Oregon enacted legislation:
- creating a Corporate Activity Tax (CAT) on certain gross receipts; and
- reducing the personal income tax rates for the lowest three brackets.
Oregon will impose the CAT beginning in 2020.
Impact of the Corporate Activity Tax
The legislation is expected to impact 40,000 businesses, out of the state’s 460,000.
The CAT was adopted as part of an education funding bill. CAT revenue will be:
- deposited into the new Fund for Student Success;
- used to offset the cost of the reduced personal income tax rates; and
- be distributed through existing school funding mechanisms.
The CAT, after the personal income tax rate cut, is expected to generate an additional:
- $1.175 billion in 2019-21;
- $2.111 billion in 2021-23; and
- $2.306 billion in 2023-25.
Similar State Taxes
The Oregon Corporate Activity Tax has similarities to the:
The Oregon CAT and Ohio CAT have similar:
- nexus standards and sourcing;
- persons subject to or excluded from tax; and
- bases of tax.
However, the Ohio CAT does not have a subtraction from commercial activity for the amount of cost inputs or taxpayer’s labor costs like the Oregon CAT. This Oregon CAT subtraction is like the Texas Franchise Tax subtraction for cost of goods sold or compensation.
Corporate Activity Tax
The CAT rate is $250 plus 0.57% on taxable commercial activity above $1 million.
Oregon will impose the CAT on each person with taxable commercial activity for the privilege of doing business in Oregon.
Persons subject to tax include:
- LLPs and LLCs;
- C corporation and S corporations;
- federal disregarded entities; and
- many other entities.
Commercial activity is the total amount realized by a person from transactions and activity in the regular course of the person’s trade or business. There are specific commercial activity definitions for:
- financial institutions; and
Corporate Activity Tax Nexus
The CAT is imposed on persons with substantial nexus with Oregon. The tax is imposed on the person receiving the commercial activity and is not imposed directly on a purchaser.
A taxpayer has substantial nexus with Oregon if they:
- own or use a part or all its capital in Oregon;
- hold a certificate of existence or authorization issued by Oregon authorizing the person to do business in Oregon;
- have bright-line presence in Oregon; and
- otherwise have nexus with Oregon to an extent that Oregon can require a taxpayer to remit the Corporate Activity Tax under the United States Constitution.
The bill includes a list of 43 items that are exempt. Among those are:
- interest income;
- dividends received;
- contributions to capital;
- tobacco, marijuana, and alcohol receipts;
- receipts from the wholesale or retail sale of groceries;
- motor vehicle fuel; and
- certain medical services.
Proposed Additional Exemptions
Two bills have already been introduced to expand on these exemptions.
The bills would add an exemption for:
Among the listed basic necessities are:
- diapers, wipes, and baby products;
- feminine hygiene products;
- over the counter medication and contraceptives;
- certain medical goods;
- oral health products; and
- toilet paper.
The proposed agricultural exemption would apply to receipts from:
- agriculture, floriculture, horticulture, and viticulture;
- vegetable and fruit products; livestock and meats;
- poultry and eggs;
- fluid milk;
- bees and honey; or
- any products that have their situs of production on the farm.
Subtraction from Commercial Activity
A taxpayer can subtract from their commercial activity 35% of the greater of the:
- amount of cost inputs; or
- taxpayer’s labor costs.
The subtraction cannot exceed 95% of the taxpayer’s commercial activity in Oregon.
By Andrew Soubel, J.D.