Oregon Passes New Corporate Activity Tax (CAT)
On May 16th Oregon Governor Kate Brown signed House Bill 3427 which imposes a gross receipts tax (Corporate Activity Tax or CAT) on businesses with gross receipts in excess of $1 million, effective for tax years beginning on or after January 1, 2020. The Corporate Activity Tax includes a flat tax of $250 on the first $1 million of “taxable commercial activity” (the calculation of which is discussed below), plus 0.57% of taxable commercial activity over $1 million. This is an additional tax, meaning it does not replace any existing taxes, and covers all industries except for certain “excluded persons” which includes some non-profits, hospitals, and long-term care facilities.
The foremost concern for our clients is, of course, whether or not this new tax applies to their situation. Although the tax is called a “Corporate” Activity Tax, it will be levied upon all partnerships, Corporations, LLC’s, trusts, estates, and sole proprietorships that have both of the following:
Under the CAT, there are many ways for businesses to meet the definition of having substantial nexus with Oregon, and does not require the taxpayer establish a physical presence in Oregon. Businesses are considered to have nexus with Oregon if they have, or meet, one of the following requirements:
1)At least $50 thousand in Oregon payroll or property
2)Oregon commercial activity of $750 thousand
3)At least 25% of their total payroll, property, or sales located within the state
4)Maintain residency or a commercial domicile in Oregon
5)Hold a certificate of existence or authorization to do business in Oregon issued by the Oregon Secretary of State
6)Own or use a part or all of the taxpayer’s capital in Oregon
Taxable Commercial Activity is computed as gross Oregon receipts, minus 35% of either Oregon sourced “cost inputs” or “labor costs” (whichever is greater). According to the bill, “cost inputs” refer to cost of materials in the creation of a good or service, and the cost of purchasing inventory, while “labor costs” refer to the total compensation of all employees except for any single employee making in excess of $500 thousand. Excluded receipts include interest and dividend income (although interest on credit sales would be included), gains from disposition of capital assets, proceeds from stock issuance, contributions to capital, income from passthrough entities, and rebates. Also included in income would be property transferred into Oregon from out of state. Within one year, the value of all property transferred into Oregon for the taxpayer’s own use in the course of trade or business shall be included in the total of taxable commercial activity. However, if the Department of Revenue determines the taxpayer’s receipt of property outside of Oregon was not intended to avoid tax, this addition will not apply.
The CAT is required to be filed annually with required quarterly estimated payments. All businesses with Oregon nexus and at least $750 thousand in commercial activity (not limited to such activity in Oregon) must register with the Department of Revenue (DOR), but will not have a CAT liability until they reach $1 million in Oregon taxable commercial activity. All businesses with an excess of $1 million in commercial activity from all state sources (not limited to such activity in Oregon) will be required to file returns, but will not be subject to the tax.
If you have any questions regarding this new tax and its potential impact, please let us know.
Aaron Lavarias, CPA
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