The Oregon Corporate Activity Tax (CAT) will go into effect January 1, 2020 and affects all businesses with Oregon sourced revenue exceeding $1 million. The tax is directly paid by the business and is calculated with information your business may not have needed to track in the past. We have identified several planning points which help you to not only correctly calculate the amount due but potentially reduce the total tax you need to pay.
Planning Point #1: Classify your sales
If you have sales outside of Oregon those amounts are excluded from the tax calculation. It is very important to use class codes in your accounting software to identify out of state sales which are not subject to the tax.
Planning Point #2: Review how you compute cost of goods sold
Cost of goods sold are direct costs of acquiring and/or manufacturing your product. Costs can include the cost of materials, direct labor, distribution costs and sales force salaries. Your company will be able to take a 35 percent subtraction from Oregon sourced gross receipts for the greater of cost of goods sold or your total labor costs. Accurately classifying your cost of good sold leads to a larger subtraction and less tax to pay for non-service industry companies.
Planning Point #3: When will your gross sales exceed $750,000
Oregon Department of Revenue requires you to register for the CAT tax when your gross sales exceed $750,000. Severe penalties can be applied if you do not register in a timely manner. This is your total gross sales whether in Oregon or outside.
Example #1: You own a business with $1,500,000 in gross Oregon sales but your margins are very low and your costs of good sold are $1,300,000. Your salaries are $100,000 to all employees and your net income for the year shows only $5,000 after all your other costs. How much will you need to pay? An estimated $500 in CAT tax for 2020 and you will be required to register immediately once your gross sales exceed $750,000.
Example #2: You own a service industry business with $2,300,000 in gross Oregon sales. Your costs of goods sold are $56,000 and your salaries are $1,000,000 to all employees. How much will you need to pay? An estimated $5,300 in CAT tax for 2020 and you will also be required to register immediately once your gross sales exceed $750,000.
- 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.