Oregon Enacts New Gross Receipts Tax
Oregon Governor Kate Brown has 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 new tax’s major provisions
Businesses with nexus in Oregon are subject to a tax of $250 plus 0.57 percent of their “taxable commercial activity” (defined as their Oregon-sourced gross receipts), less a subtraction for 35 percent 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.
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.
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.
Gross receipts exemptions
Because there are 43 types of excludible gross receipts under the CAT, 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 Sec 1221 and 1231 assets
- 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, and agricultural cooperatives.
The 35 percent subtraction from Oregon-sourced gross receipts applies to the greater of:
- Cost inputs, defined as cost of goods sold under Internal Revenue Code Sec. 471, or
- Labor costs, defined as the total compensation of all employees, excluding compensation exceeding $500,000 for any single employee.
A taxpayer’s gross receipts are sourced using the state’s existing corporate income tax apportionment regime, which uses a “market-based” sourcing method. By contrast, the subtractions for 35 percent of cost inputs or labor costs are apportioned using a new set of rules specific to the CAT. These rules appear similar to the market sourcing rules under the corporate income tax, but there are some differences. The apportioned subtraction cannot exceed 95 percent of a taxpayer’s Oregon-sourced receipts.
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 if they have at least 25 percent 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.
Property transferred to Oregon
Any taxpayer who takes delivery of property outside of Oregon, and within one year brings that property into Oregon for its 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.
Combined filing is required for businesses that are unitary and have more than 50 percent common ownership, compared to the 80 percent common ownership threshold required for unitary combined filing under the state’s corporate income tax.
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.
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.