Oregon’s Corporate Activity Tax Bill Signed into Law

On May 16, 2019, Oregon Governor Kate Brown signed House Bill 3427 (H.B. 3427) into law. In addition to codifying the state’s education initiatives and decreasing personal income tax rates, H.B. 3427 establishes a new tax regime based on commercial activity. The Corporate Activity Tax (CAT) is Oregon’s first gross receipts tax imposed on the privilege of conducting business in the state on persons with substantial nexus with Oregon. The CAT introduces new tax concepts for the state and operates in addition to the income tax. The new tax applies to tax years beginning on or after January 1, 2020 and the legislature projects the tax to generate an additional $1.6 billion in revenues for 2019–2020.

While nominally a tax on corporate activity, the CAT applies to a range of persons, including individuals, partnerships, trusts, limited liability companies, C corporations, S corporations, and entities disregarded for federal income tax purposes.

Bright-Line Nexus Standard

A person is considered to have substantial nexus with Oregon for purposes of the CAT if the person 1) owns or uses a part or all of its capital in the state; 2) is authorized to do business in the state; 3) has bright-line presence in the state; or 4) otherwise has nexus with the state to an extent that the person can be required to remit the tax under the U.S. Constitution.

A person has bright-line presence in Oregon if the person has 1) $50,000 in payroll or property, 2) $750,000 in commercial activity, or 3) 25% of its total payroll, property, or commercial activity within Oregon. A person also has bright-line presence in the state if the person is a resident of Oregon or is domiciled in the state for corporate, commercial, or other business purposes.

Allowable Subtraction

The CAT bases tax on taxable commercial activity—commercial activity is sourced to Oregon less an allowable subtraction. Under the provided subtraction, a taxpayer is allowed to subtract from commercial activity sourced to Oregon 35% of the greater of 1) the amount of cost inputs paid or incurred by the taxpayer in the tax year or 2) the amount of labor costs paid or incurred by the taxpayer in the tax year, as apportioned to Oregon.

The subtraction may not exceed 95% of the taxpayer’s commercial activity in the state. A person must also generally include as taxable commercial activity the value of property the person transfers into the state for the person’s own use in the course of a trade or business within one year after the person receives the property outside the state.

Excluded Items

H.B. 3427 excludes certain items from the definition of commercial activity, including, but not limited to, interest income (except interest on credit sales), contributions to capital, dividends received, and receipts from transactions among members of a unitary group. The tax for each calendar year will be $250 plus 0.57% of taxable commercial activity in excess of $1 million. Taxpayers whose taxable commercial activity does not exceed $1 million for the calendar year are exempt from the CAT.

Sourcing Rules

For commercial activity other than commercial activity of financial institutions or insurers, H.B. 3427 implements sourcing rules based on the nature of the commercial activity. Under these sourcing rules, sales of tangible personal property are sourced to Oregon if and to the extent the property is delivered to a purchaser in the state. In the case of the sale, rental, lease, or license of real property or the rental, lease, or license of tangible personal property, receipts are sourced to Oregon if and to the extent the property is located in the state. The sale, rental, lease, or license of intangible property is generally sourced to the state if and to the extent the property is used in the state. Sales of services are sourced to Oregon if and to the extent the service is delivered to a location in the state.

Combined Reporting

A unitary group must register, file, and pay the tax as a single taxpayer. A group of persons with more than 50% common ownership, either directly or indirectly, that is engaged in business activities that constitute a unitary business will meet the definition of a unitary group for purposes of the CAT.

Any person or unitary group with commercial activity in excess of $750,000 in the tax year must register with the Oregon Department of Revenue. Every person doing business in Oregon with commercial activity for the tax year in excess of $1 million is required to file an annual return. However, certain persons are specifically exempt from the requirement to register, file, or pay the CAT.

The Takeaway

Oregon’s new CAT represents a drastic departure from the state’s income tax and features many particular nuances. Furthermore, the state explicitly intends the CAT to avoid interstate retail protections afforded by P.L. 86-272. As such, companies making sales into Oregon should evaluate their corporate activity and nexus in the state to determine future obligations.

If you have any questions, please contact your Andersen Advisor.