INSIGHT: Reed Smith’s Relationships: Nia Ray, Oregon Department of Revenue Director

From Jefferson City to Salem

Reed Smith: It’s great to be here with you in the Pacific Northwest, Nia. You have a unique distinction of being one the few people to lead a revenue department in more than one state. Tell us a little bit about your background and how you got to Oregon.

Nia Ray: Hello, Jeremy. This is my first interview as a revenue director, so I appreciate the opportunity! My background is varied, as I’m an attorney by trade and have moved back and forth between the legal profession and government administration for most of my career. I graduated from law school in 2000 and began my legal career as an attorney on the Missouri governor’s staff and labor counsel for a state agency. After the gubernatorial term ended, I prosecuted for the city of St. Louis and worked for a firm in the private sector. Another gubernatorial transition created opportunities for me, and I was called back into state government and served in several administrative roles. The governor at that time, Jay Nixon, appointed me to direct the Division of Employment Security (DES), which administers the federal unemployment insurance program for Missouri. The DES audits and collects employment taxes from Missouri businesses. That responsibility led to my appointment to the Missouri Department of Revenue. And now, thanks to an appointment by [Gov. Kate Brown (D)] and confirmation by the Oregon Legislature, I’m the Director of the Oregon Department of Revenue. And though it’s been challenging in some respects, it has been an incredible experience so far. I’m very glad to be here.

Reed Smith: I understand that the department was scrutinized or criticized by the Legislature in the past. What were some of the problems that you’ve been brought in to fix? [Note—After repeat financial audits had uncovered significant and material weakness in the agency’s accounting reports, the Oregon Legislature ordered the Department of Revenue to undergo a $150,000 comprehensive financial audit and a $350,000 management assessment. Over the next two years, the agency must make frequent, mandatory reports to lawmakers during the interim and regular sessions of the Legislature.]

Ray: There was an intense level of legislative scrutiny during the 2017 session. The Oregon DOR as an agency, however, is far more than what was reflected during that moment in time, and we are working diligently to address the legislative concerns.

That said, the concerns raised by the Legislature were primarily centered around our personnel management, long-standing issues within our finance division, and the expectation that the department implement data-driven processes so that our policies are more objectively understood by our external stakeholders. The root of many of the legislative concerns hinges on increasing our level of communication with the Legislature and our external stakeholders to ensure they are aware of the department’s goals, challenges, and outcomes. We have to change the frequency and manner of communicating about our business here at the DOR—and that includes ensuring that the public is aware of our accomplishments as well.

Reed Smith: How do you compare leading Missouri’s department of revenue to leading Oregon’s department of revenue?

Ray: The differences lie in the tax codes of each individual state. Missouri had a broad-based sales tax, so we were structured a bit differently and, quite frankly, had very different conversations about what tax reform should entail. State agencies are driven by leadership, so the leadership priorities of the governor and Legislature at any given time certainly shape the direction of a revenue agency. While executive agencies themselves are apolitical, politics certainly shape the policies around our tax administration. Missouri and Oregon are very different states politically. The tax reform conversations are very different in Missouri and Oregon because of the different set of needs and the variances in the tax code and the tax types.

Wayfair, of Course

Reed Smith: Speaking of different tax codes, Oregon doesn’t have a state sales tax, so what impact, if any, does the Wayfair decision have on Oregon revenue?

Ray: We’re still assessing the impact of Wayfair on Oregon’s revenue stream and on the administration of the tax programs for which we are responsible. Even though Oregon doesn’t have a broad-based sales tax, we have a corporate excise tax and other smaller excise taxes that could be impacted by the decision. Oregon’s policy since 2007 states that physical presence isn’t required to establish substantial nexus in our state. This policy was recently upheld by the Oregon Supreme Court in the Capital One case that was decided in August. So, in many respects, Wayfair won’t create the level of immediate administrative redirection for Oregon as it will for other states.

Irrespective of the severity of impact to Oregon, I certainly understand the significance of the decision and remain supportive of our sister revenue agencies across the country. It’s a tough haul to respect the Supreme Court’s ruling while also addressing the real life impacts to the business community, industry and taxpayers. Developing a core set of solutions around the decision will be challenging for many states, and Oregon will be watching and keeping abreast of the various approaches.

Reed Smith: New Hampshire, I’m sure you’ve seen, is taking steps to try and protect their in‑state businesses from the impact of Wayfair. Have you considered doing anything similar, or has the business community looked to you all to shield them from taxation by other states?

Ray: New Hampshire’s response seems to be reflective of the business needs within that state’s boundaries, and Oregon’s business community has not urged us to take similar steps.

Implementing Federal Tax Reform

Reed Smith: How has your department been involved in reviewing and implementing federal tax reform?

Ray: From an administrative perspective, the department was greatly concerned about the ability to reflect the tax changes in our personal income tax forms for the 2018 tax year and were very grateful that the IRS provided form guidance when they did. From a policy perspective, the Oregon DOR is recommending that taxpayers review and revise their W-4s in accordance with the new individual income tax changes. Legislatively, Oregon was fairly quick in its initial response to federal tax reform, passing S.B.s 1528 and 1529 in February, and H.B. 4301 in May in a special session called by Gov. Brown.

Reed Smith: Can you summarize those bills a little bit and how they impact the corporate community?

Ray: Sure. S.B. 1528 was the state’s response to the federal pass-through entity deduction. Oregon’s tax laws already provide a reduced rate for certain pass-through entities, so we disconnected from the federal provision, but H.B. 4301 added categories of taxpayers to the existing list of eligible claimants for the reduced state pass-through entity tax rate. S.B. 1529 was proposed in response to the federal mandatory repatriation provisions. S.B. 1529 repealed Oregon’s listed jurisdiction statute prospectively beyond 2017 to avoid double inclusion of repatriated income. Certain corporations may claim a credit in 2017 for income included in tax years 2014–2016 to prevent over inclusion and ensure that businesses aren’t penalized for the repeal of the state law.

The downside of Oregon’s quick legislative response, if there is one, is that it requires an administrative response fairly quickly as well. So crafting administrative rules and guidance around the provisions with the same sense of urgency was expected by our stakeholders. We took and continue to take every precaution to ensure that we understood the state’s legislative intent, the purposes of the 2017 federal tax law, and the needs of industry to create administrative strategies around that legislation.

Reed Smith: Who was the driving force behind those bills?

Ray: S.B. 1529 was not a DOR policy initiative, but the agency has worked diligently to develop strategies around providing guidance and has used industry work groups to identify areas of administrative concern. I always appreciate the opportunity to engage our business interests as rules and processes are developed.

The H.B. 4301 expansion of eligible reduced rate pass-through entity claimants was the initiative of Gov. Brown. Gov. Brown called a special legislative session to ensure that small business owners are beneficiaries of the lower pass-through rate.

Reed Smith: Do legislative proposals ever commence at the department?

Ray: We create departmental priorities where appropriate but are very careful about the legislative concepts and priorities that originate from the department. There is a balancing of interests whenever we initiate policy, and we certainly want to make sure that the public is well served when we stand behind any legislative proposal.

Reed Smith: What’s the overall policy objective in implementing federal tax reform? Is the goal to remain to keep your budget neutral?

Ray: Well, without speaking for the governor or the Legislature, what I’ve been able to surmise from the discussions around 1528 and 1529 is that dual goals were pursued. Revenue neutrality and the protection of Oregon taxpayers appeared to be of equal concern.

I think we will hear robust discussion about tax reform next year, as state tax reform has been a recurring legislative theme. The recent federal changes will add a level of complexity to state tax reform discussions.

Reed Smith: So with that said, have there been any estimates as far as whether the impact with the state legislation will be revenue neutral or will it be a net gain or loss for the state?

Ray: That’s a good question. I know for 1528 (pass-through legislation), if we hadn’t disconnected, we were anticipating roughly a $100 million reduction. For 1529, the numbers are unclear. That was more of an administrative move to ensure that there wasn’t double inclusion.

Reed Smith: Who are the most influential players for tax legislation outside of the department?

Ray: Oregon has strong leadership on our House and Senate Revenue Committees. The department historically has played a very neutral and administrative role in the creation of tax policy. Industry of course plays a role in legislative policy making and we also attempt to engage industry in our rule making process. The DOR has quarterly meetings with the Oregon State Bar and Oregon Society of CPAs to create a feedback loop for stakeholder concerns. So, I’d say industry plays a significant role at the legislative and administrative levels, but I also believe that it is appropriate and worthwhile to include those affected by policy or policy changes at the formative stages.

Oregon Tax Litigation

Reed Smith: Let’s talk about tax litigation for a little bit. Are there any big corporate income or excise tax cases in the pipeline?

Ray: The Oregon Supreme Court recently decided Capital One Auto Finance vs. Oregon Department of Revenue, which upheld the department’s corporate tax assessment of the plaintiff and affirmed the DOR’s substantial nexus standard. The Oregon DOR policy is, and has been for many years, that physical presence is unnecessary to establish economic nexus for the sake of corporate income tax liability. So we were pleased, though not surprised, at the outcome.

As mentioned earlier, the Legislature passed S.B. 1528, which expanded the list of eligible claimants for the state’s reduced pass-through entity rate. Oregon’s constitution requires a three-fifths majority to pass any bill that raises revenue. A member of Oregon’s Senate recently filed suit against the DOR asserting the passage of S.B. 1528 was unconstitutional, as it did not pass with a three-fifths majority. The issue is whether the bill is a revenue-raising bill as contemplated by Oregon’s Constitution, and it’s an issue that could be raised more frequently as state tax reform is pursued. [Note: Sen. Brian Boquist sued the Department of Revenue—along with Gov. Brown, Senate President Peter Courtney, and House Speaker Tina Kotek—in state tax court on the basis that the Oregon Constitution requires a three-fifths supermajority vote in the House and Senate to “pass bills for raising revenue.” Boquist argues S.B. 1528 fit that definition because it ensured Oregon’s tax code wouldn’t automatically adopt a 20 percent tax exemption for “pass-through” businesses.]

The Oregon DOR is a defendant in the suit, but I welcome clarification and look forward to the court’s decision. It’s healthy to understand the rules of engagement.

Reed Smith: So what’s your main goal or priority when you decide to litigate a case? Is it revenue driven, or is it getting to the right tax technical answer or policy answer, or just following the way you think the statute reads?

Ray: It depends on the case. Oregon is fairly unique in that we have a tax court specifically designated to hear tax issues. As far as department-initiated litigation, it just depends on the circumstance. We work very closely with our Department of Justice to determine cases suitable for litigation, but we as a department don’t predetermine what cases will be pursued. The goal is to resolve all issues at the lowest level and work with the taxpayers whenever there is an opportunity to resolve an issue at that level. If we can arrive at resolution that serves the department and taxpayers reasonably well, then our job is well done.

Reflecting on Leadership Objectives

Reed Smith: What would you say is the best part of your job?

Ray: The people. I have an outstanding leadership team that is very competent and has a broad historical knowledge of where we’ve been and great ideas about where we’re going. Juxtaposed with that historical perspective, I’m new to the department and bring a unique perspective as a former director of another agency and an out-of-state transplant. Bringing all of the wonderful minds and ideas together is really an awesome opportunity. It’s something I look forward to continuing. Beyond executive leadership, our managers and staff at every level are committed to what’s best for the department. The commitment is infectious. The people I work with at the DOR make facing the external challenges worthwhile.

Reed Smith: What would you say to the corporate taxpayer community out there in terms of their interaction with the department and what your role is with respect to them and just how they can have a better experience with the tax administrators?

Ray: Generally my goal is to engage industry at every level to understand their needs. The department engages industry stakeholders during our rules process and has recently created additional avenues for industry input as new tax programs and collection tools are implemented.

Reed Smith: Thank you very much, Nia. We’ve really enjoyed this conversation.

Ray: I appreciate you. I certainly am glad we were able to do this. Thanks for stopping by.

Author Information

Nia Ray is Director of the Oregon Department of Revenue. Jeremy Abrams is an attorney with Reed Smith LLP and a member of Bloomberg Tax’s State Tax Advisory Board. He can be reached at jabrams@reedsmith.com. Autumn Homza also is an attorney with Reed Smith LLP and contributed to this article. She can be reached at AHomza@reedsmith.com.