With fall rulemaking underway, the Oregon Department of Revenue (DOR) has issued several amendments to, and new regulations related to, Oregon’s Corporate Activity Tax (CAT).

On October 27, the Oregon DOR held a public hearing on its first batch of Oregon CAT rules, which had been released earlier that month. Specifically, the hearing covered the following rules:

• 150-314-0248 “Refund Offset Priority”
• 150-317-1025 “Corporate Activity Tax: Election to Exclude Non-US Members from Unitary Group”
• 150-317-1070 “Sourcing of Motor Carrier Transportation Services”
• 150-317-1170 “Farming Operations: Clarifying Definitions”​
• 150-317-1200 “Cost Input or Labor Subtraction”
• 150-317-1300 “Estimated Tax: When Estimated Payments are Required”
• 150-317-1400 “Determining Property Resold Out of State, and Methods of Determining”
• 150-317-1500 “Good Faith Effort”

Of these rules, Oregon Administrative Rules (OAR) 150-317-1025 and 150-317-1200 are of particular interest to large taxpayers. OAR 150-317-1025 amends a prior rule related to the determination of the CAT filing group. As initially enacted, the CAT was required to be filed on worldwide basis; however, HB 4202 (a technical corrections bill passed in June 2020) allows taxpayers to make an election to exclude certain foreign entities with no Oregon sourced commercial activity (either directly or indirectly). Although not a full water’s edge election, this change was meant to significantly decrease the compliance burden for large taxpayers that do not calculate federal costs of goods sold on worldwide basis. The rule, as currently drafted, comports with the changes made by HB 4202 and allows the election to be made on an annual basis. The rule also makes clear that the election allows only for the exclusion of non-US entities, clarifying an ambiguity created by the statutory language in HB 4202  (i.e., foreign entity) that could have been interpreted to allow for the exclusion of other non-Oregon domestic entities.

OAR 150-317-1200 amends a prior rule related to the determination of the statutory subtraction, and the amendments are also based on changes made to the CAT pursuant to HB 4202. With HB 4202 and the amendments to this rule, the DOR has backed away from the requirement that a taxpayer must use the “commercial activity ration,” which the DOR created as a mechanism for apportioning the subtraction to the CAT. Now a taxpayer may choose to use the DOR’s commercial activity ratio or use the general UDITPA apportionment rules for purposes of apportioning the statutory subtraction.

On October 26, the DOR filed a Notice of Proposed Rulemaking for two additional rules, OAR 150-317-1310 CAT (penalty and interest provisions) and OAR 150-317-1420 (damages received from litigation). OAR 150-317-1310 is another rule amended to align with changes made in HB 4202. Specifically, the changes to OAR 150-317-1310 added an assessed penalty of five percent of the underpayment amount of the CAT for any quarter for which an underpayment exists, if none of the exceptions are met. The amendments also clarify that the penalty and interests provisions apply to tax years 2020 and 2021, and to tax years beginning on or after January 1, 2020, in addition to clarifying how commercial activity is computed on an annualized basis and when CAT installments must be paid.

The addition of OAR 150-317-1420 provides guidance in determining whether damages received as the result of litigation are subject to the CAT. Specifically, Section (1) states that “[d]amages, including settlement proceeds, received by a taxpayer as result of litigation are commercial activity to the extent they reimburse the taxpayer for transactions and activity during the regular course of the taxpayer’s trade or business.” Additionally, Section (2) states that “[t]o the extent receipts stem from damages received as the result of litigation and those receipts are in excess of what would have been received had the taxpayer not been involved in litigation, the taxpayer may exclude the amount in excess from its calculation of commercial activity.” OAR 150-317-1420 provides three examples where it applies the rule to instances where “Widget Co.” receives damages as the result of litigation.

The DOR will hold a hearing on this Notice of Proposed Rulemaking on November 24, 2020 from 9:00-11:00 am PST and will accept public comments until 5 pm PST that day. We expect this to be the last round of “official” guidance from the DOR on the Oregon CAT for 2020 but have no doubt the DOR will continue to release and amend the CAT rules in 2021.

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