We have studied the Oregon HB 3437 which defines the Oregon Corporate Activity Tax going into effect on January 1, 2020. Our goal is to share information that you must know about this tax as we learn and understand how it will be implemented. This new tax affects all businesses with Oregon sourced revenue exceeding $1 million and is paid by the business/seller and not directly by the consumer/purchaser. This new Corporate Activity Tax (CAT) was voted in to raise money for Oregon schools.
Despite being called a corporate activity tax, the new gross receipts tax applies to all forms of business, including C and S corporations, Schedule C individuals, joint ventures, partnerships, trusts, estates, and limited liability companies. Because the seller/business pays the tax rather than the purchaser, you must decide if or how you will pass through this cost to your customers starting in January.
Businesses with nexus in Oregon are subject to a tax of $250 plus 0.57 percent of their “taxable commercial activity” (defined as their Oregon-sourced gross receipts), less a subtraction for 35 percent of the greater of their “cost inputs” or “labor costs” apportioned to Oregon. Businesses are exempt from the CAT (including the $250) on their first $1 million of taxable commercial activity. Tax returns must be filed annually, with quarterly estimated payments required.
The first annual filing for the new CAT tax will be April 2021 based on 2020 revenue. Here is what you need to understand about the key timelines:
- You must register with the Oregon Dept of Revenue once your 2020 revenue exceeds $750,000. Penalties can be imposed of $100 per month up to $1,000 annual for not registering.
- When your revenue exceeds $1,000,000 you may need to pay estimated tax payments due on the last day of the month following the quarter end (January, April, July and October)
- You must file an annual tax return(due April after the tax year) to report your annual Oregon sourced revenue over $1,000,000 and compute the related tax.
Gross receipts exemptions
There are special exclusions for many specific industries such as gas and fuel sellers, grocery stores, utilities, telecommunications service providers, heavy equipment providers, vehicle dealers, and agricultural cooperatives.
Some revenue sources are excluded including dividends, interest, and other investment income. Federal and state excise taxes collected on items such as on cigarettes and tobacco products, alcohol, motor vehicles, short term lodging and bicycles are excluded.
The 35 percent subtraction from Oregon-sourced gross receipts applies to the greater of:
- Cost inputs, defined as cost of goods sold under Internal Revenue Code Sec. 471, or
- Labor costs, defined as the total compensation of all employees, excluding compensation exceeding $500,000 for any single employee.
Definition of Oregon Source Income
Receipts from the sale of products are sourced to Oregon “if and to the extent the property is delivered to a purchaser in Oregon. However, an exemption is provided for sales shipped to wholesalers in Oregon “if the seller receives certification at the time of sale that the wholesaler will sell the purchased property outside Oregon. There is no specified form for this certification at this time. Businesses may want to modify their contractual agreements with distributors to make the information available.
In the case of services, receipts will be sourced to Oregon to the extent the service is delivered to a location in the state, which indicates a market-based sourcing approach. In the case of sale, rent or lease of intangible property, receipts are sourced to the state if and to the extent the property is used in Oregon. The receipts shall be sourced to Oregon to the extent the receipts are based on the right to use the property in Oregon.
Will you meet the filing threshold when combining entities with common ownership?
Combined filing is required for businesses that are unitary and have more than 50 percent common ownership, compared to the 80 percent common ownership threshold required for unitary combined filing under the state’s corporate income tax.
A unitary business may include a group of associated companies engaged in the same general line of business, or it may involve steps in a vertically integrated process.
How can we help?
Starting in January 2020 you must have a process to track your Oregon sourced income in order to determine how much of your revenue is subject to the Oregon CAT tax. We recommend adding this to your accounting system now.
Determine what your direct costs consist of including materials, labor and indirect production costs. Review and revamp your chart of accounts if necessary to property track expenses as cost of goods sold.
We can help you determine when and how to register with the Oregon Department of Revenue and compute if estimated tax payments are required.