A brand-new tax on companies doing business in Oregon kicks in on January 1, but if you’re looking for guidance from the Oregon Department of Revenue (DOR) about how much you might owe next year, you’ll have to wait a few more months.
The so-called Corporate Activities Tax (CAT) is a consumption-based, business entity-level gross receipts tax, passed by the Oregon Legislature during the 2019 legislative session. It raises more than $1 billion in revenue annually to be directed toward new K-12 education spending. Contrary to what the name implies, all business entities, regardless of business structure, are subject to the new tax. That means C corps, S corps, partnerships, LLC’s, and sole proprietorships all must register, file, and/or pay the CAT, so long as they are not exempt.
The tax is $250 + 0.57% of a company’s Oregon sales in excess of $1 million if those sales constitute “commercial activity,” a defined term in the legislation with many exclusions. Businesses with $750,000 in commercial activity must register with DOR, even if they have no tax liability. Those businesses with $750,000 or less in commercial activity are exempt. The legislation also includes a 35% subtraction against commercial activity – the greater of cost inputs or labor costs. Businesses with $1 million or more in Oregon commercial activity must still file a return, even if the 35% subtraction results in no tax owed.
Sounds confusing? It is. And with less than six months from the end of the legislative session to the time that the CAT takes effect, DOR has had precious little time to start creating rules for administering this massive new tax. Over the past two months, DOR held a series of town hall meetings across the state to seek input from business taxpayers and tax preparers about the administrative rules for the CAT.
Here’s what we know at this point: DOR will be releasing temporary rules in three phases. A first round focused on the most high-profile issues surrounding the CAT will come out January 1. Likewise, a second and third round will come out for medium and lower priority issues on February 1 and March 1, respectively. The permanent rulemaking process will then commence, with opportunities for public comment.
Some of the expected administrative rules will be fairly straightforward. Will businesses be taxed on their sales to out-of-state customers? No, out-of-state sales fall outside the definition of Oregon commercial activity and are thus exempt. Will out-of-state companies have to pay the tax on their sales into Oregon? Yes, if they have $1 million or more in commercial activity in Oregon, they will have to pay, even if they’ve never had to pay taxes in Oregon before. Does the CAT replace Oregon corporate income tax? No, the CAT is in addition to any other taxes owed by a corporation. That means that C corporations will continue to pay an income tax on their profits, but they will also have to pay the CAT if they have $1 million or more in commercial activity.
What are some of the most common types of sales that are exempt from the definition of commercial activity? This is where things get complicated again, because DOR will likely have to define many of the following terms in their rules. Notable exemptions include transportation fuel sales, wholesale and retail sales of groceries, interest (except interest on credit sales or service charges), compensation to employees, gifts or charitable contributions received, and property, money and other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission, fee or other remuneration.
How will DOR define an agent? Will businesses be able to add the CAT to their invoices or receipts, passing the increase on to their customers? How will DOR deal with agricultural cooperatives? These questions all need answers, in addition to countless others. Have a question or comment for DOR? You can email them at [email protected]
Will DOR be able to provide Oregon businesses with enough guidance to start planning for what they might owe in time? That would be a herculean task to get right on the first try, especially given the short timeframe. One thing is certain though. Estimated quarterly payments will be due starting April 30, 2020.