Oregon Enacts Corporate Activity Tax (Gross Receipts Tax), Lowers Personal Income Tax Rates
Oregon Governor Kate Brown has signed legislation that imposes a corporate activity tax (CAT) on each person with taxable commercial activity for the privilege of doing business in Oregon, applicable for tax years beginning on or after January 1, 2020. The tax will equal a $250 minimum tax, plus 0.57% of the taxpayer’s taxable commercial activity in excess of $1 million for the calendar year. The tax will is required to be remitted quarterly to the Oregon Department of Revenue.
The tax is in addition to any other taxes or fees imposed under the tax laws of the state. The bill also reduced personal income tax rates for tax years beginning on or after January 1, 2020.
Here are a few additional details:
• The tax rate is equal to $250 plus the product of the taxpayer’s taxable commercial activity in excess of $1 million for the calendar year multiplied by 0.57%.
• Persons subject to the tax include, but are not limited to, individuals, partnerships, C corporations, S corporations, and estates.
• The new tax is not considered transactional, so it is not subject to the rules of Public Law 86-272, which allows income tax exemption for sales of tangible personal property in certain circumstances.
• The term “commercial activity” means amounts realized by a person from the transactions of a trade or business.
• Taxpayers are allowed to subtract from the commercial activity sourced to the state 35% of the greater of cost of goods sold or labor costs. Both will be apportioned amounts, similar to requirements for apportionment of income for income tax purposes. The subtraction cannot exceed 95% of the taxpayer’s Oregon commercial activity.
Any taxpayer with commercial activity in excess of $750,000 during the year must register with the Oregon Department of Revenue. Further, every individual doing business in Oregon with commercial activity in excess of $1 million must file an annual return by April 15 of the following year (first filing year being 2020, and the initial return being due April 15, 2021). Estimated tax payments will be required and payable on the last day of January, April, July, and October for the previous calendar quarter.
This new law was introduced with Oregon House Bill 3427, which lowered tax rates for Oregon personal income taxes. Personal income tax rates, on average, dropped 0.25% across income tax brackets below $125,000 on Oregon sourced income.
As with any major new tax bill, we expect some bumps along the way. The legislature is already considering technical corrections and another bill is expected to be passed in the near future. In addition, as we wait for specific guidance from Oregon Department of Revenue on the rules and regulations for the new tax, there are still many unknown parameters with the new law.
Given the impact and a quickly approaching effective date of January 1, 2020, it is important to be discussing now to begin planning for the economic impact.