On May 16, 2019, House Bill 3427 was signed into law creating the Corporate Activity Tax (CAT). This new tax doesn’t replace the corporate income tax. It is in addition to that longstanding tax. The CAT became effective January 1, 2020, and it applies to all types of businesses with Oregon commercial activity that generate revenue in excess of $1 million (although businesses with $750,000+ in revenue are required to register with the Department of Revenue). Very few businesses are exempt from the CAT (e.g. nonprofit organizations, farmers, school districts, hospitals, long-term care facilities). This gross receipts tax is expected to raise at least $1 billion in annual revenues, intended to fund state investments in education.
What is Commercial Activity?
The Oregon Department of Revenue defines commercial activity as “the total amount realized by a company from the transactions and activity in the regular course of their business in Oregon, without deduction for expenses incurred by the business. Commercial activity is realized according to the method of accounting used for federal income tax purposes.” For details on excluded receipts for certain items, reference HB 2164 Section 50, which begins on page 18.
How Do You Calculate the Liability?
Step 1: Calculate Your CAR - The first step in determining liability is to find the Commercial Activity Ratio (CAR) by taking the Oregon Commercial Activity (i.e. revenue just from Oregon companies) and dividing it by the Total Commercial Activity (i.e. revenue for all States). This step would apply if you have commercial activity in other states and/or exclusions referenced above.
Step 2: Calculate and Apply Your Deductions - After determining the commercial activity sourced to Oregon, a deduction from the CAT should be taken using either the Cost of Goods Sold, or the Gross Payroll excluding compensation paid to a single employee in excess of $500,000 (whichever is higher). The calculation for the first quarterly deduction is then as follows: Gross Payroll (or COGS – whichever is higher) x CAR (Commercial Activity Ratio) x 35%. The resulting number is the number you can deduct from your Oregon Sourced Revenue to continue calculating the CAT owed. The subtraction cannot exceed 95% of the taxpayer’s commercial activity in the state.
After the COGS or Payroll deduction is taken off of the Oregon Sourced Revenue, the CAT is calculated further by deducting either $250,000 (if your revenue figures are based only on a quarter and not multiplied out to be an annual figure), or $1,000,000 if you are annualizing your revenue. (Note that estimates can be based on each Quarter’s activity or by annualized activity. Based on so many businesses being affected by COVID, rather than annualizing the first quarter to create an expectation of taxes for the rest of the year, you might consider reporting quarter by quarter.) As always, we advise you to work with your CPA or licensed experts based on your individual situation to determine the best approach.
Step 3: Calculate the CAT - After determining the commercial activity sourced to Oregon, the CAT is $250 plus 0.57% of taxable activity over $1 million calculated on calendar year (not fiscal year).
Businesses can recover the CAT business expense by including it in the total price of sales. It is advised to not list this as a separate line item (e.g. “CAT Tax”) because Oregon does not impose a sales tax and this might be perceived as one. It is also important to remember that the total price charged, including any additional CAT recovery charges, is included in the commercial activity.
The Oregon Department of Revenue offers an informative resource that lists what you will need to complete your calculation as well as examples of calculations.
How Do You Pay the Estimated CAT?
Quarterly estimated payments are required beginning in April, 2020 (i.e. April 30, July 31, October 31, and January 31), with tax returns filed annually. A taxpayer must pay 80% of the tax due for the quarter or could be subject to the penalty, which starts at 20% of the amount of the tax. Effective April 27th the threshold for making estimated tax payments was changed from $5,000 of annual tax liability to $10,000. With the new rule tax payers that expect their annual liability to be less than $10,000 are not required to make quarterly estimated payments for 2020. Payments for these taxpayers will be due with the annual filing April 15, 2021. This change is for the 2020 tax year only. Payments are to be made through your Revenue Online account. The Oregon Department of Revenue has provided details on How to Make a CAT Payment.
The Oregon Department of Revenue has a link to Beyond the FAQ on their website, which provides additional high-level summaries of the rules and answers to common questions. If you have additional questions, you are encouraged to reach out to the CAT policy team at firstname.lastname@example.org.