Editor: Alex J. Brosseau, CPA
In an effort to raise substantial funds for public education, Oregon enacted a corporate activity tax (CAT) in 2019 (H.B. 3427). The Oregon CAT is a separate tax and may be imposed regardless of any Oregon income or excise tax; a taxpayer may be subject to both Oregon income tax and CAT. The CAT is effective for tax years beginning on or after Jan. 1, 2020 (H.B. 3427, §79). This discussion explores a few considerations for taxpayers potentially subject to CAT.
Overview
On May 16, 2019, H.B. 3427 was signed into law. In addition to the CAT, H.B. 3427 also contains a variety of education provisions, and the Oregon CAT is designed to raise approximately $1 billion in new annual revenue to fund state investments in education (see Or. Legislative Revenue Office, "Revenue Impact of Proposed Legislation, H.B. 3427-A" (April 29, 2019)). Subsequently, H.B. 2164, passed on July 23, 2019, implemented certain clarifications and technical corrections.
The CAT is imposed on persons who have taxable commercial activity exceeding the threshold and substantial nexus with Oregon. To determine the applicable tax, a person must first calculate its Oregon-source commercial activity and then the allowed deduction (based on certain costs); the net amount is the taxpayer's taxable commercial activity. Any taxpayer whose commercial activity exceeds $750,000 and who has nexus with Oregon must register with the Oregon Department of Revenue (DOR); however, no tax is due until a taxpayer exceeds the threshold of $1 million of taxable commercial activity (H.B. 3427, §65(2)).
CAT is imposed at 0.57% of taxable commercial activity in excess of $1 million, plus a flat tax of $250 (H.B. 3427, §65(1)). The tax is imposed on the person with the taxable commercial activity (i.e., the seller) (H.B. 2164, §52, amending H.B. 3427, §63).
Taxable commercial activity
CAT is imposed on gross receipts sourced to Oregon (net the applicable deduction), referred to as taxable commercial activity. Taxable commercial activity is defined as the "total amount realized" by the taxpayer arising from transactions and activity in the regular course of the taxpayer's trade or business that are sourced to Oregon (net the applicable deduction) (H.B. 3427, §§58(1)(a) and (17)). Oregon excludes numerous specific items from the definition of commercial activity, including but not limited to, receipts from the sale, exchange, or other disposition of "1221 assets" and "1231 assets"; certain interest income; contributions to capital; sales of motor fuel; dividends received; and distributive income received from a passthrough entity. The full list of exclusions is found in H.B. 3427, Section 58(1)(b) (as modified by H.B. 2164).
While the CAT refers to "sourcing" of taxable commercial activity rather than the apportionment of commercial activity, the CAT's sourcing provisions closely resemble Oregon's apportionment concepts, with certain differences. For example, purchases of tangible personal property (TPP) will be deemed in the state for CAT purposes if the property is delivered to a purchaser in Oregon (H.B. 3427, §66(1)). While this methodology is similar to apportionment provisions, Oregon has a "throwback rule" for income tax purposes, which requires certain sales of TPP originating from Oregon that are not taxable in the purchaser's state to be included in the Oregon sales factor (Or. Rev. Stat. §314.665(2)(b)). Receipts from the sale of a service, if and to the extent the service is delivered in Oregon, will be sourced to Oregon (id.). If the sourcing provisions do not fairly represent the commercial activity attributable to Oregon, then the taxpayer may request, or the DOR may require, an alternative method (H.B. 3427, §66(2), as amended by H.B. 2164, §54).
Subtraction from gross receipts
A taxpayer subject to CAT is allowed a subtraction of 35% of the greater of the taxpayer's annual cost input or labor costs against Oregon-source commercial activity (i.e., base of the tax) (H.B. 3427, §64(1)). Cost inputs are defined as "the cost of goods sold as calculated . . . in arriving at federal taxable income under the Internal Revenue Code" (H.B. 3427, §58(2), as amended by H.B. 2164, §50), while labor costs are defined as the "total compensation of all employees, not to include compensation paid to any single employee in excess of $500,000" (H.B. 3427, §58(12), as amended by H.B. 2164, §50).
The subtraction must be apportioned to Oregon "in the manner required for apportionment of income under [Oregon Revised Statutes Sections] 314.605 to 314.675" (Oregon's corporate excise tax apportionment provisions, currently modeled on a single sales factor methodology) (H.B. 3427, §64(2)). In addition, the subtraction from commercial activity cannot exceed 95% of the taxpayer's commercial activity in Oregon (H.B. 3427, §64(4), as amended by H.B. 2164, §53).
Both H.B. 3427 and H.B. 2164 specify that any commercial activity does not include intercompany transactions (H.B. 3427, §58(1)(b)(FF), as amended by H.B. 2164, §50). Further, H.B. 2164 clarified that the subtraction is not allowed for expenses related to intercompany transactions between members of a unitary group or for cost inputs or labor costs attributable to a person's receipts that are not commercial activity (H.B. 3427, §64(3), as amended by H.B. 2164, §53).
Definition of taxpayer
A taxpayer for CAT purposes is broadly defined as any person or unitary group required to register, file, or pay the tax and may include:
- Corporations (both C and S corporations);
- Partnerships;
- Limited liability companies (LLCs), including entities treated as disregarded for U.S. income tax purposes;
- Trusts and estates;
- Individuals and combinations of individuals "in any form"; and
- Various other types of entities such as associations, joint ventures, clubs, and societies (H.B. 3427, §58(14), as amended by H.B. 2164, §50).
Certain types of persons are specifically exempt from CAT, including organizations described in specific subsections of Internal Revenue Code (IRC) Sec. 501; governmental entities; state 529 plans; and certain hospitals, long-term health care facilities, and health insurance organizations (H.B. 3427, §§58(4) and (17)(b), as amended by H.B. 2164, §50). However, tax-exempt entities may be subject to CAT if they have unrelated business income that is taxable under the IRC (H.B. 3427, §58(17)(b), as amended by H.B. 2164, §50). Further, taxpayers with $750,000 or less in commercial activity are statutorily excluded and not subject to the CAT (H.B. 3427, §58(4)(j), as amended by H.B. 2164, §50).
For these purposes, 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 (H.B. 3427, §58(19), as amended by H.B. 2164, §50). A unitary business may include a variety of persons (e.g., partnerships, individuals, corporations) as a unitary group and is not limited to corporations. For CAT, a unitary group will be treated as a single taxpayer with its members jointly and severally liable for the tax (H.B. 3427, §62).
Nexus
The CAT legislation provides a number of activities that may create nexus for the purposes of the tax. A physical presence in Oregon is not required to establish nexus. The CAT nexus tests include:
- Owning or using a part or all of the taxpayer's capital in Oregon;
- Holding a certificate of existence or authorization to do business in Oregon issued by the Oregon secretary of state;
- Having "bright-line presence" in Oregon (generally defined as $50,000 of in-state property or payroll or $750,000 of commercial activity in Oregon or 25% of total payroll, property, or sales in Oregon for the year); or
- Otherwise establishing nexus with Oregon "to an extent that the person can be required to remit" CAT under the U.S. Constitution (H.B. 3427, §63(2)).
Given that these tests are connected with an "or," any one of these tests is sufficient to create nexus. For example, a taxpayer that does not meet the $750,000 threshold of Oregon-source commercial activity may still have nexus with Oregon if the taxpayer does anything sufficient to create nexus under the U.S. Constitution.
Filing and payment obligations
Any person or unitary group with commercial activity (not limited to that activity in Oregon) exceeding $750,000 must register with the DOR within 30 days of meeting the threshold or face potential penalties of $100 per month not to exceed $1,000 per calendar year (H.B. 3427, §§68(1) and (3); DOR Frequently Asked Questions (FAQs) (Dec. 6, 2019), available at www.oregon.gov). The CAT is a calendar-year tax regardless of a taxpayer's income tax filing period (such as a fiscal year); thus, an Oregon CAT return is due on a calendar-year basis no later than April 15 of the following year (see FAQs; see alsoH.B. 3427, §70(1)).
Further, taxpayers subject to CAT are required to make quarterly estimated tax payments (H.B. 3427, §70(2), as amended by H.B. 2164, §56). For tax year 2020, taxpayers must pay at least 80% of the anticipated tax for any quarter, or the DOR may impose penalties (H.B. 3427, §77(2), citing Or. Rev. Stat. §314.400(3); §78).
Next steps
There are still many questions about this new tax, as well as the manner of reporting, which will require one or more new forms. The next session of the Oregon Legislature was scheduled to run from Feb. 3 through March 8, which is a fairly compressed period of legislating time. It was widely expected that bills regarding the CAT would be submitted for consideration then.
In addition, the DOR has taken several steps to provide guidance on the CAT, including seeking input from various stakeholders on the tax and publicly releasing a summary of these meetings (Or. Dep't of Rev., "Summary of Corporate Activity Tax Stakeholder Input Tour Discussion Topics" (Dec. 6, 2019), available at www.oregon.gov). Further, the DOR has released unofficial administrative guidance in the form of FAQs and established a registration system for CAT (visit www.oregon.gov).
The DOR recently released 12 temporary administrative rules. These temporary rules cover such topics as definitions, estimated taxes, substantial nexus, unitary group determinations, sourcing, and a six-month extension of the filing of a CAT return (Or. Admin. R. 150-317-1000, 1010-1040, 1100, 1130, 1200, and 1300-1330, available at www.oregon.gov). The recently released temporary administrative rules went into effect Jan. 1, 2020, with a comment period. It is unknown whether other temporary rules, if issued, would also be effective Jan. 1, 2020.
Taxpayers potentially subject to CAT should be aware of these recent developments and anticipate that the DOR or the legislature will provide additional guidance (either new legislation or administrative guidance, such as administrative rules or nonbinding FAQs or similar guidance) for the upcoming year on this new tax. Although the tax rate is less than 1%, taxpayers with significant activities in Oregon could face a substantial CAT liability and, thus, may need to evaluate the tax's impact over the course of 2020.
EditorNotes
Alex J. Brosseau, CPA, is a senior manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax office.
For additional information about these items, contact Mr. Brosseau at 202-661-4532 or abrosseau@deloitte.com.
Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP.
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