The Oregon Department of Revenue issued twelve draft regulations intended to apply effective January 1, 2020. Even though in draft form they indicate the Department’s thinking at this point and should be considered their current stand on these issues. The complete text of these regulations is on the Department of Revenue website. Here are some summary thoughts:
150-317-1000 Definition of Commercial Activity
Defined as fair market value of all items of value received, including money, property, debt forgiven, and services rendered. Calculated under method of accounting used for federal income tax purposes. Uses transactional and functional tests for apportionable income, same as under income tax law. It is presumed that these tests are only for determining the allocation percentage, because they include some types of income not subject to the CAT.
150-317-1010 Substantial Nexus Guidelines
This primarily refers to out-of-state businesses and it is clear that nexus is defined in economic terms. You do business here, you are subject to the tax. This is not unlike other states with sales/use tax regimes. Businesses will need to follow apportionment rules to allocate taxable commercial activity to Oregon.
150-317-1020 Unitary Group Definitions
This regulation attempts to define the requirements for unitary groups, and it follows established patterns found in other areas of tax law. It addresses the concept of a unitary business being a single economic enterprise made up of interdependent, interrelated and commonly controlled groups. One significant aspect of unitary group filings is that only one exemption is allowed. As a general rule, unitary groups are expected to file on a consolidated basis with intercompany transactions eliminated. The ruling does not address the consolidation details, rather is focused on defining the nature of a unitary group.
150-317-1030 Sourcing Commercial Activity from Sales of Tangible Personal Property
Oregon sales includes transactions made in other states where it is known at the time of sale that the ultimate recipient of the property is within Oregon, irrespective of f.o.b. point or other conditions of sale or type of transportation. In other words, property is deemed delivered to a purchaser within Oregon if the recipient is located in Oregon, even though the property is ordered from outside Oregon. It appears Oregon will claim the sale when the delivery terminates in Oregon, including central warehouse facilities, whether or not it is subsequently resold outside of Oregon.
150-317-1040 Sourcing Commercial Activity from Sales Other Than Tangible Personal Property
Establishes uniform rules for sourcing receipts from sale anything that is not an item of tangible property. It includes services, performing arts, and intangible property or rights to use intangible property (software, copyrights or patents). Does not include sourcing of receipts of financial institutions and insurers. Refers to concepts such as “reasonable approximation” where it is difficult to identify the state of the customer. This regulation is very detailed and spans 40 pages where most other regulations are covered on two or three pages. Generally, it says the receipt is sourced to Oregon if the purchaser/user is in Oregon.
150-317-1100 Agent Exclusion
An exemption exists for those who act as agents of others. Its fundamental definition is a person (agent) who acts on another’s behalf and is subject to that other person’s control (customer). Examples would be escrow companies and investment brokers. Agents only need to report their fee for such services even though the customer’s transaction runs through their books and records.
150-317-1130 Property Brought into Oregon
Such property is potentially subject to inclusion in taxable commercial activity if the transaction was intended to avoid the CAT. This regulation essentially restates the text of the legislation but gives no bright line for determining when there was intent to avoid the CAT. Many businesses purchase capital assets from businesses located in other states for a variety of reasons. It may be price, a long-time relationship, or access to specialized items not available in Oregon. The regulation seems to focus on tax avoidance and leaves that definition up to future determination by the Department of Revenue. Most sales/use regimes in other states force reporting use tax on all property moved into the state from outside the state, but this does not seem to be the way the CAT legislation or regulations are written.
150-317-1200 Cost Input or Labor Cost Subtraction
Clarifies that cost inputs (cost of goods sold) or labor costs must first be identified in total irrespective of the place the input or cost is incurred. It is then subjected to apportionment using its commercial activity ratio (commercial activity sourced to Oregon divided by total commercial activity). If the special 15% exclusion for subcontractor labor is used (residential construction), total cost inputs must be reduced by this amount before applying the 35% limitation factor. The draft regulation mainly defines how the formula works and does not address definitions pertaining to cost inputs and labor. Left unaddressed are questions about how production agriculture and other businesses who typically do not report cost of goods sold are to group costs for this purpose.
150-317-1300 Estimated Tax
Quarterly estimates are required if annual CAT is expected to be over $5,000.
150-317-1310 Underpayment of Estimated Tax Penalties
Underpayment penalties will be assessed if less than 80% of amounts required to be deposited are not made timely. The regulations follow similar rules for payment of estimated income taxes.
150-317-1320 Estimated Tax for Unitary Groups and Apportioned Returns
Allows a business to use either current or prior year apportionment factors for purposes of making estimated tax payments to avoid the underpayment penalty. It also indicates that there is joint and several liability for the tax on members of a unitary group.
150-317-1330 Extension of Time to File
Extensions will require “good cause.” It appears extensions of up to six months will be available for circumstances such as death, serious illness, natural disaster, and other unavoidable or unforeseen circumstances. The draft regulation seems more restrictive than extensions for income tax returns.