On May 16, 2019, Oregon Governor Kate Brown signed House Bill 3427 into law enacting the Corporate Activity Tax (CAT). Beginning January 1, 2020, a tax is imposed on each person with taxable commercial activity for the privilege of doing business in Oregon. The tax rate is 0.57% of taxable commercial activity over $1 million plus $250.
A taxpayer’s first $1 million of Oregon commercial activity is exempt from tax and even though there will be no tax due, taxpayers with commercial activity in excess of $750,000 must register with the Oregon Department of Revenue. Quarterly estimated tax payments will be required beginning April 2020.
Who is Subject to the CAT?
Even though the name implies the tax is for corporations, the tax really applies to individuals, estates, partnerships, limited liability companies, C corporations, S corporations, and any other entity with commercial activity in Oregon. The CAT is imposed on the entity receiving the commercial activity and is not a tax imposed directly on a purchaser.
Not only does the CAT apply to each entity with Oregon commercial activity, it also applies to “unitary groups”. A “unitary group” is defined as a group of persons with more than 50% common ownership, either direct or indirect, that is engaged in business activities that constitute a unitary business. A unitary group must register, file and pay the CAT as a single taxpayer. Therefore, even though individually each business does not meet the $1 million commercial activity threshold, combined they may be subject to the CAT. Your individual situation will need to be evaluated to determine if your business is part of a unitary group.
What is Commercial Activity?
In general, commercial activity is receipts from the sale of goods delivered to the state of Oregon or services performed in the state of Oregon. Businesses located outside of the state are also subject to the CAT for sales into the state.
For purposes of computing CAT liability, there are several items which are not considered “commercial activity”. Some of the most common are as follows:
- Certain farmer sales to an agricultural cooperative
- Most interest income
- Receipts from the sale of §1231 business assets
- Certain insurance proceeds
- Dividends received
The list of all items excluded from commercial activity is extensive and will need to be evaluated based on your individual situation.
The CAT also allows for a subtraction from commercial activity for 35% of the greater of:
- amount of cost inputs; or
- taxpayer’s labor costs.
However, the subtraction cannot exceed 95% of the taxpayer’s commercial activity in Oregon.
Where to Turn?
The Oregon CAT is going to affect many of our clients who do much of their activity in the state of Oregon. There are still many unanswered questions which the Oregon Department of Revenue plans to address with further guidance issued December of 2019. Please contact us to learn more about the Oregon CAT and how it may affect your business.