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Oregon corrects corporate activity tax

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Signed into law on July 23, 2019, H.B. 2164 provides for technical corrections to the Oregon Corporate Activity Tax (CAT) enacted in May.1 The legislation modifies the definition of persons excluded from the CAT, clarifies the inclusion or exclusion of certain cost inputs and certain receipts from the tax base, and provides a new exclusion for labor cost payments made to specified contractors. As an effort to support a planned referendum of the CAT has been abandoned, the CAT is expected to be implemented as scheduled on Jan. 1, 2020.

Original parameters of CAT Enacted by H.B. 3427, the CAT generally imposes a tax of 0.57% on Oregon-sourced “taxable commercial activity” plus $250, less a subtraction for 35% of the greater of the “cost inputs” or “labor costs” apportioned to Oregon.2 The tax, as originally enacted, is imposed on individuals and most business entities with substantial nexus and taxable commercial activity over $1 million earned from the privilege of doing business in the state.3 The CAT is imposed in addition to other existing Oregon taxes, including the corporate net income tax and gross receipts-based minimum tax.

Legislative changes to CAT H.B. 2164 represents the Oregon legislature’s attempt to provide additional guidance and clarity to several potentially ambiguous provisions within the original CAT legislation.

Definition of persons excluded from CAT The taxable commercial activity threshold subjecting a taxpayer to the CAT has decreased from $1 million to $750,000 through a change to the definition of “excluded person.” 4

“Cost of Inputs” Subtraction Revised The definition of “cost inputs” is expanded to include the entire cost of goods sold as calculated in arriving at federal taxable income under the Internal Revenue Code (IRC).5 Previously, “cost inputs” was limited to the inclusion of costs calculated under IRC Sec. 471.

Inclusion of property transferred Taxable commercial activity generally included in the CAT base includes the value of property that a person transfers into the state for the person’s own use within one year after the person receives the property outside the state.6 As originally enacted, such property could be excluded from the base if the Oregon Department of Revenue determined that the property transfer was not intended to avoid the CAT. This provision has been expanded to allow either the Department or the taxpayer to prove that the receipt and transfer of property was not intended to evade taxes in order to obtain the exclusion.7

Exclusions from CAT base As introduced, the CAT provided 43 categories of income specifically excluded from the definition of “commercial activity.” H.B. 2164 has expanded the exclusions and also provides more clarity for taxpayers in the financial services and insurance industries. The following categories of income are exempt from the definition of commercial activity and are thereby excluded from the CAT base:

  • Interest income, except for interest income and service charges received by financial institutions, which are now includable in the CAT base8
  • Receipts from hedging transactions9
  • Federally reinsured premiums or certain reciprocal insurance arrangements10
  • Current and deferred compensation received by current and former employees for services rendered to an employer11
  • Groceries as defined by 7 U.S. Code 2012(k), except for edible cannabis products or marijuana seeds12
  • Restaurant tips and local taxes collected on sales of meals, prepared food and beverages13

Specific exclusions for general contractors A new exclusion is added for 15% of certain labor cost payments made by a general contractor to a subcontractor for single-family residential construction in Oregon.14 Notably, material, land and permitting costs are not eligible for this very limited exclusion, which sunsets in six years.15

Intercompany transactions Intercompany receipts from transactions among members of a unitary group are specifically excluded from the CAT base.16 However, in computing the 35% subtraction for either labor costs or cost inputs, the legislation prohibits a taxpayer from including expenses from transactions incurred between members of a unitary group.17

Effective date and cancellation of referendum As originally enacted, the CAT will become effective on Jan. 1, 2020.18 There was originally a concern that the effective date could be delayed as a result of a proposed referendum to be decided directly by voters in a general election. The Oregon Manufacturers and Commerce (OMC) had previously petitioned a referendum addressing certain portions of the new Oregon CAT. However, on July 22, 2019, the OMC announced that they abandoned their efforts to support a referendum after the Oregon legislature passed several bills that appeared to defeat and weaken their efforts.19 As a result, the Oregon CAT is expected to go into effect as scheduled on Jan. 1, 2020. The Department has begun drafting rules and regulations to facilitate administration of the CAT.

Commentary With the enactment of the CAT modification legislation and the demise of referendum efforts to defeat the CAT, both taxpayers and the Department are expected to shift their efforts towards successful implementation of the CAT at the beginning of next year, with first quarterly payments due by April 30. Over the next several months, the Department is expected to provide administrative rules and tax forms, as well as establish a platform for registration and payments.20 While the technical corrections enacted by H.B. 2164 have clarified certain provisions contained within H.B. 3427, some uncertainties remain, creating the potential for even more technical corrections in the future.

For example, there is continuing uncertainty as to whether Oregon throwback sales are included in the definition of commercial activity sourced to the state, as the CAT statute is silent as to this point.21 In addition, guidance is needed to confirm whether the cost of inputs/labor cost subtraction is apportioned using the same factor used for corporate income tax/excise tax purposes (thereby potentially including the impact of throwback sales), or whether some additional or different apportionment factors should be used.

There are questions with respect to the appropriate method by which to perform the labor cost subtraction calculation. Current law permits a 35% subtraction for the cost of inputs or labor costs sourced to the state.22 These amounts are required to be apportioned in the same manner as required to apportion income under Or. Rev. Stat. Secs. 314.605 to 314.675. At the same time, the CAT statute defines labor costs to mean the total compensation of all employees except for the compensation paid to an employee that exceeds $500,000.23 These sections, taken together, suggest that the labor cost deduction should be the apportioned amount of total labor costs (e.g., total labor costs multiplied by the taxpayer’s Oregon apportionment factor). This result could be substantially different from actual labor costs paid to Oregon employees. Further guidance is needed to determine what will be considered an accurate measure of labor costs for subtraction purposes.

Finally, an important and potentially broad exclusion from the CAT base is available for “money . . . received . . . by an agent on behalf of another . . ..”24 The full wording of this exclusion is identical to the exclusion in the Ohio Commercial Activity Tax rules and allows a prime contractor to exclude payments to subcontractors from its Ohio tax base. Confirmation is needed to determine whether it is the intent of the Oregon legislature to allow prime contractors a similar deduction.


 
1 Ch. 579 (H.B. 2164), Laws 2019.
2 Ch. 122 (H.B. 3427), Laws 2019. See GT SALT Alert: Oregon Passes Legislation Establishing Corporate Activity Tax.
3 H.B. 3427, § 63. As discussed below, the threshold has since been lowered to $750,000.
4 H.B. 2164, § 50, amending H.B. 3427, § 58(4)(j).
5 H.B. 2164, § 50, amending H.B. 3427, § 58(2).
6 H.B. 3427, § 61(1)(a).
7 H.B. 2164, § 51, amending H.B. 3427, § 61(2).
8 H.B. 2164, § 50, amending H.B. 3427, § 58(1)(b)(A)(ii). Income reported on a Form FR Y-9 by a financial institution holding company, a call report filed by a bank organization, or income reported in accordance with generally accepted accounting principles by a nonbank financial organization is included in the CAT base. H.B. 2164, § 50, amending H.B. 3427, § 58(1)(a)(B).
9 H.B. 2164, § 50, amending H.B. 3427, § 58(1)(b)(D).
10 H.B. 2164, § 50, amending H.B. 3427, § 58(1)(b)(C). Most insurance premiums are included in the CAT base. See H.B. 3427, § 58(1)(a)(C).
11 H.B. 2164, § 50, amending H.B. 3427, § 58(1)(b)(H).
12 H.B. 2164, § 50, amending the definition of “groceries” in H.B. 3427, § 58(8), which is generally excluded from the CAT base in H.B. 3427, § 58(1)(b)(EE).
13 H.B. 2164, § 50, amending H.B. 3427, § 58(1)(b)(U), (V).
14 H.B. 2164, § 58.
15 H.B. 2164, §§ 58, 59.
16 H.B. 3427, § 58(1)(b)(FF).
17 H.B. 2164, § 53, amending H.B. 3427, § 64(3)(a).
18 Ch. 122 (H.B. 3427), Laws 2019.
19 Dirk VanderHart, Opponents Scrap Campaign to Refer New $1B Business Tax to Oregon Voters, OREGONLIVE/THE OREGONIAN, July 16, 2019.
20 Oregon Department of Revenue Testimony to Joint Committee on Student Success, April 25, 2019.
21 H.B. 3427, § 66.
22 H.B. 3427, § 64.
23 H.B. 3427, § 58(12).
24 H.B. 3427, § 58(1)(b)(M).



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