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We got a bit deep in the tax weeds in the middle of today's Facebook in Prineville show, and decided we'd follow up to shed more light on the details. The question is what, exactly, the state's Oregon Investment Advantage would mean for Facebook.
To start with, here's a timeline (pdf) showing what happens when. Bascially, we're still in the early stages. Facebook has applied for preliminary certification. This means that eventually the company could be considered for the tax break. Assuming that they are granted the preliminary certification, the next steps are for Facebook to build its facility, hire its workers, and fire up its servers. Then, after its first tax year, it will file its first annual certification application.
And this is where things got a bit confusing. The Oregon Investment Advantage confers up to ten years of corporate income tax abatement. But that income tax liability is calculated based on the percentage of it sales that came from Oregon — the so-called "single sales factor." This means, for example, that Nike doesn't pay Oregon taxes for shoes sold in China, or in Weehauken. Just within this state.
But how do you calculate the Oregon component of revenue for a company that has many Oregon users but whose users aren’t exactly customers (in that they’re not paying anything)? If Facebook’s revenue is derived largely from advertising, do you simply have to add up the Oregon-based advertisers?
I asked all of these questions to Jill Miles of Business Oregon. This was her response:
While the single sales factor as a form of tax treatment is inherently attractive to many traded-sector enterprises, it is of no relevancy for Facebook, because sales refers to those for tangible goods in determining the interstate apportionment of taxable domestic income. With intangible services it is not the location of the customer that matters, but rather where most of the income-producing activity occurs. For some Oregon-based data centers, this will mean most of the sales will be allocated to Oregon if originating from here. How this will pertain to Facebook seems less than obvious, in that the data stored and processed for Facebook users may be rather more tangential to its actual income‑producing activities compared to other types of data-center operations.
Finally, internet data centers are since 2008 evidently being treated like utilities for purposes of property taxes, in that they will be subject to what’s called unitary assessment as centrally handled by the Department of Revenue. This method captures intangible company value and tends to increase property tax exposure. For Facebook, this makes the long‑term rural enterprise zone exemption all the more important in addition to the Oregon Investment Advantage.
Put another way, I think we won't know what Facebook's tax corporate liability will be — and what the Oregon Investment Advantage might mean — until their business here is up and running.