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Real estate brokers who work under principal brokers who sell property in Portland may no longer be required to pay the city鈥檚 income-based business license tax.

The Oregon Court of Appeals last week ruled in favor of two Portland-based residential brokers who claimed the business license tax breaks state law and shouldn鈥檛 apply to them because they work under the directive of principal brokers who already pay the tax. Both the local and state Realtor associations plan on using the ruling as legal precedent in their fight to eliminate the tax on brokers.

The ruling reversed an earlier decision by the Multnomah County Circuit Court that sided with the city of Portland and its requirement that real estate brokers pay the tax.

The court case is centered on a 2008 revision of the city鈥檚 Business License Law, which, among other things, added a requirement that independent real estate brokers 鈥� those classified as 1099 employees for tax purposes 鈥� pay the tax.

The minimum fee to obtain a business license is $100, but the amount grows for businesses that make more money. Businesses are taxed at about 2.2 percent of their net income once that $100 threshold is met, according to the city鈥檚 Management & Finance division.

The appealing parties 鈥� brokers Beth Kellan and Diane Rulien 鈥� claimed that the tax on brokers breaks state law. Legislation in 1987 was passed to aid contractors and real estate brokers who work in multiple jurisdictions around the state.

The legislation, which was eventually enacted as ORS 696.365, states, 鈥淎 city or county shall not impose or collect a business license tax from a person licensed as a real estate salesperson or associate real estate broker who engages in a professional real estate activity only as an agent of a real estate broker or real estate organization.鈥�

City attorneys responded, according to court documents, that the city鈥檚 tax differs from the state鈥檚 definition of a business license tax because the 2008 revision eliminated the requirement that a business obtain a license before conducting business in the city. The attorneys claimed that the change made to the Business License Law imposes a pure business income tax rather than a business license tax, so the exemption of brokers under ORS 696.365 doesn鈥檛 apply.

In its ruling, Court of Appeals Presiding Judge Rick Haselton wrote, 鈥淭he city鈥檚 alteration of other terminology 鈥� is cosmetic, not functional.

鈥淏luntly, by imposing its business income tax on plaintiffs in this case, the city is subjecting plaintiffs to precisely the same harm that the 1987 Legislature intended.鈥�

Kellan was excited about the ruling. She initially got involved with the issue and filed the case in 2009 because she felt it was a cause that no one else was willing to stand up for.

鈥淚t鈥檚 an important victory for Realtors and sets a good precedent against other municipalities looking to impose a similar tax,鈥� she said.

As part of the ruling, the appealing parties will be allowed to seek damages from the city. Kellan said that will most likely be the amount imposed on the brokers over the past three years. But first, the city of Portland has 35 days, which began Sept. 8, to appeal the decision.

The issue is unlikely to stop there. Representatives of both the Portland Metropolitan Association of Realtors and the Oregon Association of Realtors said the organizations have every intention of making sure the city stops imposing the tax on brokers.

鈥淚鈥檝e been working on this issue for over a decade and the entire time the city of Portland has been looking for a way to charge brokers this tax,鈥� said Jane Leo, government affairs director for PMAR. 鈥淲e have every intention of using this ruling as legal precedent.鈥�

Jenny Pakula, vice president of government affairs for the OAR, added that local and state organizations have received full support from the National Association of Realtors and that they don鈥檛 plan on stopping until the law in Portland is changed. She said the organizations hope to eventually sit down with the city and try to work something out.

The city鈥檚 plans aren鈥檛 known yet. Kenneth McGair, the city attorney arguing the case, did not return phone inquiries by press time.

No other cities around the state impose such a tax on brokers; however, Pakula said Multnomah County has a similar tax.

鈥淲e haven鈥檛 looked into all the details there yet,鈥� she said. 鈥淲e are focused on this case right now, but we will cross that bridge down the road.鈥�