Oregon’s new corporate activity tax will affect companies with annual in-state revenues exceeding $1 million, and was created to raise $1 billion per year for the state’s schools.
Last year Oregon Governor Kate Brown signed House Bill (HB) 3427, imposing a new gross receipts tax effective for tax years beginning on or after January 1, 2020. Signed on May 16, this new corporate activity tax (CAT) will be owed by companies with annual in-state revenues exceeding $1 million, and is anticipated to raise $1 billion per year for Oregon schools.
Despite being called a corporate activity tax, the new gross receipts tax applies to virtually all forms of business, including C and S corporations, individuals, joint ventures, partnerships, trusts, estates, and any entity that is disregarded for federal income tax purposes, such as certain limited liability companies.
The new tax will be imposed on sellers, not purchasers. It joins the state’s personal income tax, corporate net income tax, and gross receipts-based minimum tax.
Overview of the tax's major provisions
General application
Despite being called a corporate activity tax, the new gross receipts tax applies to virtually all forms of business, including C and S corporations, individuals, joint ventures, partnerships, trusts, and estates.
Businesses with nexus in Oregon are subject to a tax of $250 plus 0.57% of their “taxable commercial activity” (defined as their Oregon-sourced gross receipts), less a subtraction for 35% of the greater of their “cost inputs” or “labor costs” apportioned to Oregon. Businesses are exempt from the CAT (including the $250) on their first $1 million of taxable commercial activity. Tax returns must be filed annually, with quarterly estimated payments required.
Industries
The tax applies to businesses in every industry, including insurance companies and financial institutions, unless they are “excluded persons,” a term that covers governmental entities as well as certain nonprofits, hospitals, and long-term care facilities.
Economic nexus
The CAT is imposed upon businesses with “substantial nexus” in Oregon, a term that covers both traditional physical presence nexus criteria and a “bright line presence” economic nexus standard. Under this “bright line presence” standard, companies have nexus under the CAT if they have at least $50,000 in Oregon payroll or property, $750,000 in Oregon sales, or 25% of their total payroll, property, or sales in the state. Businesses with at least $750,000 in Oregon sales are expected to register with the Department of Revenue (DOR), but will not have a CAT liability until they reach $1 million in Oregon revenues.
Filing requirements
Once a company has nexus, it has 30 days to register with the DOR. There is a $100 per month penalty for not timely registering, which can be a maximum of $1,000 per year.
The Oregon CAT is a calendar basis tax no matter the accounting year of the taxpayer. Thus, quarterly estimated payments are due on April 30, July 31, October 31, and January 31 each year, with tax returns due on April 15 of the following year. An extension for filing the return is allowed under the statute. The DOR is looking to provide a six-month extension, and will clarify this through regulations.
Unitary filing
Combined filing is required for businesses that are unitary and have more than 50% common ownership. Entities that meet the ownership threshold are deemed to be unitary if there is an exchange of value demonstrated by:
- Centralized management or common executive force
- Centralized administrative services or functions
- Flow of goods, capital resources, or services
The unitary group would include all members from around the globe. The statutory definition of a person includes all persons, and is not restricted to domestic or U.S. persons. Thus the default, and only, filing method is a world-wide combined return.
Commercial activity
Commercial activity is the total amount of gross receipts from activity in the regular course of business. There are a large number of exempt receipts — as noted below — however, this definition includes a large number of transactions subject to tax.
Commercial activity is sourced to Oregon using the rules found in Section 66 of HB 3427. These rules are similar to — but are not the same as — the income tax sourcing rules. These rules source real and tangible property to Oregon in a manner similar to general sourcing rules for income tax. Services are sourced to Oregon to the extent the services are delivered to Oregon, while intangibles are sourced to Oregon to the extent the property is, or can be, used in Oregon.
Commercial activity exemptions
There are 43 types of excludible gross receipts under the CAT. As such, a detailed analysis of these exemptions should be made by businesses in all industries. Examples of excludible gross receipts for most industries include:
- Interest income (other than interest on credit sales)
- Receipts from the disposition of IRC Sections 1221 and 1231 assets
- Dividends
- A partner/shareholder’s distributive share of income from a pass-through entity
- Sales to Oregon wholesalers who certify that the property will be resold outside of Oregon
- Intercompany transactions among members of a unitary group
There are special exclusions for many specific industries such as gas and fuel sellers, grocery stores, utilities, telecommunications service providers, heavy equipment providers, vehicle dealers, agricultural cooperatives, and many others.
Property transferred to Oregon
Any taxpayer who takes delivery of property outside of Oregon, and within one year brings that property into Oregon for the taxpayer’s own business use, must report the value of that property as an Oregon-sourced receipt subject to the CAT. The definition of property likely covers items such as machinery, equipment, and inventory. This special rule does not apply if the DOR determines the taxpayer’s receipt of the property outside Oregon was not intended to avoid payment of the tax.
Subtractions
The 35% subtraction from Oregon-sourced commercial activity applies to the greater of:
- Cost inputs, defined as cost of goods sold under the Internal Revenue Code, or
- Labor costs, defined as the total compensation of all employees, excluding compensation exceeding $500,000 for any single employee.
This deduction is then apportioned using Oregon’s income tax sourcing rules. This apportionment factor may be different from the sourcing of commercial activity noted above, due to industry-specific rules, throwback, and other nuances in the income tax rules that are not in the CAT statutes.
Additionally, the deduction is capped at 95% of the Oregon-sourced commercial activity, resulting in at least 5% of these receipts being subject to tax.
Similarities to other states
With the enactment of HB 3427, Oregon has joined a growing list of states that impose a gross receipts tax, such as Washington and New Mexico, who have revamped their state tax code in the wake of the Supreme Court’s South Dakota v. Wayfair ruling.
While the Oregon CAT appears to have primarily relied upon the Ohio Commercial Activity Tax, it also bears similarities to the Texas Franchise Tax (specifically, its use of subtractions for cost of goods sold or compensation) and to Washington’s Business and Occupation Tax.
The DOR is working on issuing regulations as provided for in state statutes. Temporary regulations are currently being issued, with many already out and more to come in the first quarter of 2020. Permanent regulations are required six months after issuance of the temporary regulations. The DOR is working on starting that process as well.
How we can help
CLA’s state and local tax professionals offer analysis of your business to help you determine if your activities are subject to Oregon’s CAT. We can also assist in an overall analysis of your multistate tax nexus footprint.