On May 16, 2019, Oregon Governor Kate Brown signed into law HB 3427 (the Bill), which creates a new Corporate Activities Tax. The tax is a gross receipts tax that will be used to establish the “Fund for Student Success,” which will provide funds for various education initiatives. The tax is generally imposed at the business entity level and is applicable to certain businesses with commercial activities in Oregon, including, sole proprietorships, partnerships, limited liability companies, C corporations, S corporations, trusts, estates, and disregarded entities. The new tax will go into effect on January 1, 2020. Following is a general summary of the new tax.
Taxable Commercial Activity
The tax is imposed on persons with substantial nexus with Oregon and with more than $1 million of “taxable commercial activities” in Oregon. This generally includes the total amount realized from transactions and business activity in the regular course of trade or business sourced to Oregon, less 35% of the greater of costs of goods sold or employee compensation (subject to a $500,000-per-employee limit) apportioned to Oregon. The tax is equal to $250 plus 0.57% of the taxpayer’s taxable commercial activity in excess of $1 million.
The taxable commercial activity of certain financial institutions and insurers are subject to special rules.
Many types of receipts are generally excluded from commercial activity for purposes of calculating the tax. These include, among others:
- Interest income (except interest on credit sales);
- Receipts from the sale, exchange, disposition of capital assets (Section 1221 property) or property used in a trade or business (Section 1231 assets), without regard to the holding period of the asset;
- Proceeds received with respect to the principal of a loan or similar instrument;
- Contributions received by a tax-exempt trust;
- Proceeds received by a corporation from the issuance of its own stock;
- Insurance proceeds (except for proceeds received with respect to business revenue losses);
- Gifts, charitable contributions or membership dues to certain organizations;
- Damages received in litigation that are not paid for amounts that would otherwise be commercial activity;
- Contributions to capital;
- Receipts with respect to the sale, transfer, exchange of motor fuel;
- The portion of receipts from the sale of tobacco, alcohol, or marijuana products that is attributable to applicable excise taxes;
- Registration fees or taxes collected by vehicle dealers;
- Receipts attributable to services provided for medical assistance or to Medicare recipients;
- Dividends received;
- Distributive income from pass-through entities;
- Receipts from sales to a wholesaler if the seller receives certification at the time of the sale that the wholesaler will sell the purchased property outside of Oregon;
- Receipts from wholesale or retail sales of groceries;
- Transactions between members of a unitary group (as defined in the Bill);
- Certain payments to and from utilities;
- Amounts collected for transient lodging taxes;
- Amounts collected for the tax on retail bicycle sales; and
- Receipts from business conducted with or for members of agricultural cooperatives.
In addition, the tax does not apply to “excluded persons,” including, certain tax-exempt entities, governmental entities, certain foreign or alien insurance companies, any person with commercial activity that does not exceed $1 million for the calendar year (with a carve-out for members of a unitary group), and certain hospitals and long-term care facilities.
A person has “substantial nexus” with Oregon for purposes of the Corporate Activities Tax if the person (i) owns or uses capital in Oregon, (ii) holds a certificate of existence or authorization from the Oregon Secretary of State, or (iii) has “bright-line presence” in Oregon.
A person has bright-line presence in Oregon if the person (i) has payroll or property in Oregon of at least $50,000, (ii) has commercial activity sourced to Oregon of at least $750,000, (iii) has at least 25% of its total property, payroll, or commercial activity in Oregon, or (iv) is a resident of or domiciled in Oregon.
Sourcing of Receipts
Commercial activity is sourced to Oregon if the receipts from the activity are the result of:
- The sale, rental, lease, or license of real property located in Oregon;
- The rental, lease, or license of tangible personal property located in Oregon;
- The sale of tangible personal property delivered to a purchaser located in Oregon;
- The sale of services delivered to a location in Oregon; or
- The sale, rental, lease, or license of intangible property if used in Oregon.
Special sourcing rules apply to financial institutions and insurers.
A group of entities with more than 50% common ownership, either directly or indirectly, that are engaged in a unitary business constitute a “unitary group” for purposes of the Corporate Activity Tax. A unitary group is required to register, file, and pay the tax as a single taxpayer and each member of the group is jointly and severally liable for the corporate activities tax assessed to the group. Transactions among members of a unitary group, however, are not subject to the tax.
Registration. Persons and unitary groups with commercial activity in excess of $750,000 in a tax year are required to register with the Oregon Department of Revenue, even if the person or unitary group ultimately does not owe any corporate activity tax.
Returns and Payment. Returns for the corporate activity tax are due by April 15 of the following year in which the tax is imposed, but payments with respect to the tax are due and payable each quarter.
Successor Liability. A buyer that acquires a major part of the business assets of another person that is quitting or selling its business may be liable for any outstanding corporate activity tax of the seller. The buyer may withhold from the purchase price an amount sufficient to pay any tax due until the seller can show that the corporate activity tax has been paid. In addition, the buyer can avoid successor liability by providing written notice to the Oregon Department of Revenue and as long as the Department does not assess a deficiency for corporate activity tax against the seller within 18 months following the notice.
Local Commercial Activity Taxes Preempted
The legislature preempted local jurisdictions from imposing their own commercial activity taxes. The preemption does not apply, however, to ordinances or other laws adopted and operative on April 1, 2019 or which were adopted by initiative or referendum at an election held prior to March 1, 2019. This includes the City of Portland 1% gross receipts tax applicable to large retailers approved by voters in November 2018.
Effect on Other Business Taxes and Personal Income Tax
The Corporate Activity Tax is a new tax that is in addition to existing taxes and does not replace any other taxes imposed by Oregon, including the Corporation Excise Tax. To partially offset potentially higher priced goods as a result of the Corporate Activity Tax, the Bill reduces personal income tax rates for the bottom three income tax brackets by 0.25% for tax years beginning on or after January 1, 2020. The income tax rate for the lowest bracket will be reduced from 5% to 4.75%; the next higher bracket will be reduced from 7% to 6.75%; and the next higher bracket will be reduced from 9% to 8.75%. The highest bracket remains unchanged at 9.9% for income over $125,000.