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State & Local Tax Update: Oregon Adds Corporate Activity Tax to Tax Regime

Posted 7:30 PM by

Oregon Gov. Kate Brown recently signed H.B. 3427 into law, imposing a new gross receipts tax effective for tax years beginning on or after Jan. 1, 2020. This new Corporate Activity Tax (CAT) is imposed on any “person” with commercial activity occurring in the state, is in addition to all other Oregon taxes, and is not limited by the protections against imposition of state net income taxes by federal law (P.L. 86-272).

A person is broadly defined to include corporations, pass-through entities, entities disregarded for federal tax purposes, and individuals doing business in the state. Like other states that have imposed gross receipts type taxes, Oregon’s new CAT is imposed on more than corporate taxpayers. Additionally, a unitary group files as a single taxpayer. “Unitary group” is defined to include persons with more than 50% ownership, direct or indirect. This unitary group can include various types of legal entities.

A person is subject to the tax if they have substantial nexus with Oregon. “Substantial nexus” is defined to mean the person meets any of the following requirements:

  • Owns or uses their capital in the state
  • Is authorized to do business by the Oregon Secretary of State
  • Has bright-line presence in the state
  • Is a resident or domiciled in the state

“Bright-line presence” means the person meets any of the following requirements:

  • Has owned or rented property in Oregon with a value of at least $50,000
  • Has payroll in Oregon of at least $50,000
  • Has $750,000 of sales sourced to Oregon during the calendar year (H.B. 3427 applies market-based sourcing rules for sourcing sales other than tangible personal property)

Bright-line presence can also be achieved if 25% of the person’s property, payroll, or commercial activity is in Oregon.

The Oregon CAT operates like a modified gross receipts tax because it offers taxpayers a deduction from its Oregon sourced gross receipts of 35% of the greater of its annual cost inputs or labor inputs, limited to 95% of total activity. “Cost inputs” are defined as cost of goods sold under Internal Revenue Code (IRC) Section 471, and “labor costs” are defined as total compensation to employees, excluding compensation to any single employee in excess of $500,000. The rules for sourcing commercial activity to Oregon are very similar to market-based sourcing rules that apply for corporate income tax purposes. Allowable deductions must also be apportioned in the manner required for corporate income tax purposes.

In addition, H.B. 3427 outlines 43 types of excludible gross receipts from taxable commercial activity. Examples include interest and dividend income, income from sales of IRC 1221 and 1231 property, distributive income from a pass-through entity, wholesale sales by seller with wholesale certificate certifying the property will be sold outside of Oregon, and intercompany transactions among members of a unitary group. Taxable commercial activity can also include property purchased by a taxpayer which is delivered outside of Oregon and brought into the state within one year of purchase.

A taxpayer who has greater than $750,000 of commercial activity in the state is required to register with the Oregon Department of Revenue. However, the tax is only imposed on taxpayers with greater than $1 million of taxable commercial activity. The tax is $250 plus 0.57% of taxable commercial activity exceeding $1 million. The CAT return is due by April 15 following the close of the calendar year, though payment of tax is due quarterly throughout the calendar year.

For more information on how this new tax impacts your business, please contact your KSM Advisor.

About the Author
Stephen Royster is a partner in Katz, Sapper & Miller’s State and Local Tax Group. Stephen helps clients navigate the multistate tax landscape by advising them on tax law changes in every state, ensuring they are efficiently structured, and ultimately protecting their bottom line. Connect with him on LinkedIn.

 

About the Author
Amy Zimmer is a director in Katz, Sapper & Miller's State and Local Tax Group. Amy advocates for clients in the multistate tax arena, protecting their assets by resolving complex compliance issues and negotiating settlements with taxing jurisdictions. Connect with her on LinkedIn.

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