The 2019 Oregon legislature created a joint committee specifically to identify new revenue sources to support K-12 education. Recently, the committee issued a draft bill that would impose a gross receipts tax on most businesses with Oregon gross receipts in excess of $1 million.
The proposed tax is based on the Ohio commercial activity tax but includes some significant differences. The tax would be in addition to existing business income and excise taxes rather than replacing them. There would also be significant deductions allowed in computing the tax. The current version of the bill, HB 3427-15, is expected to undergo significant revisions before it is voted on. However, the legislation has a significant chance of becoming law in some form.
1. Tax on “taxable commercial activity.” The tax would be imposed on “taxable commercial activity,” which is generally defined as a taxpayer’s business gross receipts sourced to Oregon less a subtraction equal to 25% of the greater of (a) “cost inputs” or (b) “labor costs,” apportioned to Oregon.
2. Taxpayers. Generally, all persons and business entities that have (a) substantial nexus with Oregon, and (b) taxable commercial activity in excess of $1 million per year, would be subject to the tax. Excluded entities include organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code and certain hospitals and care facilities.
3. Tax rate. The tax would be $250 plus 0.49% of taxable commercial activity over $1 million.
4. Tax base. The tax would apply to all taxable commercial activity, other than business receipts that are specifically excluded. The only deduction would be a subtraction for 25% of apportioned cost inputs or labor costs.
Receipts that are excluded from the tax base 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, and receipts from transactions among members of a unitary group. Special rules apply to certain industries, including financial institutions, insurers, telecommunications, and vehicle dealers.
5. Addition for property transferred to Oregon. The bill 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. This provision was taken from the Ohio commercial activity tax. It does not apply if the Department of Revenue determines the taxpayer’s receipt of the property outside Oregon was not intended to avoid the tax.
6. Subtraction for 25% of Cost Inputs or Labor Costs. In determining its taxable commercial activity, the bill provides that a taxpayer shall subtract 25% of the greater of the taxpayer’s apportioned (a) “cost inputs,” or (b) “labor costs.” “Labor costs” means the total compensation of all employees, but does not include compensation paid to any single employee in excess of $500,000. “Cost inputs” generally are defined as the cost of materials incurred in creating a good or service and the cost of purchasing items held for inventory. 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.
7. Receipt sourcing. Generally, commercial activity (i.e., business receipts) is sourced to Oregon using a market-based sourcing method. In the case of the sale 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.
8. Unitary group. Unitary groups must register and pay the tax as a single taxpayer. As currently drafted, the bill applies a 50% ownership threshold for a unitary group, rather than the 80% 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 this tax includes non-U.S. entities.
9. Tax is effectively a “commercial activity tax.” Although the bill refers to the tax as a “corporate activity tax,” the tax would apply to all businesses (other than those specifically exempt) with taxable commercial activity over $1 million, including partnerships, LLCs, and sole proprietorships.
10. Return and registration requirements. Although only businesses with “taxable commercial activity” in excess of $1 million would be required to pay the tax, businesses with “commercial activity” (i.e., total business receipts in and outside of Oregon) in excess of $1 million would generally be required to file returns, and those with “commercial activity” in excess of $750,000 would generally be required to register with the Department.
11. Economic nexus. The Oregon Supreme Court has long held that Oregon income taxes are intended to reach all income that Oregon is constitutionally permitted to tax. This bill includes detailed economic nexus provisions for the application of the corporate activity tax.