By Thomas B. Eriksen, Attorney
This article was orginially published in the March 20, 2020 edition of the Daily Journal of Commerce Oregon.
On Thursday, May 17, 2019, Governor Kate Brown signed into law HB 3427, imposing a Corporate Activity Tax on most Oregon businesses. Since then, the Oregon Department of Revenue has issued several rounds of temporary rules designed to implement the new tax law and provide guidance for taxpayers. Unfortunately, those temporary rules have left many questions, just as the initial filings for the tax are set to occur.
Taxpayers need to remember that the new Corporate Activity Tax is in addition to, not in replacement of, the existing Oregon income tax regime. The first quarterly estimate payment of the tax is due April 30, 2020. Oregon taxpayers, even if already registered with the Oregon Department of Revenue, must also register with the Department for the Corporate Activity Tax if the taxpayer’s Oregon sourced commercial activity exceeds $750,000.
Other than announcing the cancelation of the Corporate Activity Tax informational update meetings, as of now there is no guidance from the Department of Revenue whether the due date for the first quarterly estimated payments will be extended due to the Coronavirus economic shutdown.
The new tax, $250, plus 0.57 percent of taxable commercial activity over $1,000,000, will have a significant impact on a wide range of Oregon business, especially low-margin businesses. This tax is on the gross receipts of a business, regardless of profitability, less only an amount equal to 35 percent of “cost inputs” or “labor costs.” The new tax will have a significant impact on the cost of all goods in Oregon, including housing and real property development.
There are just a few exclusions to the tax imposed on gross receipts exceeding $1,000,000, including:
- Exclusion of the greater of 35 percent of “cost inputs” or “labor costs.”
- “Cost inputs” means the costs of materials incurred in the creation of a good or service and the cost of purchases of items held in the ordinary course of business for inventory. Cost inputs are defined as the Cost of Goods Sold for federal income tax purposes under the Internal Revenue Code. This appears to mean that capital expenditures for such business as commercial landlords, are not cost inputs for this exclusion.
- “Labor costs” means total compensation of all employees, not including compensation to any single employee in excess of $500,000 per year. Labor costs include most types of benefits paid to employees including wages, insurance, retirement and fringe benefits. An employee is an individual providing services to an employer under the direction and control of another person or organization. Typically, independent contractors are not considered employees for this purpose. Additionally, partners of a partnership and members of an LLC receiving guaranteed payment or distributions income are not employees for purposes of determining labor.
- Interest and dividend income, as well as receipts from the sale of IRC Section 1221 and 1231 assets.
- The exclusion of most interest to companies in the design and construction industry is the exclusion of receipts for transactions among members of a unitary group. Transactions among members of a group of businesses with common ownership, such as equipment leasing subsidiaries, separate construction entities for residential and commercial construction, etc., are excluded from the calculation of gross receipts. Under the Oregon law, the threshold to determine common ownership is at least 50 percent, either direct or indirect, common ownership. This is much lower than the 80 percent threshold for filing consolidated returns in Oregon. Additionally, a unitary group exists if one or more of the following conditions are satisfied:
- The businesses have centralized management or a common executive work force.
- The businesses have centralized administrative services or other functions that result in economies of scale.
- The flow of goods, capital or services demonstrate functional integration of the businesses.
A unitary group with revenues in excess of $750,000 must register with the Oregon Department of Revenue and pay the tax as a single taxpayer under the name of the entity with the greatest amount of commercial activity for the year. This may create unique challenges for allocating liability for the gross receipts tax among the members of the unitary group. This also may present reporting challenges if the member of the unitary group with the most commercial activity in Oregon changes from year to year. Will a new registration be required each year?
Gross receipts include the value of any property transferred into Oregon for use in the trade or business of the company. Accordingly, contractors with business operations in several states will need to be careful moving equipment and other assets among projects inside and outside of Oregon.
Every business with gross receipts in excess of $1,000,000 must file an annual return. The tax itself must be paid quarterly on or before the last day of January, April, July, and October for the previous calendar quarter. The new statute is silent on whether the $1,000,000 gross receipts filing threshold is before or after exclusions for cost inputs or labor costs. A strict reading of the statutory language suggests the threshold requirement is before the exclusion of cost inputs or labor costs. Accordingly, reporting may be necessary, even if no tax liability is due. Expect regulatory guidance on this issue to be forthcoming.
The new Oregon tax law applies for tax years beginning on or after January 1, 2020, and before January 1, 2021, and to returns filed on or before April 15, 2021.
Thomas B. Eriksen is an attorney in Jordan Ramis PC’s Business Law practice group. He represents business and corporate clients in all aspects of business operations. You can contact him at 503-598-5590 or by email at firstname.lastname@example.org.
Thank you for your interest in this article. The information contained in this article is for the general interest of the reader and should not be regarded as legal advice. If you have questions, or to obtain more information on this topic, please contact an attorney in our Business Law practice group.