Oregon’s landmark legislation House Bill (HB) 3427A (the “Student Success Act”) was passed by the Senate on May 13, 2019, and signed by the governor on May 16, 2019. The new law is projected to raise nearly $2 billion per biennium. How does the law propose to raise the funds? It imposes a new Corporate Activity Tax, or CAT, based on a taxpayer’s Oregon sourced commercial activity. Oregon joins five other states using a tax based on gross receipts as a state funding mechanism.
Who is Subject to the New Corporate Activity Tax?
Most business industries and every tax structure doing business in Oregon are subject to the Corporate Activity Tax. It does not matter whether your business is taxed as a C Corporation, S Corporation, partnership, trust, or sole proprietor. While hospitals, not-for-profit organizations, and governmental entities are not subject to the tax, most others engaging in activities creating a taxable presence in Oregon by meeting substantial nexus tests that have taxable commercial activity above the threshold are subject to the tax.
What is the CAT?
A tax of 0.57% will be imposed on businesses with taxable commercial activity in excess of $1 million, plus an additional tax of $250.
Is All Commercial Activity Taxed?
No, not all commercial activity is taxed. Only Oregon sourced commercial activity is taxed, and there are specific forms of income excluded from the definition of commercial activity. Some of those exclusions include:
- Interest and dividends (except on credit sales)
- Receipts from the sale or disposition of capital assets subject to IRC §1221 or §1231
- For receipts from the sale of alcohol, marijuana, and tobacco, the excise tax paid on those receipts is excluded
- Receipts from the wholesale or retail sale of groceries
- Receipts to Oregon wholesalers who certify those goods will be sold outside of Oregon
Determining the extent to which your commercial activity is sourced to Oregon depends on the type of receipts your business generates, but generally is as follows:
- For the sale, rental, lease, or license of real property—to the extent the property is located in Oregon
- For the sale of tangible personal property—to the extent product is delivered to a purchaser in Oregon
- For the sale, lease, or rent of licenses and intangibles—to the extent the property, or rights to use the property, are used in Oregon
- For the sales of services—to the extent the services are delivered to a location in Oregon
How is the Corporate Activity Tax Calculated?
The tax is calculated by determining a business’ subject commercial activity less an eligible subtraction to arrive at taxable commercial activity. Taxable commercial activity in excess of $1,000,000 is multiplied by 0.57%. $250 is then added to the resulting amount to arrive at a business’ total corporate activities tax liability.
- Businesses subject to the tax may deduct from their gross receipts either 35% of labor or 35% of cost inputs, whichever is larger.
- Cost inputs are defined as the cost of goods sold calculated in accordance with IRC §471.
- Labor costs are defined as total compensation paid to all employees. Excluded from the total is any compensation paid to any single employee in excess of $500,000.
- Cost inputs and labor are apportioned to Oregon in the same manner they are apportioned for income tax purposes.
- The eligible subtraction cannot exceed 95% of Oregon sourced commercial activity.
When Will I Have to Pay the Tax?
The corporate activities tax will take effect on January 1, 2020. All businesses that generate more than $750,000 of Oregon sourced commercial activity will be required to register and file an annual return by April 15 of the following year. Estimated tax payments will be required and payable on the last day of January, April, July, and October for the previous calendar quarter starting with April 2020.
What Does All of this Mean to Me and My Business?
The corporate activities tax is a new tax and will be in addition to any tax your business is currently paying. If you are currently a pass-through entity paying Oregon’s minimum tax of $150, this tax will be in addition to that tax, not instead of. The same goes for corporate taxpayers paying in any of the various Oregon minimum taxes up to $100,000. This tax is in addition to those corporate taxes your business is already paying.
The nature of the Corporate Activity Tax calculation will require you to analyze your gross receipts and costs in new ways. We recommend that you contact your Perkins & Co team to discuss your specific situation, and to begin planning for the economic impact the CAT will have on your business. If Perkins & Co is not your current service provider, we’d love to have an opportunity to meet you and help answer any questions you have about the new tax. As with all new legislation, we expect there will be bumps along the way. The legislature is already considering technical corrections, with an additional bill expected to pass in the near future. Until the Oregon Department of Revenue issues related rules and regulations, the specific application of the law will not be fully known. We’ll be posting updates as they occur, so remember to check back on our blog to stay up to date.