New Year, New Tax: What You Need to Know About Oregon’s Gross Receipts Tax
By Katie Eyre, CPA
The 2019 Oregon Legislature established a new tax affecting all firms that do business in Oregon. While it is called by its misnomer the “Corporate Activity Tax,” the CAT actually applies to most types of organizational entities such as partnerships, individuals, limited liability companies, and trusts that have commercial activity generated in Oregon in the regular course of their trade or business. It is a tax paid annually for the privilege of doing business in Oregon. Initial expectations are that it will raise about $1 billion in new revenue annually. These funds are to be set aside for exclusive use for education and school purposes.
By now, every business in Oregon should have received a generic letter from the Oregon Department of Revenue alerting them to this new tax. This letter is a helpful primer on the CAT, but is not incredibly useful in figuring out the impact on each business’s specific situation. As is usual with all tax law, the devil is in the details.
How did the Corporate Activity Tax come about? In May 2019, the Oregon Legislature passed HB 3427. In this bill, it established the CAT as the primary mechanism to fund the new Fund for Student Success. Then in June 2019, the Legislature passed HB 2164 which provided technical corrections to HB 3427. As a follow up, the Department of Revenue held informational and listening sessions around the state through the last half of 2019. In December 2019, the Department of Revenue issued 12 temporary rules related to this new tax. The agency intends to release additional temporary guidance through March 2020. Any time there is a new tax put in place, there is much ambiguity, and so as a tax practitioner, we appreciate any guidance that is issued, especially since the effective date is January 1, 2020 and the first estimated tax payment is due April 30, 2020 (more on that later).
Who is subject to the CAT? That tax is imposed upon enterprises with a trade or business and “substantial nexus” in Oregon, who also meet certain specific thresholds. We’ll drill down on some of the definitions, but here is a quick threshold listing:
- Any business with Oregon “commercial activity” in excess of $750,000 will need to register,
- Any business with Oregon “commercial activity” in excess of $1,000,000 will need to file, and
- Any business with Oregon taxable “commercial activity” in excess of $1,000,000 will need to pay the CAT.
How much is the CAT? It is 0.57% of a firm’s Oregon taxable commercial activity in excess of $1,000,000 plus $250. If a business does not have Oregon taxable commercial activity in excess of $1,000,000, then it will not owe any tax, including the $250 minimum tax.
What is a “substantial nexus”? HB 3427 states that a business has a substantial nexus if it:
- Owns or uses a part or all of its capital in this state,
- Holds a certificate of existence or authorization issued by the Secretary of State’s office,
- Has a “brightline presence” in Oregon, defined as:
- Owns property in Oregon with an aggregate value of at least $50,000, or
- Has Oregon payroll of at least $50,000, or
- Has commercial activity in the state of at least $750,000, or
- At least 25% of the total property, payroll, or commercial activity is in Oregon, or
- Is a resident or domiciled in Oregon for commercial, corporate, or other business purposes.
The Department of Revenue provides an example of a hypothetical out-of-state firm that would be subject to CAT regulations:
Atlas Company (Atlas Co.), headquartered in Maryland, operates a website supporting internet sales, primarily to European country customers. Atlas Co. made approximately 10,000 sales at $99.00 per sale, to residents of Oregon during the year, realizing $990,000 of commercial activity. Atlas Co. contracts with an Oregon mailing service to deliver the merchandise in Oregon. While the amount of commercial activity realized by Atlas Co. is below the threshold to file a corporate activity tax return and pay tax, Atlas Co. does have substantial nexus in Oregon, and must register with the department when commercial activity exceeds $750,000.
What is commercial activity? HB 3427 introduced many new terms that require definitions. Fortunately, the law provided some definitions that will add partial clarity. The definition of commercial activity is the total amount realized by a subject taxpayer, arising from transactions and activity in the regular course of the taxpayer’s trade or business, without deduction for expenses incurred by the trade or business. For the most part, many businesses will think of this as their gross sales. For the most part, that is accurate. However, HB 3427 and HB 2164, list 47 exceptions to the calculation of commercial activity. They fall in to two categories:
- “Excluded persons” like non-profits and some health care providers, for example. There are many others.
- “Gross receipt exemptions” like non-trade interest income, excise taxes collected from customers, or wages received as an employee, for example. There are many others.
The CAT also introduces a “use tax” concept which will be unfamiliar to most Oregon businesses. If a business purchased equipment/property out of state, then brings it in to Oregon within one year of purchase, the value of the property is included in “commercial activity” unless the buyer can show that it wasn’t purchased out of state to avoid the CAT. This now requires the taxpayer and the state of Oregon to consider an Oregon business’s motivation in purchasing equipment/property from out of state suppliers and puts the CAT burden of the “gross receipts” tax on the buyer rather than the seller for this transaction.
What is Oregon taxable commercial activity income? We have discussed what “commercial activity” is, but not what the Oregon taxable commercial activity is. The CAT is only assessed against the Oregon taxable commercial activity. It is broken down as follows:
Commercial activity apportioned to Oregon
35% of the greater of
- Oregon cost inputs (as defined by the Internal Revenue Code Sec 471) or
- Oregon labor costs
- Note: This subtraction is limited to 95% of the Oregon commercial activity
What this means is that of the included commercial activity, only Oregon commercial activity is included. Non-Oregon activity is excluded. From there, a taxpayer can subtract out 35% of certain costs that are apportioned or sourced to Oregon.
What if a taxpayer has more than one business? The Oregon CAT requires a taxpayer to look at their businesses as a “unitary business” rather than separate businesses. This concept was designed for the situation where on a separate business basis, some of the businesses would not be subject to the CAT. But if aggregated into a unitary business, then they would meet the thresholds and therefore be subject to the CAT. A unitary business must file their CAT returns on a unitary basis, even though they are separate taxpayers for other purposes. This is one of the most complicated areas of the new law. The draft regulations provide the general rule that “if the activities of one business either contribute to the activities of another business, or are dependent upon the activities of another business, those businesses are part of a unitary business.” HB 3427 also discusses common ownership, centralized management, common executive force, among other things.
What are some of the administration aspects of the CAT? The Department of Revenue is still working out some kinks, but here in a nutshell is what we know to date:
- The effect start date is January 1, 2020.
- All CAT filings must be done on a calendar year basis, regardless of any fiscal year end for the taxpayer.
- A taxpayer must register if their commercial activity is at least $750,000. (If not previously required to register, the taxpayer must register within 30 days of reaching the $750,000 threshold or face per month penalties).
- Estimated taxes are required to be paid quarterly if the CAT will be greater than $5,000 for the year.
- Due April 30, July 31, October 31, and January 31 for the previous quarter.
- Note the first quarterly estimated payment will be due April 30, 2020.
- All estimated tax payments must be paid electronically.
- The annual tax return is due April 15 of the following year.
- Note the first annual return filing will not be due until April 15, 2021 for the 2020 tax year.
- A 6-month filing extension may be granted only for “good cause.” Extensions do not appear to be automatically granted.
- Unitary groups must file as a single taxpayer. Each member will be jointly and severally liable for the filing and payment of the estimated taxes and the annual filing and taxes.
What can a business do now? This is just a general discussion of the new CAT and should not be relied upon for your unique situation. Because this is a new and complex tax, both the Oregon Department of Revenue and tax advisors are trying to understand as much as possible. The information is still evolving. Any Oregon business should consult with their tax advisor immediately so that they can understand how this new tax will impact their specific business. If subject to the tax, the business will need to budget for it and be prepared to register, as well as be prepared to file and pay the quarterly estimated tax. If you have a financial review or audit, talk with your certified public accountant to find out if it should be included in your tax provision analysis. And because of the definition of “cost inputs” for subtractions, you may want to talk with your tax advisor to see if you can enhance what is currently put into your cost of goods sold.
What kind of money are we talking about? Per the revenue impact of HB 3427, each of the next biennia will generate $1.6 billion to $3.1 billion for the Fund for Student Success. However, $423 million to $762 million will be sent to the general fund, an amount totaling approximately 25% of the new tax. In addition to collected taxes from businesses, the government will also add employees. Per the fiscal impact statement of HB 3427, government will also grow. In the first biennium, 87.62 FTEs will be needed to administer the various accounts within the Fund for Student Success and for the Department of Revenue to administer the CAT.
In addition to discussing with your tax advisor, you can find more information online at:
Katie Eyre, a Certified Public Accountant, is a Tax Partner at Fordham & Co LLP in Hillsboro. She is a former Oregon state legislator and served on the Hillsboro Planning Commission for more than ten years. She is a board member of Cascade Policy Institute.