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January 14, 2020
OREGON CORPORATE ACTIVITES TAX (CAT)
In May of 2019, Oregon Gov. Kate Brown signed House Bill 3427, which established an additional, new tax on business activity conducted within the state. The Oregon Corporate Activity Tax (CAT) is a gross receipts tax. Gross receipts taxes are based on a business’s gross sales (a.k.a., gross income) as opposed to income taxes which are based on net income after the business deducts all qualified expenses.
The Oregon Corporate Activity Tax (CAT) went into effect on January 1, 2020. It will be calculated on a calendar-year basis and the first return will be due April 15, 2021.
Who is impacted? Even though the word ‘corporate’ appears in its title, this new tax it is not limited to corporations. The tax applies to sole proprietors, partnerships, limited liability companies, clubs, estates and trusts, as well as corporations. The tax is based on the total dollar amount realized (i.e., sales) by a person or entity, arising from transactions and activities in the regular course of a trade or business, without deduction for expenses incurred while conducting the trade or business.
There are some exceptions to this tax. Sales of groceries and gasoline are excluded. Certain other activities were excluded but the gross receipts for most products sold and services delivered in Oregon are subject to this new tax.
Businesses (or groups of businesses) with annual gross sales below $1,000,000 are exempt from the tax although, in some cases, they will have to register and file Oregon Corporate Activities Tax (CAT) returns.
How is the tax calculated? The tax will be $250 plus 0.57% of each dollar of taxable Oregon sales in excess of $1,000,000. When calculating the amount of taxable Oregon sales, taxpayers are allowed to deduct either 35% of their cost of goods or 35% of their labor costs (subject to certain limitations). Taxpayers are also allowed to deduct their first $1,000,000 of gross receipts. See below for a basic example of the tax calculation. Sales to customers outside of Oregon are not subject to the tax. To the extent that sales to customers outside of Oregon are excluded, a proportionate amount of costs are excluded from the deduction calculation.
(Courtesy of the Oregon Restaurant & Lodging Association)
Unitary groups. The new law requires businesses with common ownership and common management to register and calculate their tax as a ‘unitary group’. For example, if you are the greater-than-50% owner of a business and also the greater-than-50% owner of a building that rents space to that business, your business and rental activities are considered a unitary group and you will pay the Corporate Activities Tax on the combined gross receipts of both the business and the rental activities.
Registration. Businesses or unitary groups who expect to have $750,000 or more annually in Oregon taxable sales are required to register with the Oregon Department of Revenue within 30 days of the date they expect to surpass the $750,000 threshold for Oregon taxable sales. The registration is specific to the current calendar year and must be repeated each year. The penalty for failing to register is $100 per month past the point when Oregon taxable sales exceeded $750,000. Businesses and unitary groups with Oregon taxable sales below $750,000 do not need to register or pay.
There is no prohibition against registering early. We recommend that businesses and unitary groups expecting to exceed $750,000 in annual Oregon taxable sales go ahead and register now for 2020 and plan on reregistering each subsequent January. If your sales are expected to be $500,000 to $750,000, we also recommend you register to avoid late-registration penalties in case your sales are unexpectedly over the registration threshold.
The official registration website, as well as an expanding set of frequently-asked questions, can be found at https://www.oregon.gov/DOR/programs/businesses/Pages/corporate-activity-tax.aspx
Estimated tax payments. Individuals and businesses expecting to pay $5,000 or more each year for the CAT will be required to make quarterly estimated payments which will be due the last days of April, July, October, and January for the immediately-prior quarter. The first quarterly estimated tax payment is due April 30, 2020. A penalty will be assessed on taxpayers who are required to make quarterly estimated payments but fail to do so by the statutory deadlines. Individuals and businesses expecting to pay less than $5,000 each year for the CAT are not required to make estimated payments. They will be expected to pay in full with their April 15, 2021 CAT return filing.
Other items to consider. Gross receipts taxes like the Oregon CAT are similar to retail sales taxes because they are assessed based on gross sales, and they are assessed regardless of the whether the business generates a positive or negative bottom-line. But, unlike a retail sales tax that is assessed only on the final consumer purchase of a product, a gross receipts tax is assessed at every stage of production. The 0.57% tax can and likely will be applied several times before a good or service makes its way to the final consumer. This pyramiding effect means that the true cost of the Oregon Corporate Activities Tax (CAT) to businesses and individuals will be greater than the 0.57% would imply.
Corporations who operate on a fiscal-year ending on some date other than December 31st will be required to restate their sales, cost of goods, and cost of labor to a January through December calendar-year basis for the purpose of calculating the Oregon Corporate Activities Tax (CAT).
Businesses that have not historically felt it necessary to keep their accounting records updated throughout the year will now need to do so at least quarterly and preferably monthly.
And finally, Oregon consumers may begin to see tax line items added on to the receipts they receive in restaurants, retail stores and other businesses. Davis & Graves CPA, LLP has added a line item to our invoices related to the Corporate Activities Tax, and we are advising business clients to do the same whenever possible.
If you have any questions about this new tax, please contact our Oregon CAT Coordinator, Beth Diggins, at (503) 665-0173.