Three years ago, the City of Portland decided that real estate agents shouldn’t be exempt from paying city business taxes, as they had been for years.

But after the city changed its rules in 2008, agents fought back. They sued the city, saying it broke a 1987 state law that exempted agents who were working under a principal real estate company from paying a business tax. The law was intended to make sure the city couldn't charge real estate agents a business license tax when the company they worked for was already paying one.

The rule has generated an estimated $200,000 for the city—money that, the courts now say, might have been collected illegally.

The Oregon Court of Appeals on Sept. 8 struck down the city's business tax on real estate agents, reversing a circuit judge's decision.

The ruling also renews the debate as to whether the city's business tax structure falls on everyone fairly. City officials haven't decided whether they will appeal the decision, and the courts haven't yet said how the city might fix the problem.

"We're really hoping that after all this we won't have to go back to court," says Jenny Pakula, vice president of legal affairs for the Oregon Association of Realtors.

City officials have until Oct. 12 to decide whether to appeal to the Oregon Supreme Court.

"Only those individuals licensed as a real estate broker who engages in professional real estate activity as an agent of a principal real estate broker are potentially eligible for a refund," says Terri Williams, manager of the city's license and tax division. "The City of Portland has not determined at this point that any refunds are due, since we have not made a decision about appealing the court decision."

The city isn't sure how many real estate agents are affected, but Pakula says hundreds faced having to pay the tax. 

Two agents, Beth Proctor of Windermere and Diane Rulien of RE/MAX, brought suit in 2009 with the industry's backing to challenge the city's tax.

Real estate companies operating in Portland have always had to pay a city business license tax. But the case turns on state law that exempts real estate agents who work directly for a brokerage company from having to pay it as well.

State lawmakers carved out the exemption in 1987 in part to address concerns that the city might levy a business license tax against the brokerage and then again on the agents when they collect their commissions. 

The city's 2008 ordinance tried to get around that exemption. The city won at the trial court level, but a three-judge panel reversed the decision. The appeals court found the city tried to sidestep the state law by simply relabeling the tax as a "fee" and the license as a "certificate of compliance."

The appeals court called the city's maneuver "cosmetic, not functional."

It turns out many agents weren't paying the tax anyway. 

The city had said the tax applied to all brokers doing business in the city, whether or not Portland was their base. Real estate broker Rob Levy says that while he always paid the fee, many agents didn't know about it.

"You had Realtors in Washington County selling houses in Portland that didn't know about [the tax]," Levy says. "The majority of real estate agents didn't ever pay the fee. I never had a problem with the amount, but it just didn't seem fair."

City officials say they sent out hundreds of letters to real estate agents when Portland approved the tax (2.2 percent on adjusted net income). But Victor Epstein, a certified public accountant who says he has nearly 100 real estate agents as clients, agrees. Epstein says many agents who have come to him as new clients weren't paying the tax.

"There are a lot of people who don't comply with this," he adds. "I get new clients all the time, and when I ask them where their City of Portland papers are from the previous year, they don’t know what I’m talking about.”