Corporate Activities Tax in Oregon: HB 3427 & 2164 Summary

On May 16, 2019, Oregon Governor Kate Brown signed House Bill 3427A, creating a new Oregon Corporate Activities Tax. The bill was later modified by House Bill 2164, which included clarifications, technical corrections and a number of other changes. The tax is expected to raise more than $2 billion per biennium for Oregon schools and would apply to Oregon sales for companies with revenue greater than $750,000. The tax would be in addition to the existing personal and business income and excise taxes.

Highlights

• The corporate activity tax will be imposed on all businesses with nexus in Oregon, including C Corporations, S Corporations, Partnerships, LLCs and sole proprietorships.
• All businesses who expect to generate more than $750,000 in revenue for a year will be required to register with the state within 30 days of their expectation of meeting that level for the year and a penalty of $100/month will be assessed for failing to register, up to $1,000 per calendar year.
• The tax rate is $250 plus 0.57% of commercial activity over $1,000,000.
  • Commercial activity generally includes gross receipts less the greater of:
    • 35% of cost inputs
    • 35% of labor inputs
• The tax is imposed on the seller and is not a tax directly on the purchaser.
• The tax would be based on a taxpayer’s gross receipts and the tax would be due regardless of profitability.
• The tax would be effective for tax years beginning on or after January 1, 2020, and quarterly payments are due April 30, July 31, October 31 and January 31.

The bill establishes a bright-line test for determining if a taxpayer has nexus in Oregon. A taxpayer has bright-line presence in Oregon for the calendar year if any of the following applies:

• $50,000 of property
• $50,000 of payroll
• $750,000 of sales
• 25% of total property, payroll or sales in the state

Any taxpayer meeting any of these thresholds, or organized or located in Oregon, meeting the minimum gross receipts threshold, is required to file an annual Corporate Activities Tax return. While all registered taxpayers will be required to pay $250, only taxpayers with taxable commercial activity in excess of $1,000,000 will be subject to the 0.57% tax.

(The DOR is in agreement that they will not file a return unless they meet the threshold of $1M of taxable commercial activity. For further details, learn more from the Oregon DOR.)

Commercial activity means the total amount realized by a taxpayer, arising from transactions and activity in the regular course of the person’s trade or business, without deduction for expenses incurred by the trade or business.

Taxable commercial activity includes commercial activity sourced in Oregon using the following methods:

• Real Property: sale, rental or lease of property located in Oregon
• Tangible Property:
  • Rental, lease or license of property located in Oregon
  • Sale of property delivered to a purchaser in Oregon
• Service: delivered to a location in Oregon
• Intangible Property: sale, rental, lease or license of property used in Oregon or with a right to use in Oregon.

Certain revenue is exempt from commercial activity, including interest income (except interest on credit sales), gain on the sale of fixed assets, proceeds from the issuance of stock, proceeds from payments from insurance policies (except loss of business revenue), tax refunds, contributions to capital, dividends, distributive income from a pass-through entity, rebates and transactions between members of a unitary group among others.

Special rules also may exempt some or all of the gross receipts for certain industries, including gas and fuel sales, residential care facilities, wholesalers, grocery sales, telecommunications, agricultural cooperatives, charitable organizations, insurers,  governmental entities, hospitals, and financial institutions.

The bill allows for a taxpayer to subtract 35% of whichever is larger between the taxpayer’s apportioned cost inputs and labor costs.

“Cost inputs” are generally defined as the cost of goods sold in arriving at federal taxable income.

“Labor costs” means the total compensation of all employees, but does not include compensation paid to any single employee in excess of $500,000.

Single-family residential general contractors are allowed an additional subtraction of 15% of any labor costs paid to subcontractors.

If a taxpayer has activity in multiple states, the cost inputs and labor costs must be apportioned.

Taxpayers will also be limited from using subtractions to offset no more than 95% of the taxpayer’s commercial activity.

The bill also requires a taxpayer to include as taxable commercial activity the value of property the taxpayer transfers from out of state into Oregon for the taxpayer’s use in the course of a trade or business. Certain exceptions apply:

• If the taxpayer has owned the property out of state for more than one year.
• If the Department of Revenue determines the taxpayer’s receipt of the property outside Oregon was not intended to avoid the tax.

Individual Income Taxes

While the bill increases taxes on businesses, it offers a slight reduction in individual income tax rates. The lowest three personal income tax brackets will be reduced by 0.25%.

Registration for Oregon’s new Corporate Activity Tax is now open through the Department of Revenue’s online system.

To register, individuals doing business in Oregon will need their name, and their social security number or individual taxpayer identification number. Businesses will need their legal name and federal employer identification number.

Businesses and individuals will need:

• Their mailing address
• The date they exceeded or expect to exceed $750,000 in Oregon commercial activity
• A valid email address or current Revenue Online login
• Their Business Activity Code (Refer to the current list of North American Industry Classification System codes found with their federal income tax return instructions)

If you have questions about the registration process, please reach out to your Aldrich Advisor and we guide you through the process.

Download our corporate activity tax calculator to help estimate the amount of corporate activity tax owed.

Our advisors are here to help guide you through any changes in tax policy that may come into effect. As these changes come to light, we will continue to send updates on what to expect.

This alert was originally published on May 16, 2019 after Governor Brown signed into law the legislature that started as House Bill 3427A and was subsequently passed by the Senate. Further amendments prompted the language now present in this update.