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July 8, 2020

Oregon Clarifies Corporate Activity Tax, Including Foreign Exclusions

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Oregon is allowing the exclusion of certain foreign entities from tax filing groups in calculating the state's corporate activity tax and clarifying other aspects of the tax under a bill signed by the governor.

Under H.B. 4202, which Democratic Gov. Kate Brown signed Tuesday, unitary groups can exclude affiliated foreign entities with no activity attributable to the state for the purposes of the corporate activity tax. The bill also clarifies how to calculate the tax's 35% subtraction of cost or labor inputs.

The bill, introduced by House Speaker Tina Kotek, D-Portland, passed the House unanimously on Thursday and passed the Senate by a 26-1 vote on Friday.

The bill extends the 80% threshold for quarterly payments, requiring taxpayers to pay at least 80% of their liability each quarter through tax year 2021, and reduces the penalty for underestimated quarterly payments to 5%.

The 0.57% tax on corporate activity, which took effect in January, is imposed on companies with more than $1 million in annual receipts from in-state sales. The tax is expected to raise $7.4 billion over five years, and proceeds are deposited into a newly created Fund for Student Success that is separate from the state's general fund. Brown signed the bill imposing the tax in May 2019.

Exemptions are granted to certain types of businesses under the law, including hospitals and agricultural cooperatives. It also allows businesses to deduct 35% of the greater of their cost of their inputs or cost of employee compensation, except for salaries of more than $500,000.

H.B. 4202 provides a clarification that nonprofit organizations that develop or improve infrastructure for manufactured or mobile home parks are not subject to the tax. The bill also clarifies that registration for the tax is required once instead of annually, stipulates that tax refunds are not commercial activity and attributes returns and allowances to the year when they occur.

The bill contains language from H.B. 4009-A, which was introduced in the state's regular session but died when the session ended prematurely because of a Republican walkout over an environmental bill.

Some of the bill's modifications were requested by agricultural stakeholders, including provisions that would allow farmers to receive a certificate detailing the portion of the product that is exported or apply an industry average to estimate exports of their product, according to a bill summary. The bill also excludes crop insurance payments and certain dairy sales of milk from the tax.

The Council on State Taxation and the Smart Growth Coalition, an organization representing Oregon-based multinational and multistate businesses, had worked with the Oregon House Revenue Committee and Oregon Department of Revenue on a series of corrections to resolve known ambiguities in the law.

Those corrections include clarifying the process for apportioning the statutory subtraction and allowing taxpayers to use their most recent federal fiscal year information when computing the subtraction, according to written testimony in support of the bill the groups submitted June 24.

The bill's clarifications would greatly ease the administrative burdens of the tax for Oregon and the compliance burden for taxpayers, Jeff Newgard, executive director of the Smart Growth Coalition, told Law360. Newgard said the clarifications were time-sensitive and praised the Legislature and governor for acting quickly to enact them.

"Notably, the timing of enactment will provide taxpayers statutory guidance for estimated payments and preparing their annual filings," Newgard said.

Representatives for COST and the Oregon Farm Bureau did not respond to requests for comment.

Brown did not respond to requests for comment.

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