Oregon is one of the five states that does not have a state sales tax, but it is now adding a Corporate Activity Tax to make up for that lost state income. With the goal of raising approximately $1 billion in new annual revenue, the new tax will paint a broad stroke on more than just corporations. The Bill House Bill 3427, signed by Oregon Governor Kate Brown on May 16, 2019, establishes the new tax. The tax will be assessed on a calendar-year basis beginning in 2020, with the first returns due April 15, 2021. Quarterly estimated payments, however, will be required beginning April 2020. Even though it is named “corporate” activity tax, the CAT will apply to corporations, partnerships, LLCs, S Corps, and the business activity of individuals, estates, and trusts alike. The tax filing will be imposed on a unitary basis.
Since this is not an “income tax,” it has its own nexus rules and does not have protection from Public Law 86-272. A person (individuals, pass-through entities, and C Corps) has nexus for Oregon CAT purposes if it has any of the following during the calendar year: Property in Oregon with a value of at least $50,000; Payroll in Oregon of at least $50,000; Commercial activity sourced to Oregon of at least $750,000, or; At least 25% of total property, payroll, or commercial activity in Oregon at any time. Companies authorized to do business in the state by the secretary of state, companies domiciled and persons residing in Oregon also have nexus and will be required to file the CAT. There is no exemption for foreign sellers without a U.S. permanent establishment.
Fortunately, companies with a limited amount of commercial activity in Oregon should not need to worry about paying the CAT. The tax is only assessed on companies with over $1 million of gross receipts sourced to Oregon. If over the $1 million threshold, the tax is $250 plus 0.57% of the Oregon receipts. A deduction is allowed in the amount of 35% of the greater of cost of goods sold or employee compensation. These cost amounts should be apportioned to Oregon, and employee compensation cannot include compensation paid to any single employee in excess of $500,000. The deduction may not exceed 95% of the taxpayer’s commercial activity.
Note that an exemption is provided for sales to wholesalers in Oregon if the seller receives certification that the wholesaler will sell that property outside of Oregon. However, the CAT does not allow for a manufacturing exemption.
Calculation of Oregon CAT
Gross receipts sourced to OR $5,000,000 (a)
35% of the greater of:
Employee. Comp. $50,000,000
Total Deduction $28,000,000
Oregon Apportionment 5%
Deduction apportioned to OR $1,400,000 (b)
Confirm deduction doesn’t exceed
95% of commercial activity $4,750,000
Total commercial activity $3,600,000 (a-b)
Over $1 million $(1,000,000)
Tax Base $2,600,000
Tax at $250 + 0.57% $15,070
The Oregon CAT is a new tax assessed to all sorts of businesses and business activities. It is believed that the CAT will be passed onto buyers indirectly through higher prices. This may be a conversation business will want to have internally and with buyers, as it is a new tax to consider. While this blog covers a high-level overview of the new tax, the CAT contains numerous other items not addressed. For businesses and individuals that have commercial activity in Oregon, it is important to have a strong understanding of the new tax before estimates and returns come due.
Consult with a Henry+Horne tax advisor that has experience handling state commercial activity taxes to make sure your business stays compliant.