OTA Dispatch Issue 4 2019

17 www.ortrucking.org Issue 4 | 2019 Trucking and Logistic Firms Subject to New Oregon Gross Receipts Tax By Jennifer Young, Director, State & Local Tax Services and Matt Solomon, Tax Partner, Moss Adams IN 2019, OREGON passed the Oregon Corporate Activity Tax (CAT) imposing a new gross receipts tax on businesses. These tax increases could hit trucking and logistics firms especially hard, creating new challenges for companies that operate in the state. Trucking and logistics firms doing business in Oregon may need to review several facets of their operations, including apportionment, cost allocation, and accounts payable functions, to make sure they aren’t overpaying their taxes. Following is an overview of the tax and steps trucking and logistics firms can take to make sure they aren’t overpaying. BACKGROUND Oregon House Bill (HB) 3427A imposes a Corporate Activity Tax (CAT) on all businesses with receipts sourced to Oregon. The legislature passed the law in June 2019, and the tax is effective January 1, 2020. Oregon Corporate Activities Tax Oregon’s new CAT tax is titled the Corporate Activity Tax; however, it applies to essentially all forms of business, including individuals, partnerships, limited liability companies, and trusts. The CAT is imposed on all sales, not just retail sales, and is effective on January 1, 2020. The Oregon Department of Revenue has confirmed that the CAT is a calendar‐year tax. Although several other states—including Hawaii, Kentucky, Nevada, New Mexico, Ohio, Texas, and Washington—impose a tax on gross receipts or modified gross receipts, Oregon’s mechanism for determining the CAT base is unique. The CAT base comprises two elements: Oregon‐sourced sales and an apportioned deduction. Like the Texas Margins Tax, a taxpayer may deduct 35% of either its cost of goods sold or compensation. Unlike the Texas Margins Tax, however, a taxpayer won’t apportion its net margin to Oregon. Instead, a taxpayer will first assign receipts to Oregon and then apportion its deduction using its Oregon sales factor. The resulting apportioned base, less a $1,000,000 exclusion, is subject to CAT at 0.57%. While certain taxpayers use a three‐factor apportionment formula, trucking and logistics companies will use Oregon’s statutory single sales factor formula. Trucking Businesses For a trucking business, the assignment of receipts and apportionment of its deduction is relatively straightforward. Oregon employs mileage‐based apportionment for trucking companies, so the receipts assigned to Oregon will generally be equal to the receipts in its Oregon sales factor numerator. A trucking business will then apportion 35% of its cost of goods sold or labor cost using its Oregon sales factor and compute CAT on the balance exceeding $1,000,000. Logistics Businesses The calculation is more nuanced for logistics businesses and other service providers. For tax years beginning on and after January 1, 2018, Oregon requires market sourcing for service providers. In computing the sales factor, sales made to jurisdictions where the entity isn’t taxable are thrown out of the denominator. The CAT base calculation, which sources receipts but apportions the deduction, could yield anomalous results for service entities subject to throw out. Similar considerations apply to sellers of tangible personal property (TPP). Oregon employs throwback for calculating the sales factor numerator of sellers of TPP. However, for the CAT, sellers of TPP include only Oregon‐destination sales as Oregon receipts, which will exclude throwback. Sellers of TPP based in Oregon without operations in other states will presumably be subject to throwback, so their Oregon numerator will be higher than their Oregon‐sourced sales. Logistics businesses may want to carefully review Oregon’s regulation for sourcing sales of other‐than‐tangible personal property. The regulation provides detailed examples and guidance regarding when a taxpayer may use principles of reasonable approximation to determine Oregon‐ sourced receipts, according to Oregon Administrative Rule 150‐314‐0435. Oregon Use Tax Oregon’s CAT is a pyramiding gross receipts tax, similar to Washington’s Business and Occupations tax. It’s designed to apply at each step of a transaction, with no exclusions for wholesale sales. To prevent vendors from avoiding the tax by delivering property to Oregon businesses outside Oregon, the CAT contains a provision requiring Oregon taxpayers to increase their Oregon gross receipts by the value of any property brought into Oregon within one year of purchase. This could have significant implications for trucking