New Commercial Activity Tax Enacted in Oregon
On May 16, 2019, Oregon Gov. Kate Brown signed into law House Bill 3427, the legislation establishing an annual Corporate Activity Tax (CAT) based on commercial activity conducted by businesses, effective for tax years beginning on or after Jan. 1, 2020.
The CAT is $250 plus 0.57% on a taxpayer’s Oregon-sourced “taxable commercial activity” above $1 million, and would be imposed in addition to the corporate income and excise tax already imposed by the state.
Key elements of the CAT are as follows:
Overview of the CAT
The CAT is to be imposed on each person with taxable commercial activity for the privilege of doing business in Oregon.
The term “person” is broadly defined to include individuals, combinations of individuals of any form, receivers, assignees, trustees in bankruptcy, firms, companies, joint-stock companies, business trusts, estates, partnerships, limited liability partnerships, limited liability companies, associations, joint ventures, clubs, societies, entities organized as for-profit corporations under Oregon Revised Statutes Chapter 60, C corporations, S corporations, qualified subchapter S subsidiaries, qualified subchapter S trusts, trusts and entities that are disregarded for federal income tax purposes, and any other entities. As such, the new CAT is imposed on all types of business entities, whether domestic or foreign.
Persons excluded from the tax, or “excluded persons,” include, but are not limited to, various Internal Revenue Code (IRC) Section 501 entities, certain hospitals, governmental entities, and any persons with commercial activity that does not exceed $1 million for the calendar year, other than a person that is part of a unitary group with commercial activity in excess of $1 million dollars.
For sourcing purposes, commercial activity will be sourced to Oregon using the following methods:
1) For real property, it is the sale, rental, lease, or license of property located in the state.
2) For tangible personal property, it is the rental, lease, or license of property located in the state, or the sale of property delivered to a purchaser in the state.
3) For services, it is the sale of a service delivered to a location in the state.
4) For intangible property, it is the sale, rental, lease, or license of property that is used in the state.
The House bill also includes a statement that the tax is imposed on the person conducting the commercial activity and is not a tax imposed directly on a purchaser.
The CAT is imposed upon persons with “substantial nexus” with Oregon. As set forth in the legislation, “substantial nexus” exists when a person:
1) Owns or uses a part or all of its capital in the state;
2) Holds an authorization to do business from the Oregon secretary of state;
3) Has a bright-line presence in the state; or
4) Is a resident or is domiciled in the state.
To have a bright-line presence, a person:
1) Has rented or owned property in the state with an aggregate value of at least $50,000;
2) Has payroll in the state of at least $50,000;
3) Has commercial activity (i.e., receipts before deductions) sourced to the state of at least $750,000; or
4) Has at least 25% of its total property, payroll, or commercial activity in the state.
Tax base and rate
Again, the CAT is imposed on a person’s taxable commercial activity for the privilege of doing business in Oregon.
“Commercial activity” means the total amount realized by a person arising from transactions and activity in the regular course of the person’s trade or business without deduction for expenses incurred by the trade or business.
Notably, receipts from commercial activity do not include the following: certain interest income; pension reversions; proceeds from the issuance of the taxpayer’s own stock, options, warrants, puts, or calls; or from the sale of the taxpayer’s treasury stock, contributions to capital, tax refunds, and other tax benefit recoveries and reimbursements; gifts or charitable contributions; rebates and transactions among members of a unitary group; dividends; and distributive income received from a pass-through. These receipts are excluded because they do not reflect receipts from the sale of goods and services in Oregon. There are 43 specific exclusions in total.
“Taxable commercial activity” is commercial activity sourced to Oregon using the sourcing rules detailed above. The calculation of “taxable commercial activity” can be complicated:
On the one hand, the legislation requires a taxpayer to include in the measure of “taxable commercial activity” the value of property the person transfers from another state into Oregon for the person’s use in the course of a trade or business within one year after the person receives the property outside Oregon. Certain exceptions apply in the case of a unitary group, which is a group of persons (1) with more than 50% common ownership, either direct or indirect; and (2) engaged in business activities that constitute a unitary business.
On the other hand, the legislation also provides that to arrive at “taxable commercial activity,” a taxpayer shall subtract from commercial activity sourced to the state 35% of the greater of the cost inputs or labor costs paid by or incurred by the taxpayer in the tax year. “Cost input” means the “cost of goods sold” as calculated under IRC Section 471. Labor cost means the total compensation of all employees, not to include compensation paid to any single employee in excess of $500,000. Nevertheless, the subtraction may not exceed 95% of the taxpayer’s commercial activity in the state.
For a taxpayer with multistate operations, the amount deducted for cost input and labor costs must be apportioned. This means that firms operating in states in addition to Oregon must not only keep track of the numbers going into the computation of labor inputs and costs of goods sold for federal purposes, but also figure out the ratio of the portion of Oregon sales to the total nationwide sales and multiply it by the labor costs or cost inputs.
After having determined the amount of “taxable commercial activity” sourced to Oregon, the CAT imposed is equal to $250 plus the product of the taxpayer’s taxable commercial activity in excess of $1 million for the calendar year multiplied by 0.57%. The tax is not owed if the person’s taxable commercial activity does not exceed $1 million.
Reporting and penalties
Any person with commercial activity in excess of $750,000 in the tax year must register with the Oregon Department of Revenue.
Any person doing business in Oregon with “commercial activity” for the tax year in excess of $1 million must file an annual Corporate Activity Tax return with the department by April 15 of the following year. The calendar year is the tax year for all taxpayers, irrespective of their income tax fiscal year. A taxpayer is subject to the annual Corporate Activity Tax for doing business during any portion of such calendar year. But ultimately, only taxpayers with “taxable commercial activity” in excess of $1 million will be subject to CAT.
Note also that a unitary group will register and file the tax as a single taxpayer and may exclude receipts from intercompany transaction among its members.
For CAT payments, the tax shall be remitted quarterly to the department. For the 2020 tax year (the first year the CAT is imposed), a taxpayer must pay 80% of the tax due for the quarter or is at risk of being subject to a penalty of 20% of the amount of the tax.
What does CohnReznick think?
The CAT is essentially a gross receipts tax measure, based on gross receipts sourced to Oregon, and as such is not subject to protection of U.S. Public Law 86-272. Under 86-272, a state is prohibited from imposing an income tax if the only business activity within the state is mere solicitation of orders for the sales of tangible personal property, provided that the orders are approved and shipped or delivered from outside the state. Since the protection applies only to income tax, non-income based taxes, such as a gross receipts tax, are not protected and the state will actively assert nexus for such taxes.
The new tax will have far-reaching tax implications for businesses operating in Oregon, as it will apply to all types of business entities in the state, with some statutory exceptions for not-for-profits.
Subject matter expertise
JD, Principal, Practice Leader, State and Local Tax (SALT) Services
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