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Updates to Oregon’s corporate activity tax | Baker Tilly
Article
Amendments to Oregon’s corporate activity tax include new exclusions and more
July 6, 2020 · Authored by Rob O'Neill, Daniel Lapour
Oregon Governor Kate Brown signed HB 4202 into law on June 30, 2020. The law includes several amendments to Oregon’s Corporate Activity Tax (CAT) statute and is effective retroactively as of Jan. 1, 2020, the original CAT effective date.
An overview of the amendments follows.
Commercial activity exclusions
The bill clarifies that the following proceeds are excluded from the definition of commercial activity:
Proceeds received from crop insurance policies that weren’t received for the loss of commercial activity
Tax refunds
Receipts from the sale of fluid milk by dairy farmers that aren’t members of an agricultural cooperative
HB 4202 also clarifies that returns and allowances as defined by the Internal Revenue Code are subtracted from commercial activity.
Subtraction calculation
Changes that will likely impact the largest number of taxpayers are updates and clarifications to the subtraction for cost inputs or labor costs.
The original CAT statute required that taxpayers apportion the subtraction “in the manner required for apportionment of income under ORS 314.605 to 314.675.” The Oregon Department of Revenue published a rule requiring taxpayers to essentially prorate the subtraction based on its ratio of Oregon commercial activity to total commercial activity.
HB 4202 clarifies that a taxpayer must apportion its subtraction either:
As provided in ORS 314.650 and 314.665, or through the alternative apportionment method required for certain taxpayers
As provided by the department by rule
The CAT unitary group may include members that aren’t included in a unitary group for Oregon income tax purposes. HB 4202 provides that a CAT unitary group with members subject to multiple apportionment methods for Oregon income tax purposes is to apportion its subtraction in the method described by a department rule.
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.
Safe harbor
HB 4202 also creates a new safe harbor. Taxpayers may use their most recent fiscal year information to determine the subtraction.
This provision will provide relief to fiscal year taxpayers that must determine CAT on a calendar year basis.
Taxpayers that elect to use this method must make it on a timely filed original return, and the election is binding for the tax year in which it’s made.
Farmers and agricultural producers
Several provisions are especially applicable to farmers and agricultural producers.
Cost inputs for farmers
The bill adds a new definition of cost inputs for farmers. The initial CAT as passed by the legislature defined cost inputs as “the cost of goods sold as calculated in arriving at federal taxable income.”
Many taxpayers engaged in farming, however, don’t report cost of goods sold. HB 4202 amends the CAT statute to allow taxpayers engaged in farming to calculate a cost inputs subtraction based on their operating expenses excluding labor costs.
Simplified exclusion for producers of agricultural commodities
The original CAT statute allowed sellers of goods to wholesalers to exclude sales when the wholesaler provides certification of its export of the purchased goods outside Oregon. This presented difficulties for many agricultural producers that sell their goods through brokers.
HB 4202 provides that a taxpayer engaged in a farming operation that sells to a broker or wholesaler may exclude sales from Oregon commercial activity either by:
Obtaining certification from the broker or wholesaler of the percentage sold outside Oregon
Using an industry average percentage for sales made in the previous tax year based on the most recent information from the U.S. Department of Agriculture National Agricultural Statistics Service and “other sources of sales information”
HB 4202 clarifies that the term agricultural commodity “includes all agricultural, horticultural, viticultural, and vegetable products produced in this state, including bees and honey,” but excludes timber and timber products. A farming operation is an entity conducting business in a sector described under North American Industry Classification System (NAICS) code 111, 112, or 115.
Unitary group composition
The CAT as passed by the legislature included all entities engaged in a unitary business and under more than 50% common ownership. HB 4202 allows taxpayers to exclude foreign members with no Oregon commercial activity.
Taxpayers making this election must exclude all such foreign members. The department is to adopt rules regarding the procedures for making the election.
HB 4202 appears to grant the department discretion to disallow an election “in whole or in part.”
Penalty provisions and estimate safe harbors
Penalty provisions have been modified, and are different for calendar year 2020 and subsequent years.
2020 calendar year CAT payments
For the 2020 calendar year, the department may impose a penalty of 5% of the underpayment, defined as any quarterly payment that isn’t at least 80% of the tax due for a quarter.
This provision also contains a safe harbor prohibiting penalties “for any quarter for which the taxpayer has paid an amount” equal to or exceeding “the taxpayer’s required installment for the corresponding quarter of the preceding tax year.”
As this provision applies to calendar year 2020 — the CAT wasn’t in effect until Jan. 1, 2020 — it’s unclear how a taxpayer may apply this safe harbor, such as through calculating a pro-forma CAT tax based on previous year commercial activity and subtractions.
COVID-19 impacts
Taxpayers may also want to review the department’s Rule 150-317-1500, which applies to 2020.
Under the rule, a taxpayer can avoid penalties if the taxpayer makes a good faith effort to estimate and pay quarterly installments by demonstrating that, due to COVID-19, it:
Couldn’t reasonably determine whether it had a quarterly installment
Didn’t have sufficient funds to pay the required installment
Couldn’t reasonably calculate the required installment
Additionally, a taxpayer won’t be assessed a penalty if the taxpayer can demonstrate they made a reasonable estimate of the quarterly installment based on information available to the taxpayer at the time the quarterly installment was due. This includes documentary proof of the good faith effort.
Subsequent year estimated payments
For 2021 and subsequent years, the 80% threshold is increased to 90%.
