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Oregon's new proposed corporate activity tax | Baker Tilly
Article
Oregon’s corporate activity tax on track to become effective law despite referendum
Aug. 15, 2019 · Authored by Rob O'Neill, Daniel Lapour
House Bill (HB) 3427, which creates a corporate activity tax (CAT) in Oregon, was signed into law by Governor Kate Brown on May 16, 2019, following a tumultuous legislative session that may impact the tax’s future.
Before the law can take effect, Oregon voters could reject the new law during a special election. The bill will be put to a public vote if 75,000 public signatures are gathered for a proposed referendum. However, that now seems unlikely as the main proponent of such a referendum — the Oregon Manufacturers and Commerce trade group — announced it’s abandoning its attempt to force the special election. If the signature threshold isn’t met, the referendum won’t be held and the bill will become law.
Referendum dates and corrections
Following the passing of HB 3427, the state legislature passed Senate Bill (SB) 116 to call the special election for Jan. 21, 2020 if the required signatures were gathered. This was done to prevent delaying the CAT from becoming effective as the next ballot isn’t scheduled until later in 2020.
Immediately after passing the CAT, the legislature started work on technical corrections for the bill. The result, HB 2164, amends several key provisions of the CAT and several Oregon tax credits. The bill was signed by the governor and is scheduled to go into effect on Jan. 1, 2020.
A general overview of the combined bills’ key provisions follows.
Tax rates
Should the CAT go into effect, it’s expected to raise at least $1 billion in annual revenue.
Businesses subject to the CAT will be taxed at a rate of 0.57% on taxable receipts less deductions. A taxpayer’s first $1,000,000 of Oregon receipts will be exempt from the tax, but impacted taxpayers face a minimum tax of $250 and a registration requirement once Oregon receipts hit $750,000.
Who’s affected
Although HB 3427 refers to corporate tax, the tax applies to individuals and many forms of businesses, including the following:
Corporations
Joint ventures
Limited liability companies, including entities disregarded for federal income tax purposes
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Partnerships
Trusts
The tax is imposed on most industries, including financial institutions and insurance companies. However, credit unions, hospitals and long-term care facilities, and not-for-profit and government entities are excluded.
Excluded receipts
The receipts base is designed to capture commercial activity occurring in Oregon. Several classes of receipts are excluded, among them:
Farmers’ sales to agricultural cooperatives
Intercompany transactions between members of a unitary group
Interest and dividend income and service charges, unless received by a financial institution
Sales of Internal Revenue Code (IRC) Sections 1221 and 1231 assets
Sales to Oregon wholesalers to the extent the wholesalers certify the property will be sold outside Oregon
Wholesale and retail sales of groceries
Tips and local taxes collected by a restaurant
Certain hedging transactions
Deductions
Taxable persons may deduct 35% of either:
Cost inputs. This is the cost of goods sold as calculated in arriving at federal taxable income under the IRC.
Labor costs. This is total compensation of all employees, not including compensation paid to any single employee in excess of $500,000.
For labor costs, compensation is deducted whether current or deferred, and whether in cash or in kind when received by an employee or a former employee. This also includes reimbursements for certain benefits. General contractors are also entitled to deduct payments to subcontractors for their labor costs limited to 15% of the total payments. The project must also relate to single-family residence construction in Oregon.
Property delivered to Oregon
Taxpayers who take delivery of property outside Oregon and bring it into the state for use within one year must report the value as Oregon-sourced receipts.
For example, a business would be required to include the value of machinery and equipment purchased in Washington State and brought into Oregon as Oregon-sourced receipts subject to the CAT unless it meets an exception.
Exceptions
HB 2164 provides an amended exception for property subject to the CAT if the person or unitary group can demonstrate, or if the Department of Revenue (DOR) ascertains, that the property’s receipt outside Oregon wasn’t intended to avoid the CAT. It’s currently uncertain where inventory is deemed property for purposes of the CAT.
New receipts-sourcing rule
The current mechanism for calculating the tax requires taxpayers to first source Oregon receipts using rules provided in the new law. They must then separately apportion the deduction for either cost inputs or labor costs based on existing apportionment rules for the corporate net income tax.
A key change introduced by the new sourcing rules is the exclusion of throwback sales. In calculating the factor to apply to the deduction, however, throwback sales are included in the numerator. The total apportioned deduction can’t exceed 95% of Oregon-sourced receipts.
Unitary filing
The tax requires unitary combined filing for entities with more than 50% common ownership.
The combined group analysis for the CAT is distinct from the combined groups for Oregon and federal income tax purposes and will include unitary entities taxed as partnerships, corporations, and disregarded entities.
Additional information
The bills also include information on filing requirements and economic nexus.
Filing requirements
Tax returns will need to be filed annually, and quarterly estimated payments are required.
The CAT return will be filed separately from the corporate net income tax return or partnership return of net income. For fiscal taxpayers, filing cadence may be different than for Oregon income tax returns.
Economic nexus standards
A business with Oregon property, payroll, or sales exceeding one of the following thresholds is subject to the CAT:
$50,000 for payroll
$50,000 for property
$750,000 for sales
HB 3427 claims that Public Law 86-272, which allows businesses to engage in certain limited activities within a state without being subject to net income tax, doesn’t protect businesses from the CAT. This may, however, be subject to challenge.
Businesses with $750,000 or more in Oregon-sourced receipts must register for this tax, and are subject to CAT minimum tax regardless of whether or not they have a calculated CAT liability.
Planning considerations
As the new CAT applies to Oregon-sourced receipts rather than apportioned Oregon sales, it will be important to complete a detailed analysis of taxable CAT receipts. Oregon CAT receipts will be different than the receipts used for state income tax apportionment purposes.
It will also be critical to analyze the taxability of CAT receipts because there are more than 40 exemptions in calculating the CAT. Calculating which deduction method will result in the greatest subtraction is also necessary to help lessen the impact of the CAT.
Taxpayers can also start planning for strategies around passing the tax on to customers, which entities are part of your unitary group, and how those transactions may be taxed. The current law only instructs vehicle dealers on how to pass CAT onto its customers.
Rulemaking and adoptions
While the legislature was able to address a number of the CAT’s technical corrections, more corrections are expected along with some policy changes during the 2020 short session.
The DOR is in the process of drafting rules and is currently soliciting feedback on known issues, and meeting with key groups. If the special election doesn’t happen, rules will likely be adopted 30 days after the tax goes into effect which could be as early as Nov. 1, 2019. Draft rules will likely be available prior to this date before coming permanent.
