OTA Dispatch Issue 1 2020

15 www.ortrucking.org Issue 1 | 2020 ON MAY 16, the governor signed House Bill 3427 into law. This bill creates additional funding for education through a multi- billion dollar commercial activities tax to be imposed on persons doing business in Oregon. The following outline summarizes some of the key provisions of the law. By its nature, this summary does not provide all of the information you may need to fully comply with the law. Thus, it should not be relied upon for this purpose. Please call your advisor if you have any questions. ` The law includes a .25% reduction in Oregon individual income tax rates, except for those in the highest 9.9% bracket. This is intended to help offset the cost to individuals from the expected pass through of some portion of the CAT tax to consumers in the form of higher prices. ` The CAT tax applies only to those persons (including entities) whose commercial activity sourced to Oregon exceeds $1 million for the year. » Commercial activity means 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. For most, this means gross receipts. » Governmental entities and certain tax-exempt organizations are exempt from the tax. » The tax is imposed on the seller and is not directly charged to the purchaser. ` The CAT tax equals $250 plus the product of the taxpayer’s taxable commercial activity in excess of $1 million for the calendar year multiplied by .57%. Taxable commercial activity generally equals Oregon source gross receipts, less a deduction for 35% of the greater of labor costs, or the cost of inputs. » The deduction is limited to 95% of commercial activity. » Labor costs means total compensation of all employees, not to include compensation paid to any single employee in excess of $500,000. » Cost of inputs means the cost of goods sold (COGS) as calculated in arriving at taxable income under the Internal Revenue Code (IRC), excluding any expenses from transactions between members of a unitary group. » The subtraction amount is apportioned to Oregon in the manner required for the apportionment of income under ORS 314.605 to 314.675. » A subtraction is allowed for bad debt charge-offs to the extent previously included in taxable commercial activity. » The CAT tax should be deductible for income tax purposes. ` Included in taxable commercial activity is the value of property the person transfers into this state for the person’s own use in the course of a trade or business within one year after the person receives the property outside this state unless it can be demonstrated that CAT tax avoidance was not a motive. ` There is a long list of items that are exempt from the tax. See paragraph 1(b)(A)-(QQ) of the bill for a complete list. Some of the exempt items include: » Interest income except for interest income on credit sales. » Receipts from the sale of an asset described in section 1221 or 1231 of the IRC. » Tax refunds. » Distributive income received from a pass through entity. » Dividends received. Oregon Commercial Activities Tax (CAT) Summary of Key Provisions By Kimberly Pepion, CPA, Tax Manager, Kernutt Stokes