ORS 315.518

ORS 315.518 establishes a 15 percent tax credit for qualified semiconductor companies on increased research and development expenses conducted within Oregon to bolster the state's specialized technology manufacturing sector. This statutory provision allows eligible firms to offset corporate or personal income tax liabilities, with tiered refundability options based on the taxpayer's local workforce size.

Legislative Context and the Renaissance of Oregon Research Incentives

The enactment of ORS 315.518 by the Oregon Legislative Assembly in 2023 represents a pivotal strategic shift in the state’s fiscal policy, specifically targeting the semiconductor industry. For several decades, Oregon maintained a general research and development tax credit that was available across all industrial sectors; however, this general credit expired in 2017, leaving a significant void in the state’s competitive toolkit for attracting high-tech investment. The introduction of House Bill 2009, which codified ORS 315.518 through 315.522, was designed as a direct response to the federal CHIPS and Science Act of 2022. By creating a semiconductor-specific incentive, Oregon aimed to provide a local match for federal funding and ensure that the "Silicon Forest" remained the primary hub for semiconductor innovation in the United States.

This credit is not merely a restoration of previous policies but is a more modern, focused instrument. It operates on a sunset schedule, applying to tax years beginning on or after January 1, 2024, and before January 1, 2030. The decision to limit the credit to the semiconductor industry reflects a legislative intent to maximize the "multiplier effect" of state tax expenditures by focusing on an industry with exceptionally high capital intensity and wage levels. Furthermore, the legislative history indicates a desire to simplify the state-level calculation by largely conforming to the federal standards found in Internal Revenue Code (IRC) § 41, while introducing specific Oregon modifications to geographic scope and refundability.

The broader fiscal environment in Oregon during the 2023 session was characterized by record-breaking revenue collections and large corporate kicker refunds, which provided the budgetary headroom necessary to authorize a credit with a significant statewide cap. The total potential tax credits for all qualified semiconductor companies are capped at $35 million for the biennium beginning July 1, 2023, with subsequent annual caps adjusted by Business Oregon. For the 2025 calendar year, the statewide cap was increased to $38.25 million, reflecting the high demand and the anticipated growth in qualifying research activities.

Statutory Analysis of ORS 315.518: Definitions and Eligibility

The eligibility for the semiconductor research credit is governed by a strict statutory definition of what constitutes a "qualified semiconductor company." Under ORS 315.518(1), an entity must demonstrate that its primary business is integrated into the semiconductor lifecycle or the infrastructure that supports it. This is a critical threshold because it excludes general technology firms that might perform some chip-related research but do not meet the "primary business" test.

Defining the Qualified Semiconductor Company

The statute identifies several specific business activities that satisfy the primary business requirement. These activities are broad enough to cover the entire value chain but narrow enough to prevent "scope creep" into general software or hardware manufacturing.

Statutory Category	Description of Included Activities
Product Lifecycle	Research, design, development, fabrication, assembly, testing, packaging, or validation of semiconductors.
Manufacturing Equipment	Creation of specialized equipment used specifically in the semiconductor fabrication or packaging processes.
Intellectual Property	Creation of semiconductor core intellectual property (IP), such as logic gate designs or proprietary architectures.
Specialized Software	Electronic design automation (EDA) software that is primarily intended for use in the semiconductor industry.

The inclusion of EDA software and core IP in the 2024 technical amendments (HB 2095) highlights the legislature's understanding of the modern semiconductor landscape, where the software used to design chips is as vital as the hardware used to print them. This ensures that design houses and software firms that do not own their own fabrication facilities (fabless firms) can still access the credit, provided their research is conducted in Oregon.

Qualified and Basic Research Parameters

To qualify for the credit, the research must meet the definition of "qualified research" or "basic research" under IRC § 41, with the critical limitation that the research must be conducted in Oregon and must be in support of a trade or business directly related to semiconductors. This means that while a company may have a national R&D budget, only the portion of expenses tied to Oregon-based employees, supplies, and contract research is eligible for the 15 percent state credit.

Under ORS 315.518(2), the "applicable percentage" for the Oregon credit is fixed at 15 percent, which is lower than the federal 20 percent rate but significant when stacked with federal incentives. The statute also adopts the federal definition of "basic research payments," which generally refers to payments made to qualified organizations, such as universities or scientific research organizations, for the purpose of conducting original research that does not have a specific commercial objective.

Technical Mechanics: Integration with IRC Section 41

The Oregon semiconductor credit is a "conforming" credit, meaning it follows the foundational logic of the federal research tax credit. However, OAR 150-315-0195 and the underlying statutes introduce specific modifications that taxpayers must navigate to ensure accurate calculation.

The Four-Part Test for Qualified Research

Consistent with federal law, every research activity for which a credit is claimed must satisfy the "Four-Part Test." This is the primary area of scrutiny during Department of Revenue audits.

• Permitted Purpose: The research must be intended to develop a new or improved business component's function, performance, reliability, or quality. In the semiconductor context, this could involve designing a chip with lower power consumption or developing a new chemical vapor deposition process that increases yield.
• Technological in Nature: The process of experimentation must rely on the principles of physical or biological sciences, engineering, or computer science. For semiconductor firms, this usually involves solid-state physics, electrical engineering, or materials science.
• Elimination of Uncertainty: The taxpayer must encounter technical uncertainty regarding the capability, method, or appropriate design of the component. If a design can be achieved through routine engineering without technical risk, it does not qualify.
• Process of Experimentation: The research must involve a systematic process of evaluating alternatives, such as modeling, simulation, or systematic trial-and-error. This is documented through project plans, test results, and analysis of data.

Calculation Methodologies: Regular vs. ASC

Oregon taxpayers are permitted to choose between two methods for calculating the credit, as outlined in OAR 150-315-0195. The choice is irrevocable for the tax year and must be made on Schedule OR-RESEARCH.

The Regular Method

The regular method calculates the credit based on the excess of current-year Oregon Qualified Research Expenses (QREs) over a "base amount". The base amount is calculated by multiplying the taxpayer’s "fixed-base percentage" by the average annual Oregon gross receipts for the four preceding years. The fixed-base percentage is determined by the ratio of QREs to gross receipts in a historical period, typically the mid-1980s or a "start-up" period for newer firms.

The Alternative Simplified Credit (ASC) Method

OAR 150-315-0195(2) explicitly allows the election of the ASC method. Under this method, the credit is 14 percent of the current year's Oregon QREs that exceed 50 percent of the average Oregon QREs for the three preceding years. If the taxpayer has no QREs in the preceding three years, the credit is 6 percent of the current year's Oregon QREs.

Calculation Component	Regular Method	ASC Method
Oregon Rate	15% of excess	14% of excess
Base Calculation	Fixed-base % × 4-year Avg Sales	50% of 3-year Avg QREs
Complexity	High (requires historical sales/QRE data)	Medium (requires 3 years of QRE data)
Primary Advantage	Higher potential rate (15% vs 14%)	Easier documentation; benefits firms with high growth

For the purposes of these calculations, "gross receipts" refers specifically to the Oregon sales factor as determined under ORS 314.665. This ensures that the base amount is proportionate to the taxpayer’s activity within the state of Oregon rather than their global revenue.

Department of Revenue Guidance: OAR 150-315-0195

The Oregon Department of Revenue (DOR) provides the primary administrative rules for implementing ORS 315.518. These rules clarify the order in which credits are applied and the specific treatment of the refundable and non-refundable portions of the credit.

Application Hierarchy and Tax Liability

OAR 150-315-0195(7) dictates how a company must apply the semiconductor credit against its taxes. This is a critical nuance for corporate excise taxpayers who must manage both a regular tax on income (ORS 317.061) and a minimum tax based on Oregon sales (ORS 317.090).

• Non-refundable Portion First: The non-refundable portion of the tax credit must be applied first to the taxpayer’s regular tax liability calculated under ORS 317.061.
• Other Payments: Other tax payments and credits are then subtracted from the regular tax liability.
• Refundable Portion: The refundable portion of the credit is applied last. Crucially, the refundable portion may be used to satisfy the corporate minimum tax under ORS 317.090.
• Offsetting Debt: Before a refund check is issued, the DOR may offset the refundable portion against any taxes or other debts collected by the department pursuant to ORS 293.250.

The DOR guidance explicitly states that any non-refundable portion that remains unused may be carried forward to future years but cannot be used to satisfy the ORS 317.090 minimum tax. This distinction creates a clear incentive for companies to accurately track their employee counts, as that count determines the split between the refundable and non-refundable portions under ORS 315.519.

Conformity with Treasury Regulations

The DOR rules incorporate federal Treasury Regulation § 1.441-2(c) to define the beginning of tax years, ensuring that companies with fiscal years or 52-53 week tax years have a clear starting point for claiming the credit. Furthermore, the election and revocation of the ASC method must conform to Treasury Regulation § 1.41-9(b), although the Oregon Director of Revenue is substituted for the federal Commissioner in these procedures.

The Business Oregon Certification Process

A prerequisite for claiming the credit is obtaining an annual certification from the Oregon Business Development Department (Business Oregon). This is a "gatekeeper" function that ensures only legitimate semiconductor activities are subsidized by the state.

Application Timelines and Deadlines

Business Oregon has established a rigid annual cycle for certification. For tax years beginning in 2025 and beyond, the deadline to file a written application for certification is October 15 of each calendar year for the tax year that begins in that year. For example, a company with a calendar tax year beginning January 1, 2025, must submit its application by October 15, 2025.

For companies with 52-53 week tax years that may have two tax years beginning in the same calendar year, the rules specify that the application for the later tax year should be submitted by the deadline in the following calendar year. This prevents administrative confusion during the certification process.

Application Requirements and Fees

A complete application for certification must include several key components to prove eligibility and quantify the potential credit.

• Eligibility Narrative: A description of how the company meets the definition of a qualified semiconductor company.
• Research Description: An explanation of how the proposed R&D activities support a semiconductor-related trade or business.
• Financial Attestations: Estimates of expected Oregon QREs and basic research payments for the tax year.
• Historical Data: A report of the taxpayer's QREs and basic research payments from the three preceding tax years.
• Application Fee: A payment of $3,000 must accompany the application.

The department reviews these applications and issues a "Certification" which serves as the taxpayer's proof of eligibility when filing their return with the Department of Revenue. Because of the statewide cap, the certification amount provided by Business Oregon is the maximum credit the taxpayer may claim, even if their actual expenses are higher.

Refundability of the Tax Credit: ORS 315.519

The most significant departure from federal R&D tax credit policy is Oregon’s tiered refundability system. Under ORS 315.519, the credit is partially refundable for companies with fewer than 3,000 Oregon employees. This mechanism is intended to provide immediate liquidity to smaller firms that may not yet have a significant tax liability to offset.

The Three Tiers of Refundability

The "amount of credit used in the calculation" of the refund is subject to a reduction based on the company’s headcount at the close of the tax year. The "reduction" essentially defines the portion of the credit that becomes non-refundable and must be carried forward.

Oregon Employee Count	Reduction in Refundable Amount	Effective Refundable Percentage
Fewer than 150	25% Reduction	75% Refundable
150 to 499	50% Reduction	50% Refundable
500 to 2,999	75% Reduction	25% Refundable
3,000 or More	100% Reduction (Carryforward only)	0% Refundable

This tiered structure creates a progressive incentive system. A small startup with 10 employees can receive 75 percent of its credit as a cash refund, providing critical capital for reinvestment. In contrast, a massive fab operator with 5,000 employees must use the credit solely to offset its liability or carry it forward for up to five years.

Carryforward Limitations

Any portion of the credit that is not used to offset current-year liability and is not refunded under ORS 315.519 may be carried forward for the next five succeeding tax years. If the credit is not used within this five-year window, it expires. This five-year limit is relatively standard for Oregon business credits but requires companies to carefully plan their R&D expenditures to ensure the credits are fully utilized.

Transferability and Pass-Through Provisions

A common question for tax-planning purposes is whether the ORS 315.518 credit can be sold to third parties. Under current Oregon law and the specific statutory language of HB 2009, the semiconductor research credit is not a transferable credit in the same way as the Oregon Affordable Housing Lender’s Credit or the Agriculture Workforce Housing Credit.

Analysis of OAR 150-315-0005 (Transfer Provisions)

Oregon has a general administrative rule for "Tax credit uniformity transfer provisions" (OAR 150-315-0005). This rule specifies that tax credits may be transferred only by the entity that received the original certification. However, for a transfer to occur, the specific statute governing the credit (in this case, ORS 315.518) must explicitly authorize the transfer.

Since ORS 315.518 does not contain the phrase "may transfer all or any portion of the credit to another taxpayer," the credit remains tied to the entity that performed the research. The value of the credit for companies in a loss position is instead realized through the refundability provisions of ORS 315.519.

Pass-Through to Shareholders and Partners

While the credit cannot be sold to a third-party bank or insurance company, it does pass through to the owners of pass-through entities (PTEs) such as S-Corporations, Partnerships, and LLCs.

• S-Corporations: The credit is taken into account by the shareholder in their pro rata share as determined under IRC § 1377(a).
• Non-residents: If a shareholder or partner is a non-resident of Oregon, the credit is allowed in the proportion of their Oregon-sourced income as provided in ORS 316.117.
• Character of the Credit: The character of the credit is determined as if it were realized directly from the source from which it was realized by the corporation.

This pass-through mechanism is vital for many specialized design firms that are organized as LLCs but perform massive amounts of qualifying research. The individual owners can use the semiconductor credit to offset their personal Oregon income tax liability.

Detailed Example: Calculating the Oregon Semiconductor R&D Credit

To demonstrate the practical application of ORS 315.518 and its interaction with ORS 315.519 and DOR guidance, consider "Precision Silicon Systems," an Oregon-based company specializing in lithography equipment.

Step 1: Establishing the Quantitative Data

Precision Silicon Systems has the following data for the 2025 tax year:

• Current-year Oregon QREs: $5,000,000.
• Prior 3-year Average Oregon QREs: $3,000,000.
• Oregon Sales (Gross Receipts): $10,000,000.
• Oregon Employee Count: 100 employees.
• Oregon Corporate Excise Tax Liability (Before Credits): $50,000.
• Oregon Corporate Minimum Tax (ORS 317.090): $15,000.

Step 2: Selecting the Calculation Method

The company elects the Alternative Simplified Credit (ASC) method as permitted by OAR 150-315-0195(2) and (3).

• ASC Base Amount: 50% of the 3-year average ($3,000,000 × 0.50) = $1,500,000.
• Excess QREs: $5,000,000 - $1,500,000 = $3,500,000.
• ASC Percentage: 14%.
• Total Potential Credit: $3,500,000 × 0.14 = $490,000.

Note: Since $490,000 is well below the $4,000,000 individual taxpayer cap and the company has received a certification from Business Oregon, the full amount is available.

Step 3: Application to Tax Liability (DOR Guidance)

Per OAR 150-315-0195(7), the credit must be applied to the regular tax liability first.

• Reduction of Regular Tax: $50,000 of the credit is used to reduce the regular excise tax to $0.
• Remaining Credit Balance: $490,000 - $50,000 = $440,000.

Step 4: Refundability Tier Analysis (ORS 315.519)

With 100 employees, the company falls into the "Fewer than 150" tier.

• Refundable Percentage: 75% (or a 25% reduction of the credit used for refund).
• Amount Eligible for Refund Calculation: The excess balance of $440,000.
• Reduction for Refund: $440,000 × 0.25 = $110,000 (this amount becomes non-refundable and is carried forward).
• Gross Refundable Portion: $440,000 - $110,000 = $330,000.

Step 5: Final Tax Settlement

The refundable portion must first satisfy any remaining tax obligations, including the minimum tax.

• Satisfy Minimum Tax: $15,000 of the refundable portion is applied to pay the ORS 317.090 minimum tax.
• Net Cash Refund: $330,000 - $15,000 = $315,000.
• Carryforward Amount: The $110,000 "reduction" amount is carried forward to 2026.

Summary of Benefit: Precision Silicon Systems pays $0 in taxes (regular and minimum) and receives a cash payment of $315,000 from the Oregon Department of Revenue. They also retain a $110,000 credit for the next tax year.

Administrative Compliance and Documentation

To maintain eligibility for the credit and defend against potential audits, companies must adhere to rigorous documentation standards. The Department of Revenue requires that any taxpayer claiming the semiconductor research credit must submit Form OR-RESEARCH with their tax return.

Substantiating Qualified Research Expenses (QREs)

QREs are comprised of three main categories, each requiring specific evidence:

• Wages: Only wages paid for "qualified services," which include conducting research, directly supervising research, or directly supporting research. These must be documented through time-tracking records or detailed project logs.
• Supplies: Materials and supplies used in the research process, such as specialized wafers, chemicals, or electricity used in cleanrooms. General overhead, such as rent or office supplies, is strictly excluded.
• Contract Research: Expenses paid to third-party vendors for research conducted on the taxpayer's behalf. Under IRC § 41, only 65 percent of these payments are typically eligible (or 75% for certain university research).

The Role of Business Oregon in Revocation

It is important to note that the Director of Business Oregon has the authority to suspend or revoke a credit if it is determined that the taxpayer no longer meets the eligibility requirements or has provided false information. If a credit is revoked, the Department of Revenue will proceed to collect the previously allowed credit amount, along with interest. This reinforces the necessity of the annual certification process, where companies must attest to their ongoing semiconductor activities.

Strategic Implications for the Oregon Semiconductor Industry

The introduction of ORS 315.518 creates several second and third-order effects for the state’s economy and corporate strategy.

Labor Market Dynamics

The tiered refundability structure of ORS 315.519 creates a financial incentive for companies to manage their Oregon headcount strategically. For a company near the 150-employee mark, the cost of hiring the 151st employee includes not only their salary and benefits but also a potential 25 percent reduction in the refundability of their research tax credits. Conversely, for large firms that are already over the 3,000-employee mark, the credit is purely a non-refundable offset, which may lead them to prioritize R&D investments that result in immediate taxable income to absorb the credits within the five-year carryforward window.

Capital Stack Integration

For startups and mid-sized firms, the partially refundable credit becomes a vital component of the "capital stack." When combined with federal grants from the CHIPS Act and private venture capital, the 11.25 percent effective cash subsidy (15% rate × 75% refundability for small firms) significantly reduces the "burn rate" of research-intensive semiconductor design. This makes Oregon a more attractive jurisdiction for fabless design firms compared to states like Washington or California, which may have higher general business costs or less targeted semiconductor incentives.

Statewide Cap and Competitive Certification

The existence of the $38.25 million annual cap for 2025 implies that the certification process with Business Oregon could eventually become competitive. If the total credit requests from all qualified semiconductor companies exceed the cap, Business Oregon may be required to prorate the certifications. This introduces an element of uncertainty into tax planning, as a company may project a $4 million credit but only receive certification for a portion of that amount due to high statewide demand. This makes the October 15 application deadline even more critical, as early and accurate applications ensure a firm’s place in the queue for the limited pool of certified funds.

Interaction with Other Oregon Tax Policies

ORS 315.518 does not exist in a vacuum; it interacts with other facets of Oregon’s tax code, particularly the prohibition against "double-dipping" and the treatment of R&D expenditures.

Expense Deduction Limitations

Under ORS 315.518(8), a taxpayer may not take a deduction for the portion of expenses or payments that is equal to the amount of the credit claimed. This is consistent with federal rules under IRC § 280C, which require a taxpayer to "add back" the amount of the credit to their taxable income. This ensures that the state does not provide both a credit and a full deduction for the same dollar of research spending.

Kicker Refunds and the Corporate Excise Tax

Because the semiconductor credit reduces corporate excise tax liability, it indirectly impacts the "corporate kicker" calculation. Oregon’s corporate kicker is triggered when actual corporate tax revenues exceed projected revenues by more than 2 percent; the excess is then refunded to corporations. By utilizing the ORS 315.518 credit, companies reduce the total tax revenue collected by the state, potentially affecting the future availability or size of corporate kicker refunds for the entire business community.

Summary of Administrative Requirements

Administrative Step	Agency	Deadline/Form	Source Citation
Annual Certification	Business Oregon	October 15 (Annual)	9
Certification Fee	Business Oregon	$3,000 with Application	9
Claiming the Credit	Dept. of Revenue	Schedule OR-RESEARCH	1
Pass-Through Election	Dept. of Revenue	Pro-rata share to owners	20
Carryforward Tracking	Dept. of Revenue	5-Year Expiration	1

Final Thoughts

ORS 315.518 is a sophisticated tax instrument that requires precise coordination between a company’s R&D department, human resources (for employee counts), and tax counsel. By conforming to federal IRC § 41 while providing local refundability and industry-specific targeting, Oregon has created a robust framework for supporting the next generation of semiconductor innovation. The success of a claim under this statute depends heavily on timely certification from Business Oregon and strict adherence to the application hierarchies established by the Department of Revenue in OAR 150-315-0195. As the 2030 sunset approaches, the efficacy of this credit in maintaining Oregon's lead in the global semiconductor race will likely be a focal point of future legislative sessions.