State & Local Tax Alert: Oregon Enacts the Corporate Activity Tax
The Oregon governor signed H.B. 3427 into law on May 16, 2019 that imposes a Corporate Activity Tax (CAT) on a taxpayer’s modified gross receipts. The tax is 0.57% of the Oregon sourced taxable commercial activity that exceeds $1 million, plus a flat fee of $250.
Taxpayers whose commercial activities do not exceed $1 million are exempt. The bill defines commercial activity as “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.” There are several specific activities that the bill excludes from this definition. Financial institutions and insurers also have different requirements than other taxpayers.
How CAT Sourcing Works
Sourcing commercial activity to Oregon is performed in a similar manner as for income tax purposes, where real and tangible property are sourced according to location or place of delivery and services are sourced using market-based concepts. A taxpayer is allowed to subtract from commercial activity sourced to Oregon 35% of the greater of either:
- Apportioned cost of goods sold, or
- Apportioned labor costs (not to include the compensation of any single person exceeding $500,000).
The subtraction cannot exceed 95% of the taxpayer’s Oregon commercial activity.
Who is Affected?
Although there are exempt entities, the CAT tax will affect a large variety of taxpayers. The CAT taxes a “person,” which is broadly defined to include C corporations, S corporations, partnerships, trusts, LLCs, disregarded entities, trusts, individuals, unitary groups, and any other entity. The bill does not limit a “person” to solely domestic U.S. entities; foreign corporations and foreign disregarded entities should look to see if they are subject to the CAT.
Unitary groups are required to register, file and pay the CAT as a single taxpayer. Oregon defines a Unitary Group differently for CAT purposes than for corporate excise and income tax purposes. Therefore, the entities included in the CAT return may differ from the entities included in the corporate excise tax return.
In order to be subject to the CAT, a person must have substantial nexus in Oregon. Physical presence is not required and the exemption under Public Law 86-272 is not applicable. Nexus is triggered in a variety of ways including the following:
- 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 authorizing the person to do business in Oregon
- Owns at any time during the calendar year property of at least $50,000 (valued at original cost and rented property is valued at eight times the net annual rental charge)
- Has payroll of at least $50,000 in Oregon
- Has commercial activity sourced to Oregon of at least $750,000
- Has at least 25% of the person’s total property , total payroll, or total commercial activity within Oregon
- Is a resident or is domiciled in Oregon
All taxpayers will report on a calendar year basis.
Starting April 2020 quarterly payments will be required and due on the last day of April, July, October, and January for the previous quarter. Annual returns will be due April 15th each year starting April 15, 2021.
The Oregon Corporate Activity Tax is a new additional tax reporting obligation that is separate from the Oregon Corporate Excise Tax.
Potential Future Developments
Oregon voters still have the opportunity to reject this new legislative bill. If a referendum is allowed, the bill will be included on the ballet of the November 2020 election for approval.
For more information, contact Geoff Christian or Christina Braswell in the CBIZ National State & Local Tax Practice.
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