9/22/2020: This article has been updated since its original publication to provide clarification on sellers’ ability to pass along the CAT to their customers.
Earlier this year, Oregon enacted a form of gross receipts tax that will apply to taxpayers in addition to the state’s income tax. The voters had 90 days to reject H.B. 3427 through their referendum power provided by the Oregon constitution. A similar bill was turned down previously, but due to several potential reasons, the Oregon voters did not reject such a tax this time around. Thus, the tax will become effective January 1, 2020.
The Basics of the Tax
The new Corporate Activity Tax (CAT) will be imposed on “taxable commercial activity” in excess of $1 million at a rate of 0.57%, plus a flat tax of $250. However, taxpayers (including unitary groups) exceeding $750,000 of Oregon “commercial activity” are required to register for the CAT within 30 days of meeting the threshold. The reporting frequency will be quarterly. A penalty of $100 per month may be assessed for failing to register, up to $1,000 per calendar year.
Taxpayers exceeding $1,000,000 of Oregon “commercial activity” are required to file an Oregon CAT return, even though tax is not due on the first $1,000,000 of “taxable commercial activity.”
The Troubles with the Tax
As is often the case, lawmakers are resorting to the old tactic of generating new revenues via new taxes, with little thought given to the administration of said tax or the added compliance burden shouldered by the taxpayer. How these taxes are enforced or, more importantly, how these taxes are computed, is left to others to resolve. Gross receipts taxes, like the CAT, tend to quickly evolve into a complicated, nuanced web of taxable income vs. attributed income vs. apportioned income and deductions.
The Oregon Department of Revenue (DOR) is currently facing the task of implementing this new tax. As such, it is hosting a series of town hall meetings across the state to seek input from businesses affected by the tax. In addition to these in-person meetings, the DOR is also planning to host conference calls sometime in the future.
At one such town hall meeting in Portland, the room was packed with tax practitioners and business owners voicing their concerns, not only about the additional level of tax, but also the difficulties in, and incongruities of, applying the rules on specific industries. Of the business owners present, agriculture and construction were the most heavily represented. Both industries face significant additional layers of tax that was likely not anticipated by the lawmakers.
While the CAT is not a sales tax, many people view it just as such. However, unlike a sales tax imposed on purchasers, the CAT is a gross receipts tax imposed on sellers. While the CAT statute does not explicitly prohibit a seller from invoicing CAT to its customers, the total amount (including any CAT collected) would be included in the seller’s taxable commercial activity. Further, because the CAT is a liability of the seller, businesses wishing to pass the CAT along to their customers should confer with their legal and tax advisers about an appropriate way to do so.
Details of the Tax
A plain reading of the law may give the illusion of simplicity, that is until one tries to make sense of the differences between “Oregon commercial activity” and “taxable commercial activity.” “Oregon commercial activity” is gross receipts attributed to Oregon, while “taxable commercial activity” is net of certain expenses apportioned to Oregon. The CAT allows for a 35% deduction of the larger of:
- a) the amount of cost inputs;
- b) the taxpayer’s labor costs.
Both of these deductions are apportioned to the state using the tax apportionment rules under ORS 314.605 to 314.675.
Cost input means cost of goods sold as computed under IRC Section 471 apportioned to Oregon. The exact mechanics of the apportionment calculation are not entirely clear, but are expected to be addressed by administrative rule.
Labor costs mean total compensation of all employees excluding compensation paid to any single employee in excess of $500,000.
The law provides a list of “excluded persons” not subject to the tax, such as organizations described in IRS Section 501(c) and 501(j) and governmental entities.
Certain income items are not taxable, such as dividend or certain types of interest income. Interest income from credit sales or earned by financial institutions is taxable.
Out of state businesses with substantial nexus with Oregon are subject to the tax for the privilege of doing business in the state. A person has substantial nexus with Oregon if any of the following apply:
- Owns or uses a part of their capital in the state;
- Is authorized by the Secretary of State’s Office to do business in the state; or
- Has “bright-line presence” in the state.
“Bright-line presence” is established if a person (or unitary group):
- Owns at any time during the calendar year property in this state with an aggregate value of at least $50,000. For this purpose, owned property is valued at original cost and rented property is valued at eight times the net annual rental charge.
- Has during the calendar year payroll in this state of at least $50,000.
- Has during the calendar year commercial activity, sourced to this state under section 66, chapter 122, Oregon Laws 2019 (Enrolled House Bill 3427), of at least $750,000.
- Has at any time during the calendar year within this state at least 25 percent of the person’s total property, total payroll, or total commercial activity.
- Is a resident of this state or is domiciled in this state for corporate, commercial, or other business purposes.
As you might suspect, this tax is not considered an income tax and, thus, is not subject to the provisions of the Interstate Income Act of 1959 (also known as Public Law 86-272).
For help better understanding this new tax and how it might affect you, contact one of our SALT professionals.
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