Oregon Enacts Corporate Activity Tax (Gross Receipts Tax)
On May 16, 2019, Oregon Governor Kate Brown 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 is required to be remitted quarterly to the Oregon Department of Revenue.
The new tax is in addition to any other taxes or fees imposed under the tax laws of the state. The bill also provides for a reduction of income tax rates for certain Oregon individual taxpayers.
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, sole proprietors, partnerships, C corporations, S corporations, estates, and trusts.
- 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 inputs or labor costs.
- These costs are to be apportioned to Oregon in the manner required for appointment of Oregon income.
- Cost of inputs is the cost of goods sold calculated.
- Cost of labor means total compensation of all employees, but does not include compensation paid to any single employee in excess of $500,000.
- There are additional specific exclusions for general contractors.
The subtraction cannot exceed 95% of the taxpayer’s Oregon commercial activity.
The legislation lists 43 categories of income specifically excluded from the definition of commercial activity and therefore not taxable receipts, including:
- Interest and dividend income, unless received by financial institutions
- Intercompany transactions between members of a unitary group
- Receipts from the sale of business assets defined in Sec. 1231 and sec. 1221
- Certain receipts for services provided to Medicare recipients
- Current and deferred compensation received by current and former employees for services rendered to an employer
- Wholesale or retail sale of groceries, except for edible cannabis products or marijuana seeds
- Restaurant tips and local taxes collected on sales of meals, prepared food and beverages
Any taxpayer with commercial activity in excess of $750,000 during the year is subject to the CAT and must file an annual return by April 15 of the following year (first annual filing is for calendar year 2020, and due April 15, 2021).
Estimated tax payments will be required and payable on the last day of the month following each quarter (April, July, October, and January) for the previous calendar quarter. The first estimated tax payment is due April 30, 2020.
The new law was introduced with Oregon House Bill 3427, which also provided a lowered tax bracket 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 already issued the first round of technical corrections on July 23, 2019. 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. According to the Oregon Department of Revenue’s website, it will begin writing rules in the coming months for the new CAT program.
Given the impact and a quickly approaching effective date of January 1, 2020, it is important to begin planning for the economic impact. There are key planning considerations and analysis recommended in preparing for the new tax. We recommend that you contact your Jones & Roth team to discuss your specific situation to begin planning and understand the impact the CAT will have on your business.