In May 2019, Oregon created a new .57% gross receipts tax that went into effect on January 1, 2020. This adoption of a new “Commercial Activity Tax” (“CAT”) is imposed on all types of business entities. The CAT is in addition to the state’s current corporate income tax.
Oregon’s CAT is measured on a business’s commercial activity–the total amount a business realized from transactions and activity in Oregon. Certain items are excluded from the definition of commercial activity and, therefore, will not be subject to the CAT. In addition, Oregon’s CAT allows a 35% subtraction for certain business expenses.
The CAT is applied to Oregon taxable commercial activity in excess of $1 million. The tax is computed as $250 plus 0.57% of Oregon commercial activity of more than $1 million. Only taxpayers with more than $1 million of taxable Oregon commercial activity will have a payment obligation.
Any business, or unitary group of businesses, doing business in Oregon may have responsibilities under the CAT. This includes all business entity types, such as C and S corporations, partnerships, sole proprietorships, and other entities.
The CAT sets four thresholds to determine whether a business or unitary group has CAT responsibilities. These thresholds are based on the amount of commercial activity the business or unitary group earns in Oregon over the course of the year.
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If businesses are grouped as one business for the purposes of the tax, amounts paid within the group are excluded from gross receipts. Businesses may wish to be grouped together if the related businesses are likely to pay each other substantial sums. Grouping has the disadvantage that the whole group only gets one $1 million exemption.
The CAT legislation excludes certain types of business entities from any CAT liability unless such business has unrelated business taxable income under federal law. Exempted entities include but are not limited to:
- Nonprofit organizations
- Farmers’ cooperatives that are exempt from federal income taxation
- Federal, state, and local government entities (e.g., public school districts)
- Hospitals, long-term care facilities, and other entities subject to the health insurance premium and managed care assessment or the hospital and long-term care facility assessment
Oregon’s new tax allows very limited deductions. A business can deduct 35% of labor costs. If higher, it can instead deduct 35% of inventory expenses (cost inputs also known as cost of goods sold calculated in arriving at federal taxable income under the Internal Revenue Code).
Labor costs include everything paid to employees—wages, benefits, etc. Compensation over $500,000 to a single employee is not deductible. Partnerships or LLCs apparently cannot deduct payments to partners or members because they are not “employees.” Wages paid to a shareholder of a corporation who is an employee are deductible.
Multistate businesses only get a portion of these deductible costs, apportioned the same way as Oregon’s income tax. That portion is generally based on a businesses’ proportion of Oregon sales.
To apply this deduction, calculate inventory expenses and labor costs apportioned to Oregon and determine which is greater. Then multiply by 35%, then subtract the result from gross receipts.
So the new law doesn’t discriminate between manufacturers, contractors, retailers, e-commerce; with only certain items excluded. If your business entity has Oregon sales, beware!
For more information on the Oregon CAT, please reach out to Cam Brawley, Director of State and Local Taxes.
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