HB 3427 was signed into law by Governor Kate Brown on May 16, 2019.

On May 13, 2019, the Oregon legislature approved HB 3427, which would establish a new statewide corporate activity tax (CAT). The new tax, which is intended to fund HB 3427's proposed increases in state educational funding, would apply to all persons (i.e., individuals, partnerships, corporation and others) with taxable commercial activity in Oregon. The CAT would be effective for tax years beginning on or after January 1, 2020, and would be in addition to other taxes already imposed, including Oregon corporate income/excise taxes and individual income tax (the rates for the lower individual income tax brackets of were slightly reduced).¹ The bill will now be sent to Governor Kate Brown, who has indicated that she will sign it.

Highlights of the CAT include:

• Imposing an annual CAT on each person² with taxable commercial activity for the privilege of doing business in Oregon at a rate of $250 plus 0.57% of the taxpayer's taxable commercial activity over $1 million
• Imposing CAT on the person "receiving" the commercial activity, not directly on the "purchaser"
• Exempting persons with less than $1 million in taxable commercial activity (other than a person that is part of a unitary group with more than $1 million in commercial activity), tax-exempt organizations, governmental entities, certain hospitals and certain other entities
• Imposing the CAT on persons that have substantial nexus with Oregon and clarifying that the federal limits on imposing state taxes on net income under P.L. 86-272 would not apply to this "transactional tax"
• Defining substantial nexus to include:
• "Bright-line" presence, which consists of having one or more of the following in the state during the calendar year: (i) $50,000 in property; (ii) $50,000 in payroll; (iii) $750,000 in commercial activity; or (iv) at least 25% of the person's total property, total payroll or total commercial activity
• A person that otherwise has nexus with the state, to the extent that person can be required to remit the CAT under the US Constitution
• Taxing the value of certain property that a person receives outside of Oregon and, within a year of receipt, transfers into the state for use in a trade or business (does not include such property if the Oregon Department of Revenue determines that the recipient did not intend, in whole or in part, to avoid the CAT)
• Requiring taxpayers to subtract from commercial activity sourced to Oregon 35% of the greater of the following amounts that they paid or incurred: (1) the amount of the cost of inputs, or (2) the taxpayer's labor costs
• Requiring a unitary group to file and pay the CAT as a single taxpayer, excluding intercompany transactions
• Adopting, for CAT purposes only and having no effect on the Oregon income or corporate excise tax, the Internal Revenue Code of 1986, as amended (IRC) and in effect on December 31, 2018, unless otherwise provided
• Requiring a taxpayer to use the same method of accounting for commercial activity, cost inputs and labor costs for a tax year as used for federal income tax purposes (if a taxpayer's federal method of accounting changes, its method of accounting for commercial activity also will change)
• Pre-empting local jurisdictions from taxing commercial activity, except for local taxes in effect and operative on April 1, 2019, or adopted by initiative or referendum petition at an election held before March 1, 2019 (e.g., the pre-emption would not apply to the 1% Portland Clean Energy Surcharge)
• Limiting the CAT subtraction to 95% of the taxpayer's commercial activity in Oregon
• Calculating cost inputs generally in accordance with IRC Section 471
• Defining labor cost as all compensation paid to an employee under $500,000
• Using the market-based sourcing method to source business receipts from the sales of services and intangibles, and allowing for the use of alternative apportionment

The term "commercial activity" is 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, without deduction for expenses incurred by the trade or business." Over 40 items are specifically excluded from the definition of "commercial activity," including the following:

• Interest income, except interest on credit sales
• Property, money and other amounts received or acquired by an agent on behalf of another in excess of the agent's commission, fee or other remuneration
• Receipts from sales to a wholesaler in this state, if the seller receives certification from the wholesaler at the time of sale that the wholesaler will sell the purchased property outside the state
• Receipts from the sale, exchange or other disposition of an asset described in IRC Sections 1221 or 1231, without regard to the length of time the person held the asset
• Proceeds attributable to the repayment, maturity or redemption of the principal of a loan, bond, mutual fund, certificate of deposit or marketable instrument
• Certain receipts from a financial institution
• Dividends received
• Distributive income from a pass-through entity
• Receipts from transactions among members of a unitary group

The bill also provides separate definitions for "commercial activity of a financial institution" and "commercial activity of an insurer".

Lastly, the bill includes provisions regarding registration procedures, record keeping, filing returns and making payments, and audit and examination provisions, among other procedural items.

Implications

Oregon taxpayers and those making sales to customers located in the state should review the provisions of this bill and determine whether they are subject to the new CAT. It is anticipated that the Oregon Department of Revenue will issue guidance on implementing the CAT.

EY will continue to monitor this development and issue Alerts as warranted.

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ENDNOTES

¹ See HB 4327, IRC Section 56 (reducing the lowest four brackets each by 0.25% but keeping the highest bracket (applicable to income over $125,000 per year) at 9.9% (still among the very highest state personal income tax rates in the US).

² The legislature's naming of the "Corporate Activity Tax" is somewhat of a misnomer in that it clearly is imposed not only on "corporate" taxpayers but on all "persons." HB 4327, IRC Section 63 (1) ("A corporate activity tax is imposed on each person with taxable commercial activity for the privilege of doing business in this state.")The term "person" is broadly defined to include "individuals, combinations of individuals of any form, receivers, assignees, trustees in bankruptcy, firms, companies, joint-stock companies, business trusts, estates, partnerships, limited liability partnerships, limited liability companies, associations, joint ventures, clubs, societies, entities organized as for-profit corporations under ORS chapter 60, C corporations, S corporations, qualified subchapter S subsidiaries, qualified subchapter S trusts, trusts, entities that are disregarded for federal income tax purposes and any other entities." Id., IRC Section 58(15).