On May 16, 2019, Governor Brown signed Oregon’s new gross receipts tax (the “Oregon CAT”) into law. Although modeled on the Ohio commercial activity tax, the Oregon CAT includes a substantial expense deduction. The tax is effective for tax years beginning on or after January 1, 2020, and is in addition to existing business income and excise taxes.
- Tax on “taxable commercial activity.” The Oregon CAT is imposed on “taxable commercial activity,” which is generally defined as a taxpayer’s business gross receipts sourced to Oregon less a subtraction equal to 35 percent of the greater of (a) “cost inputs,” or (b) “labor costs,” apportioned to Oregon.
- Taxpayers. Generally, the Oregon CAT applies to all persons and business entities that have (a) substantial nexus with Oregon, and (b) taxable commercial activity in excess of $1 million per year. Excluded entities include health insurance companies subject to certain other excise taxes, certain hospitals and care facilities, and organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code.
- Tax rate. The Oregon CAT is $250 plus 0.57 percent of taxable commercial activity over $1 million.
- Tax base. The Oregon CAT applies to all taxable commercial activity, other than business receipts that are specifically excluded. The only deduction is the subtraction for 35 percent of apportioned cost inputs or labor costs.
- Exclusions from the tax base. The law includes a list of forty-three types of receipts that are excluded from the tax base. These include: interest income (other than interest on credit sales), gains from the disposition of capital assets, proceeds from the issuance of stock, contributions to capital, dividends, a partner/shareholder’s distributive share of income from a pass-through entity, rebates, receipts from transactions among members of a unitary group, amounts received by an agent on behalf of another in excess of the agent’s remuneration, and revenue required by contract to be distributed to another person or entity as a sales commission (provided the person is not an employee of the business making the distribution).
- Addition for property transferred to Oregon. The law requires a taxpayer include, in its taxable commercial activity, the value of property the taxpayer transfers into Oregon for the taxpayer’s own use in the course of a trade or business, within one year after the taxpayer received the property. It does not apply if the Department of Revenue “ascertains” that the taxpayer’s receipt of the property outside Oregon was not intended to avoid the tax.
- Subtraction for 35 percent of cost inputs or labor costs. To compute its taxable commercial activity, a taxpayer subtracts 35 percent of the greater of apportioned (a) “cost inputs,” or (b) “labor costs.” “Cost inputs” are defined as the cost of goods sold (“COGS”) as calculated under Section 471 of the Internal Revenue Code. “Labor costs” means the total compensation of all employees, but does not include compensation paid to (i) any single employee in excess of $500,000, or (ii) independent contractors. The amount of the subtraction is the Oregon-apportioned share of cost inputs or labor costs, using the apportionment method in Oregon UDITPA for apportioning income.
- Receipt sourcing. Generally, commercial activity (i.e., business receipts) is sourced to Oregon using a market-based sourcing method. A sale of tangible personal property is sourced to Oregon if the property is delivered to a purchaser in Oregon. In the case of a service, the receipt is sourced to Oregon if and to the extent the service is “delivered” in Oregon. In the case of intangible property, the receipt is sourced to Oregon if and to the extent the property is used in Oregon. If receipts are based on the right to use the property, rather than on actual use, the receipts are sourced to Oregon to the extent the receipts are based on the right to use the property in Oregon. Special rules apply to determining the Oregon-source receipts of financial institutions and insurance companies.
- Unitary group. Unitary groups must register and pay the tax as a single taxpayer. The law applies a “more than 50 percent” ownership threshold for a unitary group, rather than the 80 percent threshold used for determining which corporations are included in an Oregon consolidated corporation excise tax return. In addition, unlike the corporation excise tax, the unitary group for the Oregon CAT tax includes non-U.S. entities and non-corporate entities.
- The Oregon CAT is effectively a “commercial activity tax.” Although the law refers to the Oregon CAT as a “corporate activity tax,” the tax applies to all businesses (other than those specifically exempt) with taxable commercial activity over $1 million, including partnerships, LLCs, and sole proprietorships.
- Return and registration requirements. Only businesses with “taxable commercial activity” in excess of $1 million are required to pay the Oregon CAT. However, businesses with “commercial activity” (i.e., total business receipts in and outside of Oregon) in excess of $1 million are generally required to file returns, and those with “commercial activity” in excess of $750,000 are generally required to register with the Department of Revenue.
- Economic nexus. The law includes detailed economic nexus provisions for the application of the Oregon CAT, which are intended to reach all income that Oregon is constitutionally permitted to tax.