A new Corporate Activity Tax (CAT) for the privilege of doing business in the state was enacted in Oregon this week as a plan to fund education. Unlike Ohio’s CAT, this additional tax burden is imposed on individuals, partnerships, limited liability corporations, associations, estates, S corporations, and disregarded entities as well as traditional C corporations, with substantial nexus with Oregon. This tax is imposed in addition to the corporate income/franchise tax and the individual income tax already imposed by the state.
The new CAT defines substantial nexus to include a “bright-line presence” test of having one or more of the following in the state during the calendar year:
- $50,000 of property;
- $50,000 of payroll;
- $750,000 of commercial activity; or
- At least 25% of the person’s total property, total payroll, or total commercial activity.
The tax is imposed at the rate of $250 plus .57% of the taxpayer’s taxable commercial activity that exceeds $1 million. A subtraction from the gross commercial activity sourced to Oregon is allowed for 35% of the greater of the following: 1) the amount of cost of inputs, or 2) the taxpayer’s labor costs. For this purpose, cost of inputs is calculated according to Internal Revenue Code (IRC) section 471, which relates to the general rules of inventory valuations. Labor costs are defined as all compensation paid to an employee that does not exceed $500,000.
A unitary group is required to file the CAT as a single taxpayer, excluding intercompany transactions. For sales of services and intangibles, market-based sourcing is used, with the use of alternative apportionment allowed.
Although there are separate definitions of “commercial activity” for financial institutions and insurers, the general definition is “the total amount realized by a person, arising from transactions and activity in the regular course of the person’s trade or business, without deduction for expenses incurred by the trade or business.” There are more than 40 exclusions from this definition, including interest, dividends, pass-through distributions, receipts from sales of capital assets, and receipts acquired by an agent on behalf of another.
The use of gross receipts as a base, while allowing deductions for cost of goods sold or payroll, indicates that this activity tax works like a hybrid Texas Margin Tax/Ohio CAT in regard to the calculation of the taxable base. This new tax is effective for tax years beginning on or after January 1, 2020.
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