the County sued, the subcontractor was found to have been negligent and partially liable for the defects and resulting damage to the County. The subcontractor claimed indemnity from the sub-subcontractor per the terms of the sub-subcontract, but the trial court refused to enforce the indemnity provision because it was void under Or. Rev. Stat. § 30.140(1). The relevant portion of the statute provides that any provision in a construction agreement that requires a company or its insurer/surety to indemnify another against liability for damage to property caused in whole or in part by the negligence of the indemnitee is void. Citing the plain language of the statute, the Ninth Circuit affirmed the trial court’s judgment denying indemnity.

The Ninth Circuit opinion serves as an important reminder of the variety of anti-indemnity provisions across the nation. Many states take Oregon’s approach and restrict the scope of indemnity provisions to cover only the negligence of the indemnitor and not the negligence of the indemnitee. Other states have more lenient anti-indemnity statutes or no anti-indemnity provision at all. Still others take a harsher approach than Oregon and impose stricter limitations in their anti-indemnity laws and may even have different laws for different industries.

When negotiating agreements for work outside your company’s traditional footprint, consider whether the state where the project is located has an anti-indemnity statute and how it is applied. Indemnity provisions in construction contracts can be exceptionally consequential in terms of allocating risk between parties, so it is essential to understand how such provisions will be applied and enforced in any particular state before executing an agreement and moving forward with a project in that state.

Insurance Reciprocal Exchanges and Federal Diversity Jurisdiction

Stephanie Poll | Property Insurance Coverage Law Blog | July 25, 2018

Recently, a federal district court in Oregon clarified where one may sue an insurance reciprocal exchange. In the case of Staggs v. Farmers Insurance Exchange,1 the homeowners were Oregon citizens who brought suit under a homeowners’ policy issued by Farmers Insurance Exchange in a federal district court in Oregon. Farmers moves to dismiss, arguing that the court lacked subject matter jurisdiction because there was no diversity; that although its primary place of business was California, the Staggs were Oregon citizens.

The court granted Farmers’ motion, noting that in a reciprocal insurance exchange, individuals and businesses pool risk by agreeing to indemnify each other against particular kinds of losses. The policyholders are identified as “subscribers” who act through a common attorney-in-fact and are simultaneously both insurers and insureds. The court determined these insurance exchanges do not have a corporate existence. The court further determined that under California law, a reciprocal insurance exchange’s subscribers were its members and that Farmers’ citizenship had to be decided in relation to the citizenship of its members-subscribers.

Using this rationale, the court concluded that the Staggs were Oregon citizens and Farmers’ member-subscribers and therefore Farmers was an Oregon citizen, destroying diversity between the parties and resulting in the court lacking subject matter jurisdiction.

There are differing decisions among the federal courts on whether subscribers to a reciprocal insurance exchange are members or customers of the exchange.2 One significant fact is that when Congress passed the Class Action Fairness Act of 2005, it amended the diversity of citizenship rule for specific class actions.3 The amendment stated that for a subset of class actions, “an unincorporated association shall be deemed to be a citizen of the State where it has its principal place of business and the State under whose laws it is organized.”

The Senate Judiciary Committee remarked in its report on CAFA that the rule was frequently criticized because often an unincorporated association is, as a practical matter, indistinguishable from a corporation in the same business. Some insurance companies for example, are “inter-insurance exchanges” or “reciprocal insurance associations.” For that reason, federal courts have treated them as unincorporated associations for diversity jurisdiction purposes. Since such companies are nationwide companies, they are deemed to be citizens of any state in which they have insured customers.

Consequently, these companies can never be completely or even minimally diverse in any case. It makes no sense to treat an unincorporated insurance company differently from, say, an incorporated manufacturer for purposes of diversity jurisdiction. New subsection 1332(d)(10) corrects this anomaly.
1 Staggs v. Farmers Ins. Exchange, No. 3:15-cv-015020 (D. Ore. April 27, 2016).
2 Garcia v. Farmers Ins. Exch., 121 F. Supp. 2d 667, 669 (N.D. Ill. 2000); James G. Davis Const. Corp. v. Erie Ins. Exchange, 953 F. Supp. 2d 607 (D. Md. 2013); James River Ins. Co. v. Cast & Associates, Inc., No. 4:11-CV-00730 (D. Ariz. Mar. 5, 2012); Nevada Capital Ins. Co. v. Farmers Ins. Exchange, No. 2:12-cv-02166 (D. Nev. Dec. 4, 2014).
3 28 U.S.C. § 1332(d)(10).