Oregon Corporate Activity Tax
Governor Brown signed into law the “Oregon Corporate Activity Tax” effective for tax years beginning on or after January 1, 2020. The new tax is far reaching and applies to an abundance of trades and businesses regardless of whether organized as an LLC, corporation, S corporation, sole proprietorship, trust, or the like. Passage of the bill in both the house and senate followed a contentious battle, not unlike the current cap and trade bill fiasco which has made national news.
To be clear, this tax is in addition to any corporate minimum tax or income tax due by any entity or person. The bill does provide a .25% reduction in the personal income tax rates applicable to all tax brackets other than the top bracket of 9.9% which remains unchanged.
There are many details about how the tax will be imposed and how the various provisions will be interpreted, which cannot be fully understood until the state issues administrative rules. We’ve listed below what we consider to be the most salient provisions in the bill.
- The tax is equal to $250 plus .57% of a business’ “taxable commercial activity” in excess of $1 million.
- Taxable commercial activity means commercial gross receipts sourced to Oregon (not necessarily the same as apportioned income for income tax purposes) less a subtraction equal to 35% of the greater of:
- The taxpayer’s cost of goods sold calculated in accordance with section 471 of the Internal Revenue Code – i.e. inventoriable costs; or
- The taxpayer’s labor costs, limited to $500,000 per single employee.
- There are 43 specific items which are not included in “commercial activity”. Here are some of the most notable in our opinion:
- Interest income except interest on credit sales;
- Receipts from the sale, exchange, or disposition of an asset used in a trade or business or a capital asset;
- Sales of motor vehicle fuel or other product used for the propulsion of motor vehicles;
- Receipts from transactions among members of a unitary group (see below for definition);
- Dividends received;
- Distributive income received from a pass-through entity;
- Receipts from sales to an Oregon wholesaler if the seller receives certification from the wholesaler that the property will be sold outside of Oregon;
- Rebates paid to purchasers by retailers or wholesalers;
- Receipts from the wholesale or retail sale of groceries; and
- Many more.
- Certain “persons” are excluded from the tax altogether including most exempt organizations, long-term care facilities, and certain hospitals.
- In the case of a “unitary group”, the tax applies to the group and not to each individual taxpayer included in that group. This has the effect of denying multiple $1 million subtractions. A unitary group is defined as a group of businesses with more than 50% common ownership, direct or indirect, that is engaged in a unitary business. A unitary business is defined, generally, as a business enterprise in which the members share centralized management or administrative services, or which are integrated vertically or horizontally.
- The required tax return is due every April 15th and quarterly estimates of the tax are payable on or before the last day of January, April, July, and October.
- The bill includes an unusual provision which includes as taxable commercial activity the value of tangible property purchased outside the state and transferred into the state within one year, unless the Department of Revenue is satisfied that the transaction was not intended to avoid the tax.
The law as written leaves numerous questions unanswered but the general idea is clear. You might want to think about building this additional cost into bids for work and/or future pricing schedules. A full copy of the bill can be found at https://olis.leg.state.or.us/liz/2019R1/Downloads/MeasureDocument/HB3427/A-Engrossed. The Corporate Activity Tax begins on page 34. We’ll give you an update as soon as the administrative rules are issued. In the meantime, let us know if we can answer any of your questions.