Oregon Lawmakers Consider Changes to the Corporate Activity Tax

Lawmakers in Oregon are in the final days of their 35-day “short” session and are considering substantive changes to the Corporate Activity Tax. Over the past several months, a group of representatives from the Oregon Department of Revenue, legislative committee staff, and taxpayer groups have been working to identify and address statutory irregularities. Several issues have been identified that, without clarification, would constitute a significant departure from our understanding of the law.

On Thursday, February 20, the Oregon House Revenue Committee advanced a measure codifying these recommendations into law. If enacted, the measure would make changes to the following provisions:

Statutory Subtraction: The legislature intended the apportionment rules for the subtraction to follow the income tax, allowing taxpayers to use the same statutory formula (the single sales factor) for attributing their cost inputs or labor expenses to Oregon. In crafting the rules, however, the Oregon Department of Revenue concluded the statute required a separate apportionment method. The department’s temporary apportionment rule (OAR 150-317-1200) requires all taxpayers (not just multijurisdictional taxpayers) to compute an apportionment percentage comparing their Oregon commercial activity to their everywhere activity after adding back exclusions. The method prescribed in the rule could result in significant dilution of the subtraction for many taxpayers, resulting in higher effective tax rates. The legislation would allow an election for taxpayers to follow the income tax apportionment method for the statutory subtraction.

Worldwide Filing Group: The unitary group for the tax does not include a limitation to the water’s edge and appears to mandate a worldwide filing group. The group would be required to maintain a record of their commercial activity (as defined by Oregon) in every jurisdiction of every related entity, with or without sales to Oregon, to compute their subtraction. This is further complicated by the possibility that some foreign entities may not be required to file a federal income tax return because of their structure. The issue creates significant administration (auditing) and compliance (computing) hurdles for the state and taxpayers. The legislation would allow taxpayers to elect to remove from the group any foreign entity without commercial activity or excluded activity sourced to Oregon.

Fiscal Year Accounting for Apportionment: Current law is ambiguous if the tax is a calendar or fiscal year tax. The legislature may have intended the tax to be imposed on the calendar year, but the plain reading of the statute adopts federal accounting methods and synonymously uses the term “tax year” and “calendar year,” without ever defining the tax year. If the tax is imposed on the calendar year, fiscal year taxpayers would be required to maintain separate books and records for every entity to compute their statutory subtraction for Oregon. The legislation would align the accounting year for the subtraction to the federal return but retain the calendar year imposition of the tax.

Penalties for Underpayment or Underreporting: Current law prohibits the Oregon Department of Revenue from imposing any interest or penalties for underpaying or underreporting the tax in its initial year. The Oregon Department of Revenue has asked for a penalty mechanism to prevent taxpayers from gaming the grace period. Initial drafts would have imposed a 20 percent penalty if a taxpayer failed to pay 80 percent or more of their quarterly estimated payments. Taxpayer groups raised fairness concerns about the penalty and worked to find a more balanced solution. The legislation would allow a discretionary penalty of five percent of the uncollected amounts below 80 percent (90 percent after January 1, 2022) but allows a safe harbor based on the information available to the taxpayer at the time of filing.

Changes for the Agricultural Industry: Initially, the agricultural industry had lobbied for an outright exemption to the tax. Over the past several weeks, however, the discussion turned to the inability of farming operations to use the statutory subtraction because they often do not have any federal cost of goods sold. The legislation would allow farm operators to use their operating expenses (excluding labor costs) and use an industry average to determine the amount of co-mingled agricultural sales sourced to Oregon.

These changes to the tax law were approved by a unanimous vote of the committee but the bill faces significant political uncertainty for the remainder of the session. Republicans in the state legislature have walked out of the capitol over a controversial bill regulating the state’s greenhouse gas emissions. If the walkout continues through 11:59 pm on March 8, the constitutional deadline for adjournment, the bill will not become law.