Background: 

On May 16, 2019, Oregon’s governor signed H.B. 3427 into law, that created a gross receipts tax. The bill will take effect on September 31, 2019 and will apply to tax years beginning on or after January 1, 2020.  Although called a “Corporate Activity Tax,” the CAT will be imposed on all forms of businesses, including pass-through entities and sole proprietors. The CAT will be a new tax on business entities, and for corporate taxpayers would be in addition to the Corporate Income or Excise Tax.

What is included in the CAT?

The bill included the following:

  • Although only businesses with “taxable commercial activity” in excess of $1 million would be required to pay the tax, businesses with “commercial activity” (i.e., total business receipts in and outside of Oregon) in excess of $1 million would generally be required to file returns
  • Business with “commercial activity” in excess of $750,000 would generally be required to register with the Department of Revenue
  • Taxpayers would be required to situs their Oregon gross receipts, with a 35 percent deduction for apportioned “cost inputs” or “labor costs,”
  • The deduction for “cost inputs” or “labor costs” would be capped at 95 percent of a taxpayer’s “commercial activity” (or Oregon taxable receipts) within the state and would be apportioned using the taxpayer’s corporate income tax apportionment factor (the sales factor for most taxpayers)
  • Partnerships and LLCs are not exempted from the tax
  • The CAT would be levied at a rate of 0.57 percent on taxable receipts above $1 million
  • The CAT would be computed on a unitary basis, and the unitary group would be defined as “a group of persons with more than 50 percent common ownership, either direct or indirect, that is engaged in business activities that constitute a unitary business.”
  • Groceries and fuel would be exempt from the tax under the current proposal

There would also be significant deductions allowed in computing the tax.  The bill would require quarterly estimated payments and an annual return, which would be due on April 15th.

What Should Business Owners Do?

It is crucial for business owners to understand it and how it may impact their taxes. This tax may take some by surprise as Oregon does not have a sales tax and businesses may not be aware of the legislative changes that are in the works for Oregon.

For further advice, reach out to one of our Altus Group Experts.