Analyzing the new Oregon corporate activity tax

By Brandon Newton, CPA, Kansas City, Mo., and Lisa Becker, CPA, Chicago

Editor: Howard Wagner, CPA

On May 16, 2019, Oregon Gov. Kate Brown signed House Bill 3427, which establishes the new Oregon corporate activity tax (CAT). Quarterly estimated tax payments will be required beginning in April 2020. The CAT is assessed in addition to the state's current corporate income tax. The tax will be assessed on a calendar-year basis beginning on Jan. 1, 2020, with the first returns due April 15, 2021.

The tax appears to be another example of a state "outsourcing the tax base" by placing an increasingly higher relative burden on out-of-state persons and businesses. To offset some of the effect of the new tax on Oregon residents, the bill provides for a reduction of up to 0.25 percentage point for certain Oregon individual income taxpayers (Or. Rev. Stat. §316.037(1)). In this case, Oregon even places a tax burden on businesses without physical presence in the state, while mitigating the effects of the tax on the in-state voting base through the reduction in individual income tax rates.

While its name, "corporate" activity tax, appears to suggest it may only apply to corporations, the tax applies to corporations, partnerships, limited liability companies, S corporations, and the business activity of individuals, estates, and trusts. As the tax is an entity-level tax, individual owners of out-of-state passthrough entities will likely not receive a credit for taxes paid on their home state individual tax return for the CAT.

The new Oregon CAT filing will be imposed on a unitary basis. A "unitary business" is one in which there exists centralized management; centralized administrative services or functions resulting in economies of scale; or flow of goods, capital resources, or services demonstrating functional integration (Or. Stat. L. 2019 §58(19)(a)). A unitary business may include a group of associated companies engaged in the same general line of business, or it may involve steps in a vertically integrated process. The ownership threshold for filing as a unitary group is a group of persons with more than 50% common ownership, either direct or indirect, that is engaged in business activities that constitute a unitary business (Or. Stat. L. 2019 §58(20)). Since the statute refers to "persons" in its discussion of a unitary group, it appears a unitary group includes all entity types: individuals, passthrough entities, and C corporations. Transactions among members of the unitary group are excluded from the CAT.


A person has nexus in a given year for purposes of the CAT if it has any of the following during the calendar year (Or. Stat. L. 2019 §63(3)):

  • Property in Oregon with a value of at least $50,000;
  • Payroll in Oregon of at least $50,000;
  • Commercial activity sourced to Oregon of at least $750,000;
  • At least 25% of the total property, total payroll, or total commercial activity in the state of Oregon at any time.

The statute notes specifically that P.L. 86-272, the Interstate Income Act of 1959, does not exempt taxpayers, as the CAT is a transactional tax (Or. Stat. L. 2019 §63(1)). Additionally, persons that use part or all of their capital in the state, companies that are authorized to do business in the state by Oregon's secretary of state, or companies that are domiciled in the state have nexus for purposes of the CAT (Or. Rev. Stat. L. 2019 §63(2)).

Wholesalers and retailers of tangible personal property should specifically examine their level of activity and sales in Oregon especially because P.L. 86-272 does not provide protection from the CAT. In many cases, a seller of tangible personal property may not have a filing requirement for purposes of income tax in the many states but may be subject to these taxes based on the same level of activity, because they are not income taxes and are not, therefore, protected by P.L. 86-272. For instance, P.L. 86-272 may provide protection from state income taxes for a seller of tangible personal property whose sole activity outside of its home state is the solicitation of its product. But the activity of salespeople in the state of Oregon or even the volume of sales to Oregon customers will likely subject the person to the CAT.

The CAT nexus rules do not include an exemption for foreign sellers without a U.S. "permanent establishment." As such, a foreign company with U.S. inbound sales may have nexus for purposes of the CAT regardless of whether it is subject to U.S. income tax. In recent years, the state of Washington ruled that a German pharmaceutical distributor had economic nexus for purposes of the Washington business and occupation tax based on the royalties it received from its products sold to customers in Washington, despite the fact that it did not have physical presence within the state (In re [Bauer, A.L.J.], Det. No. 15-0251, 35 WTD 230 (Wash. Dep't of Rev., App. Div., 5/31/16)). The CAT nexus rules seem to provide for a similar broad interpretation of nexus rules that does not depend on having a U.S. permanent establishment.


Or. Stat. L. 2019 §58(6) provides an exemption from this tax for certain types of organizations, most notably:

  • Sec. 501(c)(3) tax-exempt organizations;
  • Certain farmers' cooperatives;
  • Governmental entities;
  • Qualified Sec. 529 state tuition programs;
  • Certain hospitals and health care facilities; and
  • Any person with commercial activity that does not exceed $1 million for the calendar year (other than a person that is part of a unitary group with commercial activity in excess of $1 million).

The statutes list a number of types of receipts that are not included in the definition of "commercial activity" and therefore are not taxable receipts, including:

  • Receipts from transactions among members of a unitary group (Or. Stat. L. 2019 §58(1)(b)(BB));
  • Dividends received and distributive income from a passthrough entity (Or. Stat. L. 2019 §§58(1)(b)(W) and (X));
  • Receipts from the sale of business assets defined in Sec. 1231 and Sec. 1221 (Or. Stat. L. 2019 §58(1)(b)(B));
  • Receipts from the wholesale or retail sale of groceries (Or. Stat. L. 2019 §58(1)(b)(AA));
  • Certain receipts for services provided to Medicare recipients (Or. Stat. L. 2019 §58(1)(b)(V)); and
  • Proceeds received attributable to the repayment, maturity, or redemption of the principal of a loan, bond, mutual fund, certificate of deposit, or marketable instrument (Or. Stat. L. 2019 §58(1)(b)(C)).
Tax computation

The CAT is computed as $250 plus 0.57% of Oregon-source commercial activity over $1 million. The tax is computed based on a calendar year beginning Jan. 1, 2020, regardless of a taxpayer's year end for accounting and federal income tax purposes. As discussed earlier, the tax is not owed if the person's taxable commercial activity does not exceed $1 million. The taxpayer can subtract from commercial activity 35% of the greater of the amount of cost inputs or the taxpayer's labor costs (Or. Stat. L. 2019 §64).

Cost inputs are the cost of goods sold as calculated under Sec. 471. "Labor costs" means total compensation of all employees but does not include compensation paid to any single employee in excess of $500,000, using the taxpayer's method of accounting for federal income tax purposes. These cost amounts are to be apportioned to Oregon in the manner required for apportionment of Oregon income under ORS §314.605 to §314.675 (Or. Stat. L. 2019 §64).

Since Oregon's apportionment rules require sales throwback (Or. Rev. Stat. §314.665(2)(b)), which increase Oregon apportionment as a result of sales to states to which the company does not pay income tax, a literal reading of this provision would also increase the amount of deduction apportioned to Oregon for those taxpayers. It remains to be seen what guidance Oregon will provide on this issue. Throwback, however, does not appear to be required for commercial activity sourcing of gross receipts. The total subtraction may not exceed ٩٥٪ of the taxpayer's commercial activity in this state. This limitation will ensure taxpayers with nexus pay at least some CAT, regardless of margins in a given year. (See the table "Calculation of Oregon CAT," below, for an example of how an entity would determine its CAT liability for the year.)

Calculation of Oregon CAT

Receipts from the sale of tangible personal property are sourced to Oregon "if and to the extent the property is delivered to a purchaser in [Oregon]" (Or. Stat. L. 2019 §66(1)(c)). However, an exemption is provided for sales shipped to wholesalers in Oregon "if the seller receives certification at the time of sale . . . that the wholesaler will sell the purchased property outside [Oregon]" (Or. Stat. L. 2019 §58(1)(b)(Y)). There is no specified form for this certification at this time. Businesses may want to modify their contractual agreements with distributors to make the information available.

In the case of services, receipts will be sourced to Oregon to the extent the service is delivered to a location in the state (Or. Stat. L. 2019 §66(1)(d)), which indicates a market-based sourcing approach. In the case of intangible property, receipts are sourced to the state if and to the extent the property is used in Oregon. If the receipts are not based on the amount of use of the property, but rather the right to use the property, the receipts shall be sourced to Oregon to the extent the receipts are based on the right to use the property in Oregon (Or. Stat. L. 2019 §66(1)(e)).

As the Oregon rules define "commercial activity" to mean "activity in the regular course of the person's trade or business" (Or. Rev. Stat. L. 2019 §58(1)(a)), an argument can be made that the sale of a business would be deemed to not constitute commercial activity as it is generally outside the regular course of the taxpayer's trade or business. Regarding the sale of intangible assets, the Oregon Supreme Court affirmed in 2013 in Tektronix, Inc. v. Department of Revenue, 354 Or. 531 (2013), that for purposes of Oregon sales factor apportionment, gross receipts from the sale of intangible assets, including goodwill, are excluded from the sales factor unless the receipts are derived from the taxpayer's primary business activity.

While this relates to corporate income tax, it suggests that the state may favor excluding proceeds from the sale of intangibles from the definition of gross receipts for CAT purposes. However, an argument can be made that receipts from a sale of a business, if the sale is deemed to be in the regular course of the taxpayer's trade or business, would be sourced to Oregon based on the sourcing rules mentioned above. For instance, this may occur in the case of a sale of a business by a private-equity company. The Oregon CAT statutes do not reference Sec. 338(h)(10) or other federal income tax deemed-asset-sale rules. As such, it is anticipated that those sales would be treated as sales of equity for CAT purposes.

Broad applicability

The Oregon CAT will affect companies in a variety of industries, including sellers and renters of most types of tangible personal property, many service providers, and sellers and renters of intangible personal property.

Oregon is one of the few states that do not impose a sales tax. While the CAT has some similarities to a sales tax, there are notable differences. Sales tax remittance is generally the responsibility of the seller, and this is similar to the CAT requirements. However, a sales tax is a transactional tax, and the burden is borne directly by the purchaser at the time of sale. Additionally, most states provide for a manufacturing exemption from sales taxes on the purchase of goods that are incorporated in, used in, or consumed in the manufacturing process. The CAT is not a transaction tax and does not provide for a manufacturing exemption, and it therefore increases the input cost of goods and services. As such, while the cost of the tax will not be directly borne by the buyer the same as a sales tax, it is anticipated that some or all of the burden of the tax will be passed on by the seller to the buyer indirectly through higher prices as a result of higher input costs.

Before adjourning on June 30, the Oregon Legislature made some technical corrections to the CAT (H.B. 2164). Many involved the definition of "commercial activity," including an exclusion of employees' compensation from the definition (Or. Stat. L. 2019 §58(1)(b)(H)). According to the Oregon Department of Revenue's website, it will begin writing rules in the coming months for the new CAT program and will involve stakeholders during the process.


Howard Wagner, CPA, is a partner with Crowe LLP in Louisville, Ky.

For additional information about these items, contact Mr. Wagner at 502-420-4567 or

Unless otherwise noted, contributors are members of or associated with Crowe LLP.

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