Oregon Enacts Gross Receipts Tax – Corporate Activity Tax

On May 16, 2019, the Oregon governor signed legislation imposing a gross receipts tax for the privilege of doing business in Oregon, also referred to as corporate activity tax (the “Oregon CAT”), on each person with taxable commercial activity. It joins the state’s personal income tax, corporate net income tax and gross receipts–based minimum tax.

The Oregon CAT looks like the Ohio Commercial Activity Tax and the Texas Margin Tax.

Overview of Oregon CAT

Businesses with nexus in Oregon are subject to a tax of $250 plus 0.57 percent of their “taxable commercial activity” (defined as their Oregon-sourced gross receipts), less a subtraction for 35 percent of the greater of their “cost inputs” or “labor costs” apportioned to Oregon. Businesses are exempt from the Oregon CAT (including the $250) on their first $1 million of taxable commercial activity. Tax returns must be filed annually with quarterly estimated payments required.

Please note that the Oregon CAT is not a transactional tax, as it is imposed on sellers, not purchasers.

Individuals and companies impacted

Even though this new tax is called the “corporate activity tax,” the Oregon CAT applies to individuals, C corporations, S corporations, qualified subchapter S subsidiaries, joint ventures, LLCs, partnerships, trusts, estates, entities disregarded for federal income tax purposes, and other entities.

The Oregon CAT applies to every industry, other than excluded persons such as governmental entities, certain nonprofits, and other entities listed in the law.

Nexus

The Oregon CAT is imposed upon businesses with “substantial nexus” in the state, a term that covers both traditional physical presence nexus criteria (such as employees, agents, or property in the state) and a bright-line presence economic nexus standard.

Under the bright-line economic presence nexus standard, nexus is generated if any one of the following apply to a person or entity at any time during the calendar year:

• Owns property in Oregon with an aggregate value of at least $50,000
• Has payroll in Oregon of at least $50,000
• Has gross receipts, sourced to Oregon, of at least $750,000
• Has within Oregon at least 25 percent of their total property, total payroll or total gross receipts

Businesses with at least $750,000 in Oregon sales are expected to register with the Department of Revenue (DOR), but will not have an Oregon CAT liability until they reach $1 million in Oregon revenues.

Gross Receipts Exemptions

Because there are more than 40 types of excludable gross receipts under the Oregon CAT, you should review the exemptions to see if any such exemptions apply to you. Examples of excludable gross receipts for common industries include:

• Interest income (other than interest on credit sales)
• Dividends
• A partner/shareholder’s distributive share of income from a pass-through entity
• Sales to Oregon wholesalers who certify that the property will be resold outside of Oregon
• Intercompany transactions among members of a unitary group.

There are special exclusions for many specific industries such as gas and fuel sellers, grocery stores, utilities, telecommunications service providers, heavy equipment providers, vehicle dealers and agricultural cooperatives.

Deductions

The 35 percent subtraction from Oregon-sourced gross receipts applies to the greater of:

• Cost inputs, defined as cost of goods sold under Internal Revenue Code Sec. 471

or

• Labor costs, defined as the total compensation of all employees, excluding compensation exceeding $500,000 for any single employee

Sourcing of Revenue

A taxpayer’s gross receipts are sourced using the state’s existing corporate income tax apportionment regime, which uses a “market-based” sourcing method. By contrast, the subtractions for 35 percent of cost inputs or labor costs are apportioned using a new set of rules specific to the Oregon CAT. These rules appear similar to the corporate income tax rules, but there are some differences. The apportioned subtraction cannot exceed 95 percent of a taxpayer’s Oregon-sourced receipts.

Property Transferred to Oregon

Any taxpayer who takes delivery of property outside of Oregon, and within one year brings that property into Oregon for its own business use, must report the value of that property as an Oregon-sourced receipt subject to the Oregon CAT. The definition of property likely covers items such as machinery, equipment and inventory. This special rule does not apply if the Department of Revenue determines the taxpayer’s receipt of the property outside Oregon was not intended to avoid payment of the tax.

Unitary Filing

Combined filing is required when there is common ownership greater than 50 percent.

Effective Date

The CAT is effective for tax years beginning on or after January 1, 2020.

Concerned About Compliance?

Weaver’s State and Local Tax Services professionals can help you navigate the impact of Oregon’s CAT. If you would like more information about how it may apply to you or your business, contact us or see the latest state tax news on our blog.