December 6, 2019
by Don Lance
On May 16th the governor signed House Bill 3427 into law. This bill creates additional funding for education through a multi-billion dollar commercial activities tax to be imposed on persons doing business in Oregon.
The following outline summarizes some of the key provisions of the law. By its nature, this summary does not provide all of the information you may need to fully comply with the law. Thus, it should not be relied upon for this purpose. Please call your advisor at Kernutt Stokes, LLP if you have any questions.
The law includes a .25% reduction in Oregon individual income tax rates, except for those in the highest 9.9% bracket. This is intended to help offset the cost to individuals from the expected pass through of some portion of the CAT tax to consumers in the form of higher prices.
The CAT tax applies only to those persons (including entities) whose commercial activity sourced to Oregon exceeds $1 million for the year.
- Commercial activity means the total amount realized by a person, arising from transactions and activity in the regular course of the person’s trade or business, without deduction for expenses incurred by the trade or business. For most, this means gross receipts.
- Governmental entities and certain tax-exempt organizations are exempt from the tax.
- The tax is imposed on the seller and is not directly charged to the purchaser.
The CAT tax equals $250 plus the product of the taxpayer’s taxable commercial activity in excess of $1 million for the calendar year multiplied by .57%. Taxable commercial activity generally equals Oregon source gross receipts, less a deduction for 35% of the greater of labor costs, or the cost of inputs.
- The deduction is limited to 95% of commercial activity.
- Labor costs means total compensation of all employees, not to include compensation paid to any single employee in excess of $500,000.
- Cost of inputs means the cost of goods sold (COGS) as calculated in arriving at taxable income under the Internal Revenue Code (IRC), excluding any expenses from transactions between members of a unitary group.
- The subtraction amount is apportioned to Oregon in the manner required for the apportionment of income under ORS 314.605 to 314.675.
- A subtraction is allowed for bad debt charge-offs to the extent previously included in taxable commercial activity.
- The CAT tax should be deductible for income tax purposes.
Includible in taxable commercial activity is the value of property the person transfers into this state for the person’s own use in the course of a trade or business within one year after the person receives the property outside this state unless it can be demonstrated that CAT tax avoidance was not a motive.
There is a long list of items that are exempt from the tax. See paragraph 1(b)(A)-(QQ) of the bill for a complete list. Some of the exempt items include:
- Interest income except for interest income on credit sales.
- Receipts from the sale of an asset described in section 1221 or 1231 of the IRC.
- Tax refunds.
- Distributive income received from a pass through entity.
- Dividends received.
- Receipts from sales to a wholesaler in this state, if the seller receives certification at the time of sale from the wholesaler that the wholesaler will sell the purchased property out of state.
- Receipts from the wholesale or retail sale of groceries (but not nonfood items).
- Intercompany receipts between members of a unitary group.
- Amounts collected that are contractually obligated to be paid as sales commissions to a nonemployee of the business.
- 15% of the amount received for labor by a subcontractor from a general contractor pursuant to a contract for residential real estate construction for single-family residential construction located in Oregon.
Unitary groups shall register, file and pay the tax as a single taxpayer.
- Unitary group means a group of persons and/or entities with more than 50% common ownership (direct or indirect) that are engaged in business activities that constitute a unitary business.
- Unitary business means a business enterprise in which there exists directly or indirectly between the members or parts of the enterprise a sharing or exchange of value as demonstrated by:
- Centralized management or a common executive force;
- Centralized administrative services or functions resulting in economies of scale; or
- Flow of goods, capital resources or services demonstrating functional integration.
- Unitary businesses may include a business enterprise the activities of which are in the same general line of business or constitute steps in a vertically integrated process.
- Public Law 86-272 does not apply.
- A person will have “substantial nexus” and be subject to the tax if any of the following apply:
- The person owns or uses a part or all of its capital in this state.
- The person is registered to do business in the State.
- The person has bright-line nexus in the state (see below).
- Any other situation that would create nexus under the U.S. Constitution.
- Bright-line nexus exists if any of the following apply:
- The person owns property with a value of at least $50,000 that is located in the State. Owned property is valued at original cost. Rented property is valued at eight times annual rental cost.
- The person has payroll of at least $50,000. Payroll includes “any amount the person pays for services performed in this state on the person’s behalf by another”.
- The person has commercial activity sourced to the state of at least $750,000.
- The person has at least 25% of the person’s total property, payroll or commercial activity in Oregon.
A taxpayer’s accounting method for the CAT tax shall be the same as for federal income tax.
Commercial activity is sourced to Oregon as follows:
- Sale, rental, lease or license of real property – If the property is located in Oregon.
- Rental, lease or license of personal property – If the property is located in Oregon.
- Sale of tangible personal property – If and to the extent the property is delivered to a purchaser in this state.
- Sale of a service – If and to the extent the service is delivered to a location in this state.
Any person or unitary group with commercial activity in excess of $750,000 in the tax year must register with the ODR or be subject to penalties.
Every taxpayer with commercial activity of greater than $1 million for the year must file a CAT annual return no later than April 15th.
- The ODR can establish extension guidelines.
- The tax itself is payable quarterly on or before the last day of January, April, July and October of each year for the previous quarter.
- Underpayment penalties may be imposed if less than 80% of the balance due for any quarter is paid.
- The tax is computed and reported on a calendar year basis, even for fiscal year taxpayers.
Effective Date: January 1, 2020.