Oregon Enacts the Corporate Activity Tax, A Gross Receipts Tax on Commercial Activity In Oregon

May 2019

Summary

On May 16, 2019, Oregon enacted H.B. 3427, which will impose a new Oregon corporate activity tax (CAT) on “commercial activity” (defined below) in Oregon.  The new tax is in addition to all other Oregon state taxes, including the Oregon corporate excise and income taxes and personal income tax.  Despite its name, the CAT is not restricted to corporations.  Rather any “person” (defined below) with Oregon commercial activity is subject to the tax, with some exceptions.  The Oregon CAT will be effective for tax years beginning on or after January 1, 2020.     
 

Details

Overview
H.B. 3427 was an Oregon education funding bill, which established the Oregon “Fund for Student Success.” The Oregon CAT was enacted to provide the funding.   
 
The Oregon CAT will be imposed on every person with taxable commercial activity in Oregon at a rate of $250 plus 0.57 percent of the person’s taxable commercial activity that exceeds $1 million.  A person is defined to include not only corporations, but also individuals, partnerships, limited liability companies, trusts, including business trusts, estates, clubs, societies, C corporations, S corporations, qualified subchapter S subsidiaries, and entities that are disregarded for federal income tax purposes.
 
Persons with less than $1 million in taxable commercial activity for the calendar year, tax-exempt organizations, governmental entities, certain hospitals, and certain other entities are exempt from the Oregon CAT.  The Oregon CAT will treat a “unitary group of persons” as a single taxpayer for purposes of the Oregon CAT tax base, tax jurisdiction, apportionment, and the less than $ 1 million taxable commercial activity exemption.
 
When used in the Oregon CAT, the term “Internal Revenue Code” means the Internal Revenue Code as amended and in effect on December 31, 2018.   
 
Jurisdiction to Tax

H.B. 3427 will impose Oregon CAT on any person with “substantial nexus” in Oregon.  First, the new statute asserts that the Oregon CAT is not limited by the protections against imposition of state net income taxes by federal law (P.L. 86-272).  It then defines substantial nexus to include “bright-line presence,” which means a person has either (a) $50,000 in property, (b) $50,000 in payroll, (c) $750,000 of commercial activity sourced to Oregon, or (d) at least 25 percent of the person’s total property, total payroll, or total commercial activity is in Oregon.
 
Tax Base
The Oregon CAT is imposed on a tax base of commercial activity sourced to Oregon, less 35 percent of the greater of the person’s “cost inputs” or “labor costs.”  The term commercial activity means the total amount realized by a person, arising from transactions and activity in the regular course of the person’s trade or business, without trade or business expense deductions.  Cost inputs are defined as costs of goods sold under Internal Revenue Code (IRC) Section 471, and labor costs are defined as total compensation to employees, excluding compensation to any single employee in excess of $500,000.  The deduction for cost inputs or labor costs is apportioned using the corporate income excise and income tax apportionment formula (a single sales factor formula).  
 
The subtraction from the commercial activity base for apportioned cost inputs or labor costs is limited to 95 percent of the person’s commercial activity sourced to Oregon.
 
A person’s method of accounting for commercial activity, cost inputs, and labor costs for the Oregon CAT is the same as the person’s method of accounting for federal income tax purposes.  A federal method of accounting change will also apply for the Oregon CAT. 
 
The legislation specifically states that the Oregon CAT is “not a transactional tax…[it] is imposed on the person receiving the commercial activity and is not a tax imposed directly on a purchaser” (i.e., the Oregon CAT is not a sales/use tax).  However, and oddly, the tax base will also include the value of property that a person transfers into Oregon for the person’s use in a trade or business in Oregon within one year after the person received the property outside of Oregon.   
 
Although the Oregon CAT base is the total amount realized from trade or business activity in or sourced to Oregon, H.B. 3427 then excludes 43 different items from the definition of taxable commercial activity, including: 
  • Dividends received
  • Interest income
  • Distributive share of income from a pass-through entity
  • Receipts from sales to a wholesaler in Oregon, if the person receives certification from the wholesaler at the time of sale that the wholesaler will sell the purchased property outside of Oregon
  • Receipts from transactions among members of an Oregon unitary group of persons.
 
Market-Based Sourcing
For purposes of determining whether a person has substantial nexus by exceeding the $750,000 Oregon commercial activity threshold, or to calculate the Oregon CAT tax base, H.B. 3427 applies market-based sourcing.  The Department of Revenue is granted authority to issue administrative rules for sourcing commercial activity.  Given that the statutory language of H.B. 3427 with respect to market-based sourcing is similar to that adopted for Oregon corporate excise and income tax purposes in 2017 (and cost inputs and labor costs are apportioned using the corporate excise and income tax rules), the department may rely on its administrative rules already issued for the corporate excise and income tax.
 
Unitary Group Reporting
H.B. 3427 treats a unitary group of persons as a single person or taxpayer.  A “taxpayer” is defined to include a unitary group.  In turn, a unitary group is defined as a group of persons with more than 50 percent “common ownership, either direct or indirect,” that is engaged in a “unitary business.”  The term unitary business is generally defined as a business enterprise among persons with a sharing or exchange of value. 
 
As a result, the Oregon CAT tax base will be the total commercial activity or receipts sourced to Oregon, less the $1 million exemption and deductions for 35 percent of cost inputs or labor costs of a unitary group of persons.  The $1 million commercial activity exemption is applied to the unitary group, not per member. 
 
Returns and Registration
Since the Oregon CAT is an annual tax that is first effective for tax years beginning on or after January 1, 2020, the initial Oregon CAT return of a person or unitary group of persons with taxable commercial activity in Oregon will be due on April 15, 2021.  Payments of the Oregon CAT are due and payable on or before the last day of January, April, July, and October of each year for the previous calendar quarter.
 
Any person or unitary group of persons with Oregon commercial activity in excess of $750,000 in a tax year must register with the department.  A penalty may be imposed for failure to register and is imposed not earlier than 30 days after the date on which the Oregon commercial activity exceeds $750,000 for the tax year.
 

BDO Insight

  • The Oregon CAT’s definition of, and taxation of, a unitary group of persons is not limited by the new Oregon statute to a unitary group within the confines of the United States “water’s-edge.”    
  • The Oregon CAT appears to borrow certain aspects of the tax base, sourcing, and nomenclature of the Ohio commercial activity tax and Texas franchise (margin) tax.  
  • Taxpayers affected by the Oregon CAT, as enacted by H.B. 3427, should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures. 

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