HB 3427: IMPACT ON PROPERTY MANAGERS AND HOUSING PROVIDERS The 2019 Oregon Legislature created a tax structure based on the Ohio commercial activity tax. It includes some significant differences from the Ohio commercial model. The tax would be in addition to existing business income and excise taxes rather than replacing them. There would also be significant deductions allowed in computing the tax. Key Points •
Tax on "taxable commercial activity." The tax would be imposed on "taxable commercial activity," which is generally defined as a taxpayer's business gross receipts sourced to Oregon less a subtraction equal to 25% of the greater of (a) "cost inputs" or (b) "labor costs," apportioned to Oregon. Taxpayers. Generally, all persons and business entities that have (a) substantial nexus with Oregon, and (b) taxable commercial activity in excess of $1 million per year, would be subject to the tax. Excluded entities include organizations that are tax-exempt under Section 50l(c)(3) of the Internal Revenue Code and certain hospitals and care facilities. Tax rate. The tax would be $250 plus 0.49% of taxable commercial activity over $1 million. Tax base. The tax would apply to all taxable commercial activity, other than business receipts that are specifically excluded. The only deduction would be a subtraction for 25% of apportioned cost inputs or labor costs.
Receipts that are excluded from the tax base include: 1. 2. 3. 4. 5. 6. 7.
Interest income (other than interest on credit sales) Gains from the disposition of capital assets Proceeds from the issuance of stock Contributions to capital Dividends A partner/shareholder's distributive share of income from a pass-through entity Rebates
Receipts from transactions among members of a unitary group. Special rules apply to certain industries, including financial institutions, insurers, telecommunications, and vehicle dealers. •
Addition for property transferred to Oregon. The bill requires a taxpayer include, in its taxable commercial activity, the value of property the taxpayer transfers into Oregon for the taxpayer's own use in the course of a trade or business, within one year after the taxpayer received the property. This provision was taken from the Ohio commercial activity tax. It does not apply if the Department of Revenue determines the taxpayer's receipt of the property outside Oregon was not intended to avoid the tax.
HB 3427: IMPACT ON PROPERTY MANAGERS AND HOUSING PROVIDERS •
Subtraction for 25% of Cost Inputs or Labor Costs. In determining its taxable commercial activity, the bill provides that a taxpayer shall subtract 25% of the greater of the taxpayer's apportioned (a) "cost inputs," or (b) "labor costs." "Labor costs" means the total compensation of all employees but does not include compensation paid to any single employee in excess of $500,000. "Cost inputs" generally are defined as the cost of materials incurred in creating a good or service and the cost of purchasing items held for inventory. The amount of the subtraction is the Oregon-apportioned share of cost inputs or labor costs, using the apportionment method in Oregon UDITPA for apportioning income.
Receipt sourcing. Generally, commercial activity (i.e., business receipts) is sourced to Oregon using a market-based sourcing method. In the case of the sale of a service, the receipt is sourced to Oregon if and to the extent the service is "delivered" in Oregon. In the case of intangible property, the receipt is sourced to Oregon if and to the extent the property is used in Oregon. If receipts are based on the right to use the property rather than on actual use, the receipts are sourced to Oregon to the extent the receipts are based on the right to use the property in Oregon.
Unitary group. Unitary groups must register and pay the tax as a single taxpayer. As currently drafted, the bill applies a 50% ownership threshold for a unitary group, rather than the 80% threshold used for determining which corporations are included in an Oregon consolidated corporation excise tax return. In addition, unlike the corporation excise tax, the unitary group for this tax includes non-U.S. entities.
Tax is effectively a "commercial activity tax." Although the bill refers to the tax as a "corporate activity tax," the tax would apply to all businesses (other than those specifically exempt) with taxable commercial activity over $1 million, including partnerships, LLCs, and sole proprietorships.
Return and registration requirements. Although only businesses with "taxable commercial activity" in excess of $1 million would be required to pay the tax, businesses with "commercial activity" (i.e., total business receipts in and outside of Oregon) in excess of $1 million would generally be required to file returns, and those with "commercial activity" in excess of $750,000 would generally be required to register with the Department.
Economic nexus. The Oregon Supreme Court has long held that Oregon income taxes are intended to reach all income that Oregon is constitutionally permitted to tax. This bill includes detailed economic nexus provisions for the application of the corporate activity tax.
HB 3427: IMPACT ON PROPERTY MANAGERS AND HOUSING PROVIDERS SECTION 63. Corporate activity tax imposed on commercial activity. "(l) A corporate activity tax is imposed on each person with taxable commercial activity for the privilege of doing business in this state. The tax is imposed upon persons with substantial nexus with this state. The tax imposed under this section is not a transactional tax and is not subject to the Interstate Income Act of 1959 (P.L. 86-272). The tax imposed under this section is in addition to any other taxes or fees imposed under the tax laws of this state. The tax imposed under this section is imposed on the person receiving the commercial activity and is not a tax imposed directly on a purchaser. The tax imposed under this section is an annual privilege tax for the calendar year and shall be remitted quarterly to the Department of Revenue. A taxpayer is subject to the annual corporate activity tax for doing business during any portion of such calendar year. (2) A person has substantial nexus with this state if any of the following applies. The person: (a) Owns or uses a part or all of its capital in this state. (b) Holds a certificate of existence or authorization issued by the Secretary of State authorizing the person to do business in this state. (c) Has bright-line presence in this state. (d) Otherwise has nexus with this state to an extent that the person can be required to remit the tax imposed under sections 58 to 76 of this 2019 Act under the United States Constitution. (3) A person has brightline presence in this state for the calendar year if any of the following applies. The person: (a) Owns at any time during the calendar year property in this state with an aggregate value of at least $50,000. For purposes of this paragraph, owned property is valued at original cost and rented property is valued at eight times the net annual rental charge."
Examples of how the tax works: 1. Revenue is counted for the year if you have over a million dollars in rental revenue, you will pay the higher amount on all over $1 million. This is revenue not profit. However, you can subtract 35% of your costs - i.e. labor, supplies. 2. If you are a property manager - that revenue which your company receives but holds for disbursement to owners does not count as revenue. 3. If you buy a building for $1 million and sell it for $3 million, you have profited $2 million which counts as revenue for your company. All revenue for the year over $1 million (less that 35%) is taxed at higher rate. This applies to all S corps.
The calculator is on the following page.
How to Calculate Oregon's Adopted Corporate Activity Tax Under HB 3427 Determine Tax Base
Gather the total amount "arising from transactions and activity in the regular course of the person’s trade or business."
Source Commercial Activity:
• For real property, to the extent the property is in Oregon. • For the sale of tangible personal property if the property is delivered to a purchaser in Oregon. • For a sale of a service if the service is delivered to a location in Oregon. • In the case of a sale of intangible property, if the property is used in Oregon.
Exclude: receipts from the sale of motor fuel oil, cigarettes or tobacco, malt beverages, wine or liquor, and groceries, among others.
Apportion the firm’s labor costs or cost of inputs paid to other businesses using a single sales factor.
Calculate Tax Base:
Taxable receipts minus 35% of labor costs.
Taxable receipts minus 35% of cost inputs paid to other businesses
Labor costs are the "total compensation of all employees." Excludes compensation paid to any single employee in excess of $500,000.
deﬁned as “purchases used in the determination of the cost of goods sold as calculated under section 471 of the Internal Revenue Code.”
Either deduction may not exceed 95 percent of the taxpayer’s business receipts in this state.
Apply the tax rate:
$250 ﬂat tax for businesses receiving Oregon-sourced receipts
For Oregon-sourced receipts exceeding $1 million, apply a 0.57% levy on taxable Oregon-sourced commercial activity.
In addition to the Corporate Activity Tax, C corporations must pay Oregon’s Corporate Income Tax:
Apportion income based on a single sales factor: Add up all sales from Oregon and divide by sales everywhere. Multiply this number by total labor costs or cost of inputs paid to other businesses.
Apply a 6.6% corporate income tax rate on corporate income up to $1 million. Apply a 7.6% corporate income tax rate on corporate income above $1 million.
Final Tax Liability
Remit the tax to Oregon Department of Revenue
This step is multiple flowcharts worth of calculations.