Current through Register Vol. 63, No. 9, September 1, 2024
(1) This rule adopts a model regulation
recommended by the Multistate Tax Commission to promote uniform treatment of
this item by the states.
(2)
Property rented by the taxpayer is valued at eight times its net annual rental
rate. The net annual rental rate for any item of rented property is the annual
rental rate paid by the taxpayer for such property, less the aggregate annual
subrental rates paid by subtenants of the taxpayer.
(3) Subrents are not deducted when the
subrents constitute apportionable income because the property that produces the
subrents is used in the regular course of a trade or business of the taxpayer
when it is producing such income. Accordingly there is no reduction in its
value.
Example 1:The taxpayer
receives subrents from a bakery concession in a food market operated by the
taxpayer. Since the subrents are apportionable income they are not deducted
from rent paid by the taxpayer for the food market.
Example 2: The taxpayer rents a five-story
office building primarily for use in its multistate business, uses three floors
for its offices, and subleases two floors to various other businesses on a
short-term basis because it anticipates it will need those two floors for
future expansion of its multistate business. The rental of all five floors is
integral to the operation of the taxpayer's trade or business. Since the
subrents are apportionable income, they are not deducted from the rent paid by
the taxpayer.
Example 3: The
taxpayer rents a 20-story office building and uses the lower two stories for
its general corporation headquarters. The remaining 18 floors are subleased to
others. The rental of the 18 floors is not integral to but rather is separate
from the operation of the taxpayer's trade or business. Since the subrents are
nonapportioable income they are to be deducted from the rent paid by the
taxpayer.
(4)
(a) If the subrents taken into account in
determining the net annual rental rate produce a negative or clearly inaccurate
value for any item of property, another method that will properly reflect the
value of rented property may be required by the department or requested by the
taxpayer.
(b) In no case however
may such value be less than an amount that bears the same ratio to the annual
rental rate paid by the taxpayer for such property as the fair market value of
that portion of the property used by the taxpayer bears to the total fair
market value of the rented property.
Example
4: The taxpayer rents a 10-story building at an annual rental rate
of $1,000,000. Taxpayer occupies two stories and sublets eight stories for
$1,000,000 a year. The net annual rental rate of the taxpayer must not be less
than two-tenths of the taxpayer's annual rental rate for the entire year, or
$200,000.
(c) If property
owned by others is used by the taxpayer at no charge or rented by the taxpayer
for a nominal rate, the net annual rental rate for such property must be
determined on the basis of a reasonable market rental rate for such property.
(5) "Annual rental rate"
is the amount paid as rental for the property for a 12-month period (i.e., the
amount of the annual rent). Where property is rented for less than a 12-month
period, the rent paid for the actual period of rental is the "annual rental
rate" for the tax period. However, where a taxpayer has rented property for a
term of 12 or more months and the current tax period covers a period of less
than 12 months (due, for example, to a reorganization or change of accounting
period), the rent paid for the short period must be annualized. If the rental
term is for less than 12 months, the rent may not be annualized beyond its
term. Rent may not be annualized because of the uncertain duration when the
rental term is on a month-to-month basis.
Example
5: Taxpayer A, that ordinarily files its returns based on a
calendar year, is merged into Taxpayer B on April 30. The net rent paid under a
lease with five years remaining is $2,500 a month. The rent for the tax period
January 1 to April 30 is $10,000. After the rent is annualized the net rent is
$30,000 ($2,500 x 12).
Example 6:
Same facts as in Example (5) except that the lease would have terminated on
August 31. In this case the annualized net rent is $20,000 ($2,500 x
8).
(6) "Annual rent" is
the actual sum of money or other consideration payable, directly or indirectly,
by the taxpayer or for its benefit for the use of the property and includes:
(a) Any amount payable for the use of real or
tangible personal property, or any part thereof, whether designated as a fixed
sum of money or as a percentage of sales, profits, or otherwise.
Example 7: A taxpayer, pursuant to the terms
of a lease, pays a lessor $1,000 per month as a base rental and at the end of
the year pays the lessor one percent of its gross sales of $400,000. The annual
rent is $16,000 ($12,000 plus one percent of $400,000 or
$4,000).
(b) Any amount
payable as additional rent or in lieu of rents, such as interest, taxes,
insurance, repairs, or any other items that are required to be paid by the
terms of the lease or other arrangement, not including amounts paid as service
charges, such as utilities, janitor services, etc. If a payment includes rent
and other charges unsegregated, the amount of rent must be determined by
consideration of the relative values of the rent and the other items.
Example 8: A taxpayer, pursuant to the terms
of a lease, pays the lessor $12,000 a year rent plus taxes in the amount of
$2,000 and interest on a mortgage in the amount of $1,000. The annual rent is
$15,000.
Example 9: A taxpayer
stores part of its inventory in a public warehouse. The total charge for the
year was $1,000 of which $700 was for the use of storage space and $300 for
inventory insurance, handling and shipping charges, and C.O.D. collections. The
annual rent is $700.
(7) "Annual rent" does not include:
(a) Incidental day-to-day expenses such as
hotel or motel accommodations, daily rental of automobiles, etc.; and
(b) Royalties based on extraction of natural
resources, whether represented by delivery or purchase. For this purpose, a
royalty includes any consideration conveyed or credited to a holder of an
interest in property that constitutes a sharing of current or future production
of natural resources from such property, irrespective of the method of payment
or how such consideration may be characterized, whether as a royalty, advance
royalty, rental or otherwise.
(8) Payments for lease bonus and delay rental
expensed in the current tax year must be treated as rental property and valued
at eight times the amount paid.
(9)
Leasehold improvements must, for the purposes of the property factor, be
treated as property owned by the taxpayer regardless of whether the taxpayer is
entitled to remove the improvements or the improvements revert to the lessor
upon expiration of the lease. Hence, the original cost of leasehold
improvements must be included in the factor.
Statutory/Other Authority: ORS
305.100,
305.653 &
314.605 -
314.667
Statutes/Other Implemented: ORS
314.655
