Oregon enacts gross-receipts based “corporate activity tax”

Effective January 1, 2020, a new state-level tax called the “Corporate Activity Tax” (“Oregon CAT”) takes effect as a result of legislation enacted in 2019 H.B. 3427 and H.B. 2164). 

The Oregon CAT, which is imposed in addition to the state’s historical corporate net income tax and gross receipts-based minimum tax, is a form of gross receipts tax that combines elements of Ohio’s Commercial Activity Tax and Texas’ Revised Franchise (Gross Margin) Tax.

Even though Oregon law describes this new tax as a “corporate” activity tax, the tax applies to any “person,” which is broadly defined to include both C and S corporations, trusts, estates, joint ventures, individuals and any legal entity that is considered a “disregarded entity” for U.S. federal income tax purposes, and “any other entities.” Returns are filed under a unitary combined reporting method.

For businesses subject to the Oregon CAT, their liability equals $250.00 plus 0.57% of their “taxable commercial activity,” defined as Oregon-sourced gross receipts less a subtraction of 35% of the greater of “labor costs” or “cost inputs” apportioned to Oregon. Businesses do not owe any Oregon CAT liability unless their “taxable commercial activity” for the tax year exceeds $750,000.[1]

Nexus rules

The Oregon CAT is imposed upon persons who have “substantial nexus” with Oregon, defined as persons who:

• Own or use all or part of their capital in Oregon,
• Are formed under Oregon law,
• Hold a certificate of authorization to do business issued by the Oregon Secretary of State,
• Have “bright line presence” in Oregon, defined as having any one of the following for any calendar year:
  • At least $50,000 in Oregon property
  • At least $50,000 of Oregon payroll
  • At least $750,000 of Oregon-sourced commercial activity
  • At least 25% of its total property, payroll, or commercial activity in Oregon,
• Otherwise has nexus in Oregon under the U.S. Constitution, or
• Is an Oregon resident or is domiciled in Oregon for corporate, commercial or other business purposes.

Businesses with substantial nexus in Oregon are required to register for the Oregon CAT within 30 days of meeting the $750,000 Oregon-sourced commercial activity threshold, or a penalty of $100 per month may be applied, up to $1,000 per calendar year.

Exempt industries

The Oregon CAT applies to businesses in all industries unless they are considered an “excluded person,” defined to include the following:

• Nonprofit organizations (unless they have unrelated business taxable income under the Internal Revenue Code)

• Farmers’ cooperatives that are exempt from federal income taxation
• Federal, state and local government entities (e.g., public school districts)
• Hospitals, long-term care facilities and other entities subject to Oregon’s health insurance premium and managed care assessment or Oregon’s hospital and long-term care facility assessment

Note: Because H.B. 3427’s definition of “person” does not appear to be limited to domestic entities, and because its definition of “excluded persons” does not refer to foreign entities, foreign-formed legal entities (including those disregarded for U.S. federal income tax purposes) may be treated as taxpayers under the Oregon CAT.

Exempt receipts

Even though only a handful of business types are exempt from the Oregon CAT, many receipt types are excluded from the definition of “commercial activity” (and are thus not taxable), including the following:

• Receipts from the sale of motor vehicle fuel
• Receipts from the wholesale and retail sales of groceries
• Sales of items or services that are delivered outside of Oregon
• Receipts from a farmer’s sales to an agricultural cooperative described in Section 1381 of the Internal Revenue Code
• Property, money or other amounts received by an agent on behalf of another in excess of the agent’s fee or commission
• Intercompany receipts from transactions between members of the same unitary group
• Distributive income received from a pass-through entity
• Interest income, except when received by financial institutions

Sourcing rules

The term “commercial activity” means all amounts realized by any person from transactions and activity in the regular course of their trade or business, without deduction for expenses.  “Commercial activity” becomes “taxable commercial activity” if it is sourced to Oregon under the following rules: 

• Real property: The sale, rental, lease or license of realty is sourced to Oregon to the extent that it is located in Oregon.

• Tangible personal property: The rental, lease or license of tangible personal property (TPP) is sourced to Oregon to the extent the property is located in Oregon. The sale of TPP is sourced to Oregon to the extent the property is delivered to a purchaser in Oregon.
• Services: The sale of a service is sourced to Oregon to the extent that the service is “delivered to a location” in Oregon.
• Intangible property: The sale, rental, lease or license of intangible property is sourced to Oregon to the extent the property is used in Oregon.

Note: The sourcing rules for the Oregon CAT and the Oregon corporate income/excise tax are created by different statutes. Even though this means that the sourcing rules under each tax are not necessarily the same, draft regulations issued by the Oregon Department of Revenue (the “Department”) on December 20, 2019, indicates that the Department treats these rules as roughly equivalent, including their so-called “market sourcing” rules for service revenue.[2]

However, one major difference between these two sets of sourcing rules is that while Oregon uses a “throwback” rule for sourcing sales of TPP under the corporate income/excise tax,[3] the Oregon CAT does not appear to use a “throwback” rule for sourcing commercial activity from TPP.[4] The Department has been made aware of this difference during calls with practitioners.

Apportioning deductions

After determining their taxable corporate activity (Oregon-sourced gross receipts), taxpayers claim a deduction for the greater of 35% of the following items:

• Cost inputs, defined as cost of goods sold as calculated in arriving at taxable income under the Internal Revenue Code,[5] apportioned to Oregon under the corporate income/excise tax rules; or
• Labor costs, defined as the total compensation of all employees, excluding compensation exceeding $500,000 for any single employee, apportioned to Oregon under the corporate income/excise tax rules.

These apportioned deductions may not offset more than 95% of any taxpayer’s taxable commercial activity (Oregon-sourced gross receipts).

Note: Even though taxpayers’ “commercial activity” (i.e., gross receipts) are apportioned using a special set of rules that do not include a throwback rule, taxpayers’ “cost inputs” and “labor” costs are apportioned using the corporate income tax rules, which do include a throwback rule.

Unitary combined filing

Under the Oregon CAT, a group of persons with more than 50% common ownership, either direct or indirect, must file a combined report if they are part of the same unitary business. 

Note: This standard appears to differ from the unitary combined reporting approach used under Oregon’s corporate income/excise tax in several ways. 

First, while the common ownership threshold for inclusion in a unitary combined report is 80% under the corporate income/excise tax, the Oregon CAT uses a common ownership threshold of anything more than 50%. 

In addition, even though the Oregon corporate income tax prohibits the inclusion of unitary foreign (non-U.S.) corporations in a unitary combined report (through its exclusion of affiliates that cannot be included in a federal consolidated return), the Oregon CAT does not appear to exclude foreign-formed entities from taxation. As a result, the Oregon CAT appears to mandate worldwide unitary combined reporting, without offering any kind of “water’s edge” filing election.

Reporting

All taxpayers under the Oregon CAT are required to use a calendar tax year, even if they use a fiscal year for federal income tax purposes. They are required to use the same method of accounting that they use for federal income tax purposes.

Oregon CAT returns are due annually on April 15, and the first returns will be due on April 15, 2021.  Oregon will grant an extension of up to six months, and the extension form and instructions are forthcoming.

Taxpayers who expect to owe more than $5,000 in Oregon CAT liability for a calendar year are required to make quarterly estimated payments, which are due on April 30, July 31, October 31, and January 31 for the preceding quarter. 

Insurance companies and financial institutions

“Financial institutions” and “insurers” are subject to a wide variety of special rules under the Oregon CAT, including the types of commercial activity/receipts that they must report and the sourcing rules that they must use for those receipts.