Following several failed attempts by Oregon voters and the Oregon legislature to pass a gross receipts tax (see Not Dead Yet: Oregon Voters Propose Another Gross Receipts Tax in the Wake of Market-Based Sourcing and Oregon Proposes “Gross” New Tax), Governor Kate Brown signed Enrolled House Bill 3427, Oregon’s corporate activity tax (CAT), into law on May 16, 2019.
The CAT goes into effect on January 1, 2020 and, despite its denomination as a “corporate” activity tax, it applies to both corporate and noncorporate business entities, including partnerships, limited liability companies, and sole proprietorships. For corporations that are already subject to the Oregon corporate income or excise tax (the “Excise Tax”), the CAT is an additional tax, not a replacement. This differs from prior gross receipts tax proposals, which sought to implement the gross receipts tax by way of amending Oregon’s minimum tax and subjecting Oregon corporate taxpayers to the higher of the gross receipts tax or the Excise Tax.
The CAT generally subjects businesses with Oregon nexus to a tax of $250 plus 0.57% of their taxable “commercial activity” (a term explored in more detail below) in excess of $1 million. If the business’s taxable commercial activity does not exceed $1 million, the business is not subject to the CAT at all. On the nexus front, along with incorporating traditional physical presence nexus standards, H.B. 3247 provides that a person has substantial nexus with the state for CAT purposes to the extent permitted under the U.S. Constitution, and establishes bright-line factor presence standards of $50,000 of property, $50,000 of payroll, or $750,000 of commercial activity sourced to Oregon. Interestingly, the CAT also contains a self-serving conclusory statement that it is not subject to Public Law 86-272.
H.B. 3247 defines “commercial activity” 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.” See H.B. 3247, Section 58(1)(a). A long list of items (43 in total) are excluded from commercial activity, including interest income (except interest on credit card sales), receipts from the sale of capital assets, dividends, and distributive income from a pass-through entity. Separate definitions of “commercial activity” are provided for financial institutions and insurers. Commercial activity is sourced to Oregon using a market-based method very similar to the one that exists in the Excise Tax context. See H.B. 3247, Section 66; see also Or. Rev. Stat. §§ 314.650; 314.665.
Businesses are permitted to subtract 35% of their “cost inputs” or “labor costs” apportioned to Oregon. “Cost inputs” are defined as costs of goods sold (COGS) under Internal Revenue Code section 471, and “labor costs” mean total compensation of all employees (not including compensation paid to any single employee in excess of $500,000). H.B. 3247, Section 58(4), (13). This subtraction is capped at 95% of the taxpayer’s commercial activity within the state and must be apportioned to Oregon in the manner required under the Excise Tax (i.e., using a single sales factor methodology).
The CAT requires combined filing for businesses that are unitary and have more than 50% direct or indirect common ownership. The 50% ownership threshold for combined filing in the CAT context is markedly less than the 80% common ownership threshold that exists in the Excise Tax. See Or. Rev. Stat. § 317.705. Furthermore, because pass-through entities, which are not taxed under the Excise Tax and thus not directly included in a combined Excise Tax report, are includable in a combined CAT report, groups engaged in a unitary business should carefully evaluate whether their CAT combined group differs from their Excise Tax combined group.
Despite the business community’s staunch objection to this and prior gross receipts tax proposals , in January 2020, Oregon will officially join the list of states that impose a gross receipts-based tax, including its neighbor, Washington (Washington, however, does not impose an additional net income-based tax). Oregon’s CAT bears many similarities to the Ohio CAT, which similarly uses gross revenues as a starting point and then provides a list of exclusions for items that would be considered, under a traditional “UDITPA-type” analysis, to be “non-business” income (such as interest, dividends and capital gains). The Oregon CAT also borrows from the Texas franchise (or margin) tax, in its decision to provide a subtraction for COGS or labor. Critics have debated whether the Ohio CAT has achieved its stated goals of raising revenues, while the Texas franchise tax has been widely viewed as a failure in this regard. Whether Oregon’s CAT will succeed where other gross-receipts-based taxes have failed—or whether it too will merely add complexities without meeting revenue targets—remains to be seen. In the meantime, because the CAT is an additional (rather than a replacement) tax for corporate entities, and a wholly new tax for pass-through and disregarded entities, businesses must move quickly to consider the significant impact the Oregon CAT may have on both their overall tax liability in the state and the complexity of their tax filings.