CAT got your bottom line? Corporate Activity Tax has pounced!
Source: Jordan Manley, DJC Oregon
Since Governor Kate Brown signed Oregon’s new Corporate Activity Tax (CAT) into law on May 16, 2019, business owners have many burning questions. What is the CAT? To which businesses does the CAT apply? How is the CAT calculated? Can business owners pass the CAT on to their customers?
The CAT is a tax imposed on businesses to continue to enjoy the pleasure of conducting business in the state of Oregon. The CAT is not a traditional tax like a sales tax or an income tax, but rather one measured by the total amount a business realizes from transactions and activity in Oregon (i.e. the “commercial activity” of the business). The new law defines “commercial activity” as the total amount realized by a company from the transactions and activity in the regular course of business in Oregon, without deducting expenses incurred by the business. In other words, the CAT is a modified gross receipts tax on business and is considered an expense of the business. The CAT does provide a deduction from taxable commercial activity of 35% of the greater of:
- the annual cost inputs (i.e. cost of goods sold as calculated under IRC 471); or
- the annual labor costs.
The CAT is applied to Oregon taxable commercial activity exceeding $1 million. The CAT applies to tax years beginning January 1, 2020, and Oregon requires CAT filing and payment on an annual calendar year, despite the fiscal year used by some businesses. As the first CAT applies to tax years beginning January 1, 2020, the first CAT tax returns will be due April 15, 2021.
However, be aware that a business that expects to pay more than $5,000 of CAT liability for the calendar year must make quarterly estimated payments on April 30, July 31, October 31 and January 31 of each preceding calendar year beginning in 2021.
The CAT is calculated as $250 plus 0.57% of the amount of Oregon commercial activity exceeding $1 million. To calculate the CAT business owners will need the following information:
- determine the total amount of commercial activity anywhere the business transacts plus any applicable exclusions;
- determine the total amount of commercial activity in Oregon;
- determine the amount of compensation paid to employees (excluding an employees who are individually paid more than $500,000 annually); and
- determine the amount of qualifying payments to subcontractors for labor.
The ability of business owners to pass the CAT through to customers may ease some nerves about this new tax. However, business owners should calculate the mathematical value while also considering the subjective value of passing such a tax onto its customers. Some businesses may determine the risk of distaste from customers required to pay the extra tax and the potential for reputational damage greatly outweigh the minimal value derived from passing the tax through to customers. Although the law does not prohibit any business from recovering CAT when determining the total price charged to customers, another consideration for business owners is that the total price charged will be included in the total calculation of the business’ commercial activity. That means the business, by passing the expense through to the customer, generates a higher volume of gross receipts and the business owner effectively pays CAT on the CAT collected from the customer, meaning more CAT is paid overall.
Ultimately it will be critical to analyze the taxability of CAT receipts as there are many different exemptions available for calculating the CAT. The legislature continues to make technical corrections to the CAT in addition to providing further guidance about the new law. It is likely another bill may come about to implement changes to CAT policy. To stay up to date on the CAT and further developments, business owners should review information published by the Oregon Department of Revenue and the Oregon Legislature. Business owners should also consult with legal counsel to better understand how they may be impacted.
Jordan Manley is an attorney in Sussman Shank’s business group. She advises clients on a variety of business issues related to business transactions, taxation, business formation, business succession planning and estate planning.