New Business Tax
Oregon's Corporate Activity Tax
On September 29, 2019, Oregon House Bill 3427 (the “Student Success Act”) became law after being enacted by the legislature and signed by the governor in the spring. The legislation represents a landmark investment in public education, infusing roughly $1 billion into Oregon schools each year, and the creation of a new state tax imposed on businesses. The funding component to the investment package was a business tax called the Corporate Activity Tax (CAT).
The CAT is a low rate, broad-based modified gross receipts tax levied on any business with annual commercial activity (generally defined as in-state sales, minus exclusions) exceeding $1 million and is in addition to any other business tax owed to the state. Despite its name being the corporate activity tax, the tax is imposed on virtually all forms of businesses (e.g., c-corporations, s-corporations, partnerships, and sole proprietors) in any industry.
Taxpayers engaged in a trade or business in Oregon with commercial activity sourced to the state are subject to a tax of $250 plus 0.57 percent of their commercial activity exceeding $1 million less a statutory subtraction of 35 percent of either their cost inputs (defined as the cost of goods sold for federal income taxes) or labor expenses for most employees.
Filing, Registration & Tax Year
The tax is imposed on a calendar-year basis. This means taxpayers filing their federal income tax returns on a fiscal year basis need to maintain books and records for the calendar year. The Oregon Department of Revenue is using its existing “Revenue Online” portal for registering and filing the tax. Businesses with commercial activity exceeding $750,000 are required to register for the tax but are not required to file until their activity exceeds the $1 million threshold.
Tax Year & Accounting Method
Taxpayers should use the same accounting method (cash or accrual) as used for federal income taxes.
Groups of taxpayers, corporations, or partnerships are required to register as a combined group. The group for the CAT may differ from the state income tax unitary group. This is because the law includes a common ownership percentage that is lower (more than 50 percent) than the state income tax (more than 80 percent). Sales within the filing group are exempt from the tax.
The law combines traditional physical presence and economic factor presence nexus standards in its definition of “substantial nexus.” According to the law, any taxpayer who owns or uses the property in the state, holds a business license, or has “bright-line nexus” in the state has established nexus and is subject to the tax. The bright-line nexus is established by having at least 25 percent of their total payroll, property or sales in Oregon, $50,000 in Oregon payroll or property, or $750,000 in Oregon sales.
Sales are generally sourced to Oregon using income tax rules. Sales of tangible property are sourced to Oregon if the property is delivered to a location in Oregon. Sales of intangible property sold, rented, leased, or licensed to an Oregon location are sourced to the state to the extent the property is used. Taxpayers may also request an alternative sourcing method.
There are 47 exemptions from taxable commercial activity included in the law, including:
- Governmental entities
- Intercompany transactions
- 501(c)(3) tax-exempt organization
- Entities subject to Medicaid managed care taxes
- Wholesale or retail sales of groceries
- Sales of motor fuel
- Property, money and other amounts received by an agent in excess of a commission
- Distributive income of a pass-through business
- Damages received as the result of litigation
- Select fees and excise taxes
Taxation of Property (Use Tax)
Any property transferred to Oregon within one year of purchase needs to be included in the commercial activity tax base. However, the property is not included in the tax base if the taxpayer can show or if the state can ascertain the transfer was not intended to avoid the tax.
State Preemption of Gross Receipts Taxes
The law preempts local governments from imposing a tax measured by commercial activity but provides immunity for taxes already operative. This exemption allows the Portland Clean Energy Surcharge and the prepared food tax charged by Ashland and Yachats to survive the preemption.
Grace Period for Penalties
The Oregon Department of Revenue is prohibited from imposing any interest or penalty for underpayment or underreporting for the first year under the tax.
Administrative Rules & Regulations
The Oregon Department of Revenue released several temporary administrative orders on January 1, February 1, and March 1 to advise taxpayers and tax preparers on the regulatory rules for the new tax. The department will begin a permanent rulemaking process for the tax on April 1 and will begin implementing those rules in the summer.
You can view the temporary administrative rules here.
Disclaimer: The information provided on this website is solely for general information purposes and is not intended and shall not be used as legal, accounting or tax advice.