By Harriet A. Strothers, CPA
On May 16, 2019, Governor Kate Brown signed the Student Success Act that enacted Oregon's Corporate Activity Tax (CAT) into law. There is a good deal of ambiguity in the new law. We have learned several things from the town hall meetings that the Oregon Department of Revenue (DOR) held over the past two months.
The CAT rate of 0.57% will be applied to the net Oregon commercial activity which is calculated as follows:
Oregon gross receipts delivered to or benefit received in Oregon less:
• the greater of:
- 35% of apportioned cost inputs or
- 35% of apportioned cost of labor
• $1,000,000 annual exemption
The tax applies to all business ventures regardless of the form of the venture. This includes: individuals, combinations of individuals of any form, receivers, assignees, trustees in bankruptcy, firms, companies, joint-stock companies, business trusts, estates, partnerships, limited liability partnerships, limited liability companies, associations, joint ventures, clubs, societies, entities organized as for-profit corporations under ORS chapter 60, C corporations, S corporations, qualified subchapter S subsidiaries, qualified subchapter S trusts, trusts, entities that are disregarded for federal income tax purposes and any other entities.
Registration is required annually for the tax when you reach $750,000 in gross Oregon commercial activity, regardless if tax is owed. For a unitary group, only one member is required to register. Registration is now open on the DOR website.
It is important to note that sales are assigned to Oregon for the CAT based on where the delivery takes place, without any throwback, or where the benefit of the service is received by the customer. Conversely, cost of goods sold and labor are apportioned based on the income tax apportionment which includes throwback sales. The throwback component of apportionment increases the Oregon apportionment factor because sales delivered from Oregon into states where the taxpayer does not have nexus are thrown back (added) to the Oregon numerator.
Unitary groups that are commonly owned (>50%) will file a single return. They will only get one $1 million annual exemption and intercompany transactions among the group will be eliminated. It is likely that the federal attribution rules will apply in determining the common ownership of unitary entities. (Lineal descendants are considered 1 person.)
There is nothing in the law that precludes a taxpayer from passing on the tax to their customer. It is not yet clear what the rules will be with regard to calculating the tax on an invoice.
The DOR released the first set of proposed rules on December 9, 2019. The proposed rules cover a limited number of issues including the following definitions and explanations:
Substantial nexus OAR 150-317-1010 – Substantial nexus for the CAT is established by either physical or economic presence. Earning revenue through sales into the state may establish economic nexus.
Unitary group OAR 150-317-1020 – The draft states: "A unitary business is a single economic enterprise that is made up either of separate parts of a single entity or of a commonly controlled group of entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts." Unity is generally shown by centralized management or a common executive force, centralized administrative services or functions resulting in economies of scale, or the flow of goods, capital resources, or services demonstrating functional integration.
Exclusion for persons operating as an agent OAR 150-317-1100 – A person is an agent if they are acting on behalf of another and are subject to the direction and control of the other. The rule identifies that an escrow and payroll company are acting as an agent. The definition of direction and control is still unclear. An agent can exclude from their commercial activity, the fair market value of property, money, and other amounts received or acquired on behalf of the person who controls the agent.
Property brought into Oregon ORS 150-317-1130 – The CAT is applicable to transactions where property is received outside of Oregon but is brought into Oregon within a year of the purchase for use in a business. This rule is only applicable if the transfer of the property was made outside of Oregon for the purpose of tax avoidance.
Estimated payment requirements ORS 150-317-1300, 1310 & 1320 – Estimated payments must be made if your combined CAT liability is $5,000 or more. Estimates are due beginning in 2020. Payments are due on April 30, July 31, October 31, and January 31. A taxpayer may annualize their income when calculating the required estimated payment due. Tax exempt organizations/persons subject to tax on Unrelated Business Income must also file the CAT return and pay estimates if liability is more than $5,000.
Extension of time to file ORS 150-317-1330 – Initial year returns are due April 15, 2021 and annually thereafter. An extension will be available for six months if a taxpayer can show good cause. For purposes of this rule good cause includes "…information required to complete the return is not available or is not in the proper form."
CPAs and taxpayers will need to properly evaluate their CAT exposure and make sure that they are registered in a timely manner. Stay tuned for the next installment on the CAT as soon as additional rules become available. Additional information will also be available at www.delapcpa.com. As developments unfold this information will be updated on www.orcpa.org. Watch for part two of this article in the April/May 2020 issue of The Accountant.
About the author
Harriet A. Strothers, CPA, is a partner with Delap LLP, Lake Oswego, Oregon. She has over 30 years of experience in providing state and local tax advisory and compliance services to large multistate and multinational companies. Harriet also performs state and local due diligence related to mergers and acquisitions.