House Bill (HB) 3427A, a bill that would create an Oregon corporate activity tax (CAT), passed in the state house and senate. It’s now expected to be signed into law by Governor Kate Brown.
The CAT is in addition to the state’s current corporate net income excise tax and gross receipts-based minimum tax regimes. The tax is expected to raise at least $1 billion in annual revenues and would be effective beginning January 1, 2020.
A general overview of the bill’s key provisions follows.
Businesses subject to the CAT will be taxed at a rate of 0.57% on taxable receipts less deductions. A taxpayer’s first $1 million of Oregon receipts will be exempt from the tax, though impacted taxpayers face a minimum tax of $250.
Although HB 3427A refers to a corporate activity tax, the tax applies to many forms of businesses, including:
- Joint ventures
- Limited liability companies, including entities disregarded for federal income tax purposes
- Limited liability partnerships
The tax is imposed on every industry, including financial institutions and insurance companies. However, credit unions, hospitals and long-term care facilities, and not-for-profit and government entities are excluded from the tax.
The receipts base is designed to capture commercial activity occurring within Oregon. Several classes of receipts are excluded, among them:
- Certain transactions with or for agricultural cooperatives
- Intercompany transactions between members of a unitary group
- Interest and dividend income, 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
Businesses may deduct 35% of either:
- Cost inputs, defined as the cost of goods sold as calculated under IRC Section 471
- Labor costs, defined as total compensation of all employees, not including compensation paid to any single employee in excess of $500,000
Addition to Tax for Property Delivered to Oregon
Taxpayers that 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. Inventory will likely be deemed property unless a technical correction is added to the current bill.
HB 3427A contains an exception to this rule if the taxpayer can demonstrate that avoiding the Oregon tax wasn’t the purpose for the transaction structure.
Sourced Receipts and Apportioned Deduction
The current mechanism for calculating the tax requires taxpayers to first source Oregon receipts using rules provided in the new law, 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 difference is that the new receipts-sourcing rules don’t include 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.
The tax requires unitary combined filing for entities with more than 50% common ownership. The combined group analysis for 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.
The bill also includes rules for credits, filing requirements, and economic nexus.
No credit will be provided to members or owners of pass-through entities for taxes paid by the entity.
Tax returns will need to be filed annually. 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.
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 3427A 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, even if the receipts don’t meet the $1 million threshold for taxation.
As the new CAT is on 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 your CAT receipts as there are 43 different 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. Other considerations to plan for include strategies around passing the tax on to your customers and which entities are part of your unitary group and how those transactions may be taxed.
There are a number of technical corrections being considered by the legislature related to this new tax. Another bill is expected to pass during this session or next year’s short session to implement these changes as well as some changes around the CAT policy.
We’re Here to Help
We’re monitoring the progress of the bill and amendments that may be made to it during the legislation process. To learn more about Oregon’s new CAT and how it may affect your business, contact your Moss Adams professional.