Ready or Not, Here it Comes: Oregon’s New Corporate Activity Tax Remains a Work in Progress Even as It’s Set to Take Effect in 2020

In 2019, Oregon enacted the Corporate Activity Tax (CAT), which applies to a broad range of taxpayers. With the new levy set to take effect on January 1, 2020, it is important to understand applicable filing and registration thresholds. Additionally, some key aspects of the CAT such as estimated filing due dates differ from Oregon’s corporate income and excise taxes. Some key aspects of the CAT, such as sourcing, are evolving and are likely to be the subject of administrative guidance issued sometime in the future.

House Bill 3427 (H.B. 3427), signed into law on May 16, 2019, established Oregon’s new gross receipts tax, the Corporate Activity Tax (CAT). The CAT, effective for tax years beginning on or after January 1, 2020, is imposed for the privilege of doing business in the state and applies in addition to the Oregon income and excise taxes. House Bill 2164 (H.B. 2164), enacted two months later on July 23, 2019, provides technical corrections and clarifications to the original CAT bill.

Overview

The CAT applies to a broad range of persons, including individuals, corporations, S corporations, partnerships, limited liability companies, estates, and trusts. A person is subject to the CAT if the person has taxable commercial activity and substantial nexus with the state.

Commercial activity is defined as “the total amount realized by a person, arising from transactions and activity in the regular course of the person’s trade or business, without deduction for expenses incurred by the trade or business.” The term taxable commercial activity means commercial activity sourced to Oregon, less the allowable cost subtraction.

A registration requirement is met when the taxable entity has commercial activity in excess of $750,000 for a calendar year. The tax rate for the CAT is equal to $250 plus 0.57% of the taxpayer’s taxable commercial activity in excess of $1 million. The applicable thresholds for the CAT are as follows:      

A taxpayer’s method of accounting for CAT purposes will be the same as the taxpayer’s method of accounting for federal income tax purposes. If a taxpayer elects to make an accounting method change at the federal level, the taxpayer’s method of accounting for the CAT will change accordingly.

The provisions implementing the new tax in H.B. 3427 and H.B. 2164 raise several issues. Notable distinctions exist between the legislation and guidance provided by the Oregon Department of Revenue and the Oregon income and excise taxes.

Economic Presence Nexus

The CAT is imposed on persons, which includes individuals, corporations, S corporations, partnerships, limited liability companies, estates, and trusts, having substantial nexus with Oregon. A person generally has substantial nexus with Oregon if the person owns or uses a part or all of its capital in the state; holds a certificate of existence or authorization to do business issued by the Secretary of State; or has bright-line presence in the state. Bright-line presence is established if the person has $50,000 of payroll or property in the state; $750,000 of commercial activity sourced to the state; 25% of total property, payroll, or commercial activity in the state; or the person is a resident of or domiciled in Oregon. This could result in a taxpayer having a CAT registration and filing requirement, even though the taxpayer does not have physical presence for Oregon excise tax purposes.

Foreign sellers without a U.S. permanent establishment are not explicitly exempt from the CAT. As such, a foreign person with U.S. inbound sales may have nexus for purposes of the CAT regardless of whether it is subject to U.S. or Oregon income/excise tax.

Subtraction from Commercial Activity

Taxpayers are allowed a deduction from commercial activity equal to 35% of the greater of the taxpayer’s annual cost inputs or labor costs apportioned to Oregon. The subtraction cannot exceed 95% of the taxpayer’s commercial activity sourced to Oregon and a subtraction is not allowed for any amount of expenses from transactions among groups members. When apportioning the amount of cost inputs and labor costs for a taxpayer’s cost subtraction, taxpayers are instructed to apportion these amounts using Oregon’s corporate and excise tax apportionment rules.

The term cost inputs means the cost of goods sold as calculated in arriving at federal taxable income under the Internal Revenue Code. 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. Because the CAT is not subject to fiscal year reporting, these items must be reported on a calendar-year basis which may depart from a taxpayer’s reporting period for federal income tax purposes. This can present difficulties for fiscal-year taxpayers that do not maintain cost-of-goods sold in accordance with federal tax law on a calendar year basis.

Unitary Filing

For purposes of the CAT, a unitary group must register, file and pay taxes as a single taxpayer, although gross receipts from transactions among members may be excluded. The term unitary group means a group of persons with more than 50% direct or indirect common ownership that is engaged in a business activity that constitutes a unitary business.

A business is considered unitary if a sharing or exchange of value exists, directly or indirectly, between the members or parts of the enterprise, as demonstrated by:

• Centralized management or a common executive force;
• Centralized administrative services or functions resulting in economies of scales; or
• Flow of goods, capital resources or services demonstrating functional integration.

A unitary business may include a business enterprise with activities that are in the same general line of business or constitute steps in a vertically integrated process.

Unlike a unitary group for the CAT, a unitary group is generally required to file a combined report for purposes of Oregon’s corporate income and excise taxes only if a federal consolidated return is filed for the group. Furthermore, under the corporate income and excise tax regimes, corporations must be a part of a commonly controlled group to be considered a unitary business. A commonly controlled group generally consists of corporations whose voting stock is owned at least 80% directly or constructively by common ownership. As a result, taxpayers may find their filing groups differ between the CAT and corporate excise and income taxes.

Sourcing

H.B. 3427 and H.B. 2164 provide the following guidance for sourcing commercial activity:

• Real property – The sale, rental, lease, or license of real property is sourced to Oregon to the extent the property is located in Oregon.
• Tangible personal property – The rental, lease, or license of tangible personal property is sourced to Oregon to the extent the property is located in Oregon.
• Tangible personal property sales – The sale of tangible personal property is sourced to Oregon to the extent the property is delivered to a purchaser in Oregon.
• Services – The sale of a service is sourced to Oregon to the extent the service is delivered to a location in Oregon.
• Intangible property – The sale, rental, lease, or license of intangible property generally is sourced to Oregon to the extent the property is used in Oregon.

While the CAT sourcing rules, outlined above, appear to follow a market-based sourcing approach and generally align with the apportionment rules for the corporate income tax, the CAT sourcing rules are currently limited to high-level instruction and do not include the level of detailed guidance that is provided in the corporate income tax apportionment rules. The Oregon Department of Revenue has unofficially acknowledged that this is an evolving area and will continue to develop the sourcing rules moving forward.

Estimated Payments and Applicable Periods

Taxpayers subject to the CAT are required to file an annual return on a calendar-year basis. Additionally, certain taxpayers are required to make estimated payments. Specifically, a taxpayer expecting more than $5,000 of CAT liability for the calendar year, which corresponds with taxable commercial activity equal to $1,833,245, must make estimated payments. The due dates for the CAT annual return and the estimated payments, contrasted with the due dates for the income and excise taxes, are as follows:

ASC 740 Treatment

While Oregon does not deem the CAT to be an income tax, it appears to qualify as an income tax under ASC 740. This is because revenues are reduced by expenses in order to calculate the tax. Even though the tax is not applicable for tax years beginning before January 1, 2020, taxpayers should begin considering the impact of the CAT on their deferred tax calculation as of the enactment date. As noted above, the CAT requires the same accounting methods to be used for CAT and federal income tax purposes. Therefore, if a taxpayer has a temporary difference for deferred revenue that is expected to be sourced to Oregon in the future, the taxpayer should consider whether a deferred tax asset or liability should be recorded.

The Takeaway

Oregon is still in the development phase for the rules that will govern the CAT. The state continues to hold interested party meetings to understand some of the challenges that taxpayers will face with compliance with the new tax. Andersen will continue to monitor these proceedings and provide updates as they are released.