On May 16, 2019, Oregon Governor Kate Brown (D) signed House Bill 3427 (H.B. 3427), enacting a corporate activity tax (CAT) applicable to tax years beginning on or after January 1, 2020. According to the latest regulatory updates, initial quarterly tax payments are due April 30, 2020, and the first annual return filing is due April 15, 2021. The Oregon CAT is anticipated to raise in excess of $1 billion per year for Oregon K-12 education.
The Oregon CAT is in addition to Oregon’s corporation income and excise taxes. The Oregon CAT, despite being called a “corporate” activity tax, applies to all “persons” with taxable commercial activity in Oregon and includes corporations (C and S), partnerships, limited liability companies, joint ventures, individuals, trusts, federally disregarded entities, sole proprietorships, foreign entities (including those disregarded for federal income tax purposes) and “any other entities.” Excluded entities include IRC 501©(3) tax-exempt organizations, governmental entities, state 529 plans, health insurance organizations, certain hospitals and care facilities.
The Oregon CAT is a modified gross receipts tax on taxable commercial activity — defined as the total amount realized by a person, arising from transactions and activity in the regular course of the person’s trade or business sourced to Oregon — and is imposed at the rate of $250 plus 0.57% of commercial activity over $1 million (based on the unitary group’s total commercial activity).
Taxpayers whose taxable commercial activity does not exceed $1 million are exempt from the Oregon CAT. However, taxpayers with at least $750,000 in Oregon commercial activity are still expected to register with the Department of Revenue (DOR).
The Oregon CAT excludes over forty types of gross receipts, spanning numerous industries, from the definition of “taxable commercial activity,” including but not limited to:
When a company transfers property into Oregon for use in the course of a trade or business, the property is considered taxable commercial activity and the value of that property is deemed to be an Oregon-sourced receipt subject to the CAT, if transferred within one year of the company’s receipt the property. If the DOR determines receipt of the property outside Oregon and its subsequent transfer into Oregon was not intended to avoid paying tax, the property will not be considered taxable commercial activity.
A taxpayer may request, or the Department may require, an alternative sourcing method if the statutory method does not adequately reflect the taxpayer’s commercial activity attributable to Oregon.
The Oregon tax is a modified gross receipts tax, because it provides taxpayers with a subtraction from Oregon taxable commercial activity 35% of the greater of the taxpayer’s annual cost inputs or labor cost, both of which are apportioned according to the state’s corporate apportionment rules. The 35% subtraction cannot exceed 95% of the taxpayer’s Oregon commercial activity.
Labor costs are defined as the total compensation of all employees, but do not include compensation paid to any single employee in excess of $500,000.
The state of Oregon sources taxable commercial activity (gross receipts) according to a market-based sourcing methodology, as outlined below:
Oregon’s definition of “substantial nexus” casts an extremely wide net, encompassing economic nexus and factor presence nexus. It specifically includes, but is not limited to, the following:
Public Law 86-272 does not apply to the CAT.
Unitary groups must register and pay the tax as a single taxpayer. Oregon defines “unitary group” as a group of persons with more than 50% common ownership, either direct or indirect, and engaged in a business activity that constitutes a unitary business.
The Oregon CAT unitary group filing requirement differs from the 80% common ownership threshold required for consolidated groups filing under the state’s corporate excise and income tax.
Despite the Governor’s signing of H.B. 3427, Oregon voters can still overturn the passage of H.B. 3427 via their right of referendum, which enables Oregon citizens to overturn statutes or laws passed by the Oregon legislature. If approved, the passage of H.B. 3427 would be up to the voters in Oregon’s next general election in November 2020.
The Washington legislature recently passed HB 2167, which imposes B&O tax surcharges. Beginning with business activities occurring on or after January 1, 2020, HB 2158 imposes business and occupation (B&O) tax surcharges on over 40 services at rates of 20%, with 33.33% and 66.66% imposed on business activities related to advanced computing.
A 20% workforce education investment surcharge is applicable to business activities taxed under RCW 82.04.290(2), before application of any tax credits would be imposed on any person primarily engaged within Washington in any combination of over 40 enumerated activities. Some of the activities to which the surcharge would apply include:
For persons that report under more than one tax classification, the surcharge would only apply to services listed under this specific provision [RCW 82.04.290(2)]. If more than 50% of the person’s gross amount reportable (i.e., total value of products, gross proceeds of sales, and gross income of the business before deductions) under this chapter during the entire current or immediately preceding calendar year was generated from engaging in one or more of these activities, their entire gross proceeds are subject to tax under this chapter.
Higher surcharges are imposed on select advance computing businesses, defined as “designing or developing computer software or computer hardware, whether directly or contracting with another person, including modifications to computer software or computer hardware, cloud computing services, or operating an online marketplace, an online search engine, or online social networking platform.” Any person that is a member of an affiliated group with at least one member of the affiliated group is deemed to be engaged in the business of advanced computing.
A 33.33% surcharge will be applied for an affiliated group with worldwide gross revenue of more than $25 billion, but not more than $100 billion, during the entire current or immediately preceding calendar year. That surcharge would increase to 66.66% for worldwide gross revenue over $100 billion. The combined surcharge paid by all members of an affiliated group could not be less than $4 million or more than $7 million annually.
The Legislature made clear that it “intends the provisions of this act to be applied broadly in favor of application of the surcharges,” and recommended that any provision of the act deemed ambiguous by a court, the tax appeals board, or any other judicial or administrative body “be construed in favor of application of the surcharges.”
The B&O tax surcharges would be in addition to taxes already imposed, and could be substantial. Taxpayers should review the extensive list of activities subject to the B&O tax surcharges, and consult a state tax professional to determine if they are liable for the additional tax.
Additionally, the legislature simultaneously passed bills changing the tax rate for specified financial institutions, significantly narrowing the qualifications for international investment management firms to be taxed at a preferential rate, and adjusted the graduated rates for real estate excise tax – which may result in significant increases in tax on real estate transactions. Taxpayers that could be affected by these changes should contact a state tax professional to understand the implications.
On March 14, 2019, Washington Governor Jay Inslee signed measure SB 5581, which is meant to simplify the state’s economic nexus standards to be consistent with the U.S. Supreme Court’s decision in South Dakota v. Wayfair, and implements tax collection requirements for marketplace facilitators. (L. 2019, S5581, effective as noted.)
Effective 7/1/19, Washington has revised the term “seller” to now include “marketplace facilitators,” regardless of whether making sales on their own behalf or on behalf of marketplace sellers. Additionally, the state has revised the type of sales that trigger the economic nexus threshold of $100,000 gross receipts & eliminated the economic nexus transaction threshold.
Historically the B&O tax’s economic standards were subject to different standards than the WA retail sales tax economic nexus thresholds. SB 5581 intention is to minimize differences between retail sales tax and the B&O tax.
Additionally, H.B. 1403 made various apportionment-related changes related to WA B&O tax. The changes include, but are not limited to, creating a “throw-out” provision, clarifying the steps required to petition for alternative apportionment, changing the definition of “Business activities tax” which no longer includes sales tax, use tax, or a similar transaction tax, further defining who qualifies as a “customer” and clarifying how the “customer location” is to be determined.
Armanino can provide the expertise to help you navigate significant changes in tax law. If you do business in Oregon or Washington and expect to be affected by these new developments, contact your Armanino tax partner today.
