July 8, 2020
New Oregon law makes significant changes to Corporate Activity Tax
On June 30, 2020, Oregon Governor Kate Brown (D) signed HB 4202, which makes significant technical corrections to the Oregon Corporate Activity Tax (CAT). In addition, the Oregon Department of Revenue (Department) adopted the first of 17 permanent rules related to the CAT.
HB 4202 made the following key changes to the CAT:
Unitary group. Taxpayers may elect to exclude certain foreign entities from the CAT filing group when those entities do not have any Oregon sources of commercial activity or their activity has been excluded. CAT law requires the Department to adopt rules that direct how the election is made.
Fiscal-year filers. A fiscal-year taxpayer, for purposes of the CAT subtraction,1 may elect to use its most recent fiscal-year information. The election is made on an original, timely filed return and is only binding for the year the election is made. This election does not apply to the commercial activity of the taxpayer.
Subtraction apportionment. Taxpayers may elect to use one of the following methods for apportioning the subtraction:
Returns and allowances. Returns and allowances may offset commercial activity in the calendar year they are made.
Registration. Taxpayers are only required to register one time and not annually.
Penalty provisions. The law decreases the penalty for underpayment of quarterly estimated payments to 5% (previously it could be up to 25%), adds a safe harbor and extends the 80%-threshold for estimated quarterly payments through tax year 2021. The Department will not assess penalties for underestimating quarterly payments in 2020 if the business has made a good faith effort to determine the required installment. Moreover, the Department will not assess a penalty for failing to make a quarterly payment if a business does not have the financial ability to make the estimated payment due to the impact of the COVID-19 emergency.
A summary list of all the changes to the CAT made by HB 4202 is available on the Department's website. For more information on the original CAT, see Tax Alert 2020-0940.
On June 28, 2020, the Department adopted the first of 17 permanent rules related to the CAT. The rules cover a variety of topics, and the complete listing can be found on the Department's website. Both the cost subtraction rule and the unitary group rule received significant public comments. In response, the Department modified some of the proposed provisions.
Given the significant legislative changes that were adopted in HB 4202, taxpayers should carefully examine these rules. Many of the provisions in these two rules directly conflict with the legislative changes made by HB 4202. While the provisions of HB 4202 will control when there is a conflict, there is still significant guidance for other issues in the rules that the Department will likely leave unchanged. Even though the Department is still drafting and implementing other temporary rules, it indicated that it will start the process to update these two rules.
Taxpayers should carefully examine which members of their worldwide group need to be included in the Oregon CAT combined return. The new legislative provisions in HB 4202 should ease the compliance burden related to the cost subtraction method, especially for fiscal-year filers and multi-national corporations.
EY will continue to monitor developments related to the CAT and issue additional tax alerts as warranted.
1 Taxpayers are required 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.