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Jamie C. Yesnowitz
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On May 16, 2019, Oregon Gov. Kate Brown signed into law H.B. 3427 which generally adopts a 0.57 percent corporate activity tax (CAT) on persons with substantial nexus conducting commercial activity in the state.1
The Oregon CAT is imposed in addition to other existing Oregon taxes, including the corporate net income tax and gross receipts-based minimum tax. As enacted, the Oregon CAT will be imposed for tax years beginning on or after Jan. 1, 2020. However, the bill may be subject to voter approval through referendum.
Taxpayers subject to Oregon CAT
The Oregon CAT is imposed on each person with substantial nexus and taxable commercial activity of more than $1 million earned from the privilege of doing business in the state.2
The term “person” is broadly defined and includes individuals, practically all pass-through entities (including entities disregarded for federal income tax purposes), and C corporations.3
Persons excluded from taxation include, among others, specified Internal Revenue Code (IRC) Sec. 501 entities, governmental entities, certain hospitals and persons with commercial activities not exceeding $1 million annually (other than a person part of a unitary group that exceeds the $1 million threshold).4
The Oregon CAT is an annual privilege tax imposed on persons having “substantial nexus” with the state.5
The tax is not a transactional tax and is not subject to the nexus protection afforded by P.L. 86-272.6
Evidence of substantial nexus includes the use of capital within the state, registration with the Secretary of State, exceeding the bright-line presence thresholds detailed below, or otherwise having nexus by meeting the requirements to be subject to tax established under the U.S. Constitution.7
Specifically, a person has bright-line nexus for the Oregon CAT if any of the following apply. The person:
- Owns at least $50,000 in property located in Oregon
- Has at least $50,000 in payroll located in Oregon
- Has commercial activity sourced to Oregon of at least $750,000
- Has at least 25% of their total property, total payroll, or total commercial activity in Oregon
- Is an Oregon resident or domiciliary for corporate, commercial or other business purposes.8
The Oregon CAT exempts from tax the first $1 million of taxable commercial activity.9
However, any person or unitary group with commercial activity in excess of $750,000 is required to register with the Oregon Department of Revenue, even if no tax is due.10
Penalties may apply for failing to register as required.11
Taxable commercial activity
The Oregon CAT is imposed on a person’s “taxable commercial activity” sourced to Oregon.12
Notably, the Oregon CAT sourcing provisions are substantially similar to Oregon’s corporate income tax sourcing provisions, including the use of market-based sourcing. Commercial activity is sourced to Oregon if and to the extent the real or tangible property is located in the state or delivered to a purchaser in the state.13
In the case of service revenue, sales are sourced to Oregon to the extent they are delivered to an Oregon location.14
Lastly, receipts related to intangible property are sourced to Oregon if the property is used in Oregon.15
If the rules do not fairly represent the taxable extent of a person’s Oregon activity, the taxpayer may request or the Department may require the use of an alternative method.16
Further, taxable commercial activity 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.17
This may include inventory and other various types of property used in the course of a person’s trade or business. An exception is provided for situations in which the Department ascertains that the property’s receipt outside the state and subsequent transfer were not intended to avoid the Oregon CAT.18
Notably, several types of receipts are statutorily excluded from the definition of “commercial activity,” including interest and dividends received, distributive income received from pass-through entities, proceeds from the issuance of stock, amounts required by contracts to be paid to third parties, receipts from sales to a wholesaler in the state with required documentation,19
and intercompany receipts.20
Tax calculation and administrative procedures
Once substantial nexus and the $1 million taxable commercial activity threshold have been established, persons with Oregon nexus are subject to a tax of $250 plus 0.57 percent of their taxable commercial activity, less a subtraction for 35% of the greater of their cost inputs or labor costs apportioned to Oregon.21
As noted above, businesses are exempt from the Oregon CAT (including the $250) on their first $1 million of taxable commercial activity.22
A taxpayer is allowed to deduct 35% of the greater of the following amounts paid or incurred during the year that are sourced to Oregon:
- Cost inputs, defined as the cost of goods sold as calculated under IRC Sec. 47123
- Labor costs, defined as the total compensation of all employees, excluding any compensation paid to any single employee exceeding $500,000.24
For purposes of computing the deduction, both cost inputs and labor costs are apportioned to Oregon in the manner required for apportionment of income under Ore. Rev. Stat. Secs. 314.605 to 314.675 (the statutory apportionment provisions governing corporate income tax).25
Notably, the referenced method of apportionment under these statutes does take into account throwback sales. The total deduction may not exceed 95 percent of the taxpayer’s commercial activity sourced to Oregon.26
Oregon CAT returns are separate from the corporate net income tax and partnership returns and must be filed annually, with quarterly estimated payments required.27
Unitary combined filing required
Persons who are part of a unitary group and subject to the Oregon CAT must file a unitary combined return as a single taxpayer and may exclude receipts from transactions among its members.28
“Unitary group” is defined as a group of persons with more than 50 percent common ownership, either direct or indirect, that is engaged in business activities that constitute a unitary business.29
In contrast, the requirements for Oregon corporate income tax purposes require taxpayers filing a state consolidated return to include the same group members as for federal consolidated return purposes.30
Further, for corporate income tax purposes, only C corporations are subject to the mandatory consolidated reporting requirement. For Oregon CAT purposes, all entity types are subject to the unitary consolidated reporting requirement.31
After months of significant controversy and discussion among state legislators and residents, Oregon has followed states like Ohio and Washington in adopting a gross-receipts based tax, albeit with a cost or compensation deduction which is one of the main components of the Texas Margin Tax. The bill is estimated to raise $1 billion a year for Oregon schools and is intended to support the state’s educational system, including K-12 school support and early childhood learning programs.32
As signed into law, the Oregon CAT will become effective Jan. 1, 2020. However, a voter referendum may prevent the Oregon CAT from actually taking effect. Although the governor has signed the legislation, Oregon’s referendum process allows voters to approve or reject the legislation if sufficient signatures are obtained for the referendum within 90 days after the date on which the 2019 regular session of the 80th Legislative Assembly adjourns sine die (which will occur on June 30, 2019).32
Accordingly, the legislation does not take effect until either (1) insufficient signatures are obtained for the referendum by Sept. 28, 2019, in which case the legislation becomes effective on Sept. 29, 2019 (the 91st day after the date on which the 2019 regular session of the 80th Legislative Assembly adjourns sine die) or (2) sufficient signatures are obtained for the referendum by Sept. 28, 2019, and the voters subsequently approve the legislation. While the next generally scheduled election in Oregon will be in November 2020, there may be efforts to propose an earlier election solely to vote on this issue as a means to determine whether the Oregon CAT will be effective as soon as possible after Jan. 1, 2020.
Oregon’s referendum process only requires 75,000 supporting signatures to be collected, and as this is a relatively low bar, this condition is expected to be met in the next few months. Therefore, with an indefinite enactment date, taxpayers that could be subject to the Oregon CAT face significant uncertainty regarding appropriate financial statement accruals and whether to begin quantifying and/or attempting to minimize tax exposures stemming from enactment of the new tax.
In addition to the uncertainty surrounding the effective date, there are a number of definitions and provisions that could benefit from further clarification. For example, the sourcing of Oregon receipts for Oregon CAT purposes does not appear to include throwback sales. However, the corresponding allowable cost of inputs or labor cost deduction is apportioned using existing corporate income tax apportionment factor rules that specifically include throwback sales. Also, further guidance regarding the specific calculation of these deductions would be helpful. Oregon Senate leadership has already indicated that technical corrections to this bill will likely follow, so developments surrounding the Oregon CAT should continue to be monitored.
The Oregon CAT could have a substantial impact on taxpayers already doing business in the state and will likely result in new filing requirements for entities lacking nexus for other tax types with its adoption of bright-line thresholds indicative of economic nexus. Taxpayers should evaluate their potential Oregon CAT liability, taking into account the 43 different excluded categories of receipts as well as their potential cost of inputs / labor deduction. Notably, Oregon CAT receipts may differ from receipts used for state income tax apportionment purposes. In addition, taxpayers should consider whether an Oregon CAT combined reporting group exists that may be substantially different from its other state combined groups. It will be critical to analyze any tax efficiencies from including related entities which are not traditionally included in a taxpayer’s federal consolidated group including partnerships, disregarded entities and foreign entities and the resulting impact on Oregon CAT liability.
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