Oregon Corporate Activities Tax
The new Oregon Corporate Activities Tax becomes effective January 1, 2020. While the legislation (House Bills 2164 and 3427) is in place and some aspects of the new tax are clear, many details have been left up to the Oregon Department of Revenue for interpretation through regulations. We have been told regulations will be coming during the first two or three months of 2020. Businesses subject to the tax are left with making good faith interpretations of the law for first quarter 2020. The first quarterly deposit is due April 30, 2020, but until regulations are issued, we do not know what the reporting forms will look like.
Just what is this new tax? It is a gross receipts tax based on “commercial activities” in the State of Oregon. It applies to all types of businesses rather than just corporate entities, with the exception of governmental entities and tax-exempt entities. Gross receipts from outside of Oregon are not subject to the tax and there will be an apportionment method available to make the multi-state allocation states. The tax calculation is $250 plus 0.57% of taxable corporate activity that exceeds $750,000. The main subtraction in coming up with the tax base is 35% of the greater of cost of goods sold as calculated in arriving at federal taxable income, or total compensation (limited to $500,000 per employee).
To put this in perspective, let’s say a subject business entity has $5.0 million in gross revenue and $3.0 million in cost of goods sold. Let’s further say the sales were all made to Oregon customers. The tax base would be $5.0 million less 35% of $3.0 million ($1.05 million), less $750,000, which equals $3.2 million. The tax would be $250 plus 0.57% of the tax base, which equals $18,490. Not exactly chump change!
Some gross receipts are exempt from the CAT by statute, including sale or exchange of capital assets and Section 1231 assets; hedging transactions; loan principal received; capital contributions; insurance proceeds; dividends and interest; distributions from pass-thru entities; sales to a wholesaler in Oregon where seller receives certification at time of sale that the wholesaler will resell the property outside of Oregon; sales of groceries (defined as food vs. crops raised by farmers); sales to a farmer cooperative, transactions between members of a unitary group, and certain pass-through taxes (but not the CAT).
There are unanswered questions to be solved by the Oregon Department of Revenue, and perhaps by the Legislature itself. Here’s a partial list:
- The legislation requires substantial nexus with Oregon. Substantial nexus is present if a business owns or uses a part or all of its capital in the state; holds a certificate of existence or authorization issued by the Secretary of State to do business in Oregon, has physical presence (bright line presence concept), or otherwise has nexus to the fullest extent permitted under the US Constitution. Just what does this mean?
- Unitary groups are made up of business entities under economic control. Transactions between members of unitary groups are exempt from the tax. We need better definitions of what this means and how it works. It appears that some kind of combined filing will be required.
- Gross receipts include the fair market value of property transfers from out of state, unless these transactions are not intended to evade the CAT. Is there going to be a bright line test on this aspect of the legislation?
- Production agriculture generally does not calculate cost of goods sold for the 35% subtraction. How do they make this calculation?
- Wholesalers do not always know if their customer is going to be an Oregon customer. How can they issue a certificate to the seller at the time of sale? What if the product ends up pooled with other products and identity is lost?
- In a meeting with the Oregon Department of Revenue, a representative said they might define the place of sale as being where the product is delivered. Is this realistic?
- A recent letter by the Oregon Department of Revenue indicated that the exemption is $1.0 million. Yet, House Bill 2164 says it was changed to $750,000. Who is right?
- There is a 15% labor cost subtraction available on certain labor cost payments to subcontractors on single-family residential construction, but not on material, land or permitting costs. How will general contractors know what the labor component is if the subcontractors are not willing to share this information?
Is there any planning to be done? Be sure all allowable costs are reported in the cost of goods sold section of your tax return in order to maximize the 35% subtraction. Establish records to identify Oregon sales separate from other States. Review the Oregon Department of Revenue Regulations when they are issued to see if there are other strategies available. Call us at 503-399-7306 if you have questions.
Some concluding thoughts: Low margin business will be disproportionately impacted by the tax. If applicable, the tax is due even if a business has a loss for the year. The tax is applied to all levels of the business cycle of goods and services thus it has a pyramiding nature to it. The legislation directs tax collections to education, but there is no guarantee that current funding for education will not be redirected.