Oregon enacts commercial activity tax on businesses
TAX ALERT |
On May 16, 2019, Oregon Governor Kate Brown signed HB 3427A into law, paving the way for Oregon to impose a corporate activity tax (CAT) on certain businesses with a sufficient level of commercial activity and nexus in Oregon. The CAT, levied on Oregon-sourced commercial activity, is expected to raise over $1 billion in revenue for education.
Oregon’s CAT is imposed on the commercial activity, or gross receipts sourced to Oregon, of certain businesses that establish nexus in the state. Commercial activity in the new law is defined as, “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.”
Although the tax is labeled a corporate activity tax, all businesses with commercial activity in Oregon, not just corporations, are subject to its jurisdiction if they meet Oregon’s nexus requirements. Nexus in Oregon, for purposes of the CAT, is established if you are a resident, commercially domiciled business, or meet one the following thresholds during a calendar year:
- Owning property in Oregon with an aggregate value of at least $50,000
- Oregon-sourced payroll of at least $50,000
- Oregon-sourced sales, or commercial activity, of at least $750,000
There are 43 exclusions to the definition of commercial activity written into the law, including, but not limited to: most forms of interest and dividend income, the sale or exchange of IRC sections 1221 or 1231 assets, insurance policy proceeds, certain sales to wholesalers, certain financial institution services, grocery sales, and transactions between members of a unitary group, among others. Additionally, certain nonprofit organizations, hospitals, and other entities are excluded from the tax.
The newly enacted CAT is imposed at $250, plus 0.57% of the businesses’ Oregon-sourced commercial activity over $1 million. However, taxpayers are allowed to deduct from their Oregon-sourced commercial activity 35% of either 1) cost inputs (cost of goods sold as defined by IRC section 471) or 2) labor costs, whichever is greater. Businesses with less than $1 million of Oregon-sourced commercial activity are explicitly excluded from paying the tax.
Prescribed methods for sourcing commercial activity such as sales and other transactions of real property, tangible personal property, intangible property, and services are included in the statute. In contrast, apportioning the statute’s two 35% deductions, cost inputs and labor costs, are calculated according to existing Oregon apportionment rules. This means throwback sales are included in the deduction apportionment, but not commercial activity sourcing. Deductions may not exceed 95% of the taxpayer’s commercial activity. Further, property bought outside of Oregon and brought into the state for use within one year must report the value as Oregon-sourced receipts.
Oregon’s CAT is effective Jan. 1, 2020. Businesses subject to the reporting requirement must remit quarterly payments throughout the year and file their return no later than April 15 of the following year.
The newly signed CAT in Oregon may significantly affect any business with Oregon-sourced commercial activity.
Additional guidance should be released in the coming months, and potential minor changes to the law by the Oregon legislature may be voted on and enacted soon.
Because the CAT is imposed at a rate of 0.57% of all Oregon-sourced commercial activity, the tax implications may be substantial. However, given the numerous exclusions to the definition of commercial activity, ascertaining the precise impact of the CAT may pose a challenge to many taxpayers. Additionally, the CAT requires registration within 30 days of meeting the nexus thresholds defined above. A penalty of $100 per month may be assessed for failing to register, up to $1,000 per calendar year. Any taxpayer with Oregon-sourced commercial activity should consult with their tax advisor in order to best determine how Oregon’s newly enacted CAT affects them.