New Oregon corporate activity tax in 2020

Keep in mind, this new tax will be in addition to any corporate taxes your business is currently paying and will be based on different receipts than used for state income tax purposes. Oregon’s House Bill (HB) 3427A passed the Senate on May 13, 2019, and was signed by the governor on May 16, 2019. The new law, dubbed the “Student Success Act,” is projected to raise nearly $2 billion per biennium for Oregon schools by imposing a new corporate activity tax (CAT) based on a taxpayer’s Oregon-sourced commercial activity.
 
How is it calculated?
While a taxpayer’s first $1 million of Oregon receipts will be exempt from the tax, all impacted taxpayers will face a $250 minimum tax. And a 0.57% tax will be imposed on taxable commercial activity over $1 million – less a 35% reduction for the greater of the cost of materials or labor. The apportioned subtraction cannot exceed 95% of Oregon receipts. This will be an annual tax with quarterly estimated tax payments imposed on the seller, not the purchaser. It will be based on gross receipts and would be due regardless of a taxpayer’s profitability.
 
Who does it impact?
In spite of being labeled a corporate activity tax, it applies to nearly all forms of business across every industry:

• Partnerships
• LLPs and LLCs – even those disregarded for federal income tax purposes
• C and S corporations
• Sole proprietorships
• Joint ventures
• Trusts
• Estates

 
However, there are exclusions for not-for-profit and government entities, hospitals and residential care facilities, and credit unions.
 
The CAT is imposed upon businesses considered to have “substantial nexus” in Oregon, which includes both traditional physical presence and “bright line presence” economic nexus criteria – the latter meaning at least $50,000 in Oregon payroll or property, $750,000 in Oregon sales, or a minimum of 25% of total payroll, property, or sales in the state.
 
Is all commercial activity taxed?
 
Taxable commercial activity includes services, real property, tangible property, and intangible property sourced to Oregon. However, there are 43 types of income excluded from the CAT, which include:

• Interest income
• Dividends received
• Contributions to capital
• Proceeds from sale of IRC 1221 and 1231 assets
• Proceeds from stock issuances
• Receipts from transactions among members of a unitary group
• A partner/shareholder’s distributive share of income from a pass-through entity

• Sales to Oregon wholesalers who certify that the property will be resold outside of Oregon
• Alcohol, tobacco, and marijuana receipts
• Grocery receipts
• Motor vehicle fuel
• Certain medical services 

 
And exemptions are available for basic necessities and agricultural products.
 
When does it take effect?
The new tax will go into effect for tax years beginning on or after January 1, 2020. Until the Oregon Department of Revenue issues related rules and regulations, the specific application of the law will not be fully known.
 
How can we help you?
We’re here to help you analyze your business activities and determine if they are subject to the new Oregon CAT. Keep in mind, this new tax will be in addition to any corporate taxes your business is currently paying and will be based on different receipts than used for state income tax purposes. There will likely be an economic impact to your business with this new tax and we recommend you schedule a time to sit down with us now so we can look at your gross receipts and costs in relation to the new tax and start planning for your business’ future.