New Tax Rules in 2020: The Game-Changers in Economic Development

With the tax season soon approaching, we wanted local businesses to be informed of a couple of new tax law changes beginning in 2020. Please note, REDI is not the expert on this topic. It is important that you speak with your tax professional about these new laws.

At the National Level:  The Wayfair Decision:

In June of this year, the U.S. Supreme court handed down its ruling in South Dakota v. Wayfair, in favor of South Dakota, to collect sales tax on all interstate commerce, reversing the Quill decision of 1992. Quill held that states cannot force sales tax collection by vendors who do not have employees or property in the state (the “physical presence” standard). The key point in this reversal was not so much physical presence, but whether or not there was sufficient burden on an interstate seller to comply with a state’s tax system. A helpful summary and review of the Supreme Court’s decision can be found on the Tax Foundation website: https://taxfoundation.org/supreme-court-decides-wayfair-online-sales-tax-case/.

What does this mean for Oregon businesses with an online presence?

Just because Oregon doesn’t have a sales tax doesn’t mean this decision doesn’t apply to local companies. Oregon retailers who conduct e-commerce must track sales and comply with tax laws in the states in which they do business. Businesses must collect taxes wherever they sell their goods, and pay taxes on that state’s schedule.

The Supreme Court is encouraging congress to step in and set federal standards through pending bills such as the Remote Transactions Parity Act, or RTPA, and the Marketplace Fairness Act, or MFA, which would specify stipulations a state must make in order to require online sellers to collect taxes.

At the Local Level: Oregon’s Corporate Activity Tax:

In May of this year, the Oregon State Legislature passed the “Student Success Act” (HB 3427) and instituted the Corporate Activity Tax, or CAT, which will go into effect beginning January 1, 2020. This tax is expected to generate approximately $2 billion of investment into the general fund for education, with the Student Success Act generating another $200 million to fund education.The Oregon Department of Revenue hasn’t written the rules yet; the first draft is anticipated in December. Confused? We and many professional tax preparers are too.

According to the Oregon Department of Revenue website,

​​The new Corporate Activity Tax (CAT) is imposed on businesses for the privilege of doing business in this state. The CAT is not a transactional tax, such as a retail sales tax, or an income tax. Oregon’s CAT is measured on a business’s commercial activity–the total amount a business realizes from transactions and activity in Oregon. Certain items are excluded from the definition of commercial activity and, therefore, will not be subject to the CAT. In addition, Oregon’s CAT allows a 35% subtraction for certain business expenses.

The CAT is applied to Oregon taxable commercial activity in excess of $1 million. The tax is computed as $250 plus 0.57% of Oregon commercial activity of more than $1 million. Only taxpayers with more than $1 million of taxable Oregon commercial activity will have a payment obligation.

To summarize, this is not a tax on sales receipts alone, it’s imposed on all commercial activity.  For instance, if a company sells hops to a brewery and the gross receipts exceed $1 million, they are required to comply with registration deadlines and pay quarterly estimated taxes. The brewery that turns those hops into a finished product is also required to comply, as is the transportation company that delivers the truckload of malted beverages to stores throughout Oregon, and beyond.

Again, the first draft of the code is due to be released in December. Keep in mind, however, even with rules in draft form only, there could be penalties for not complying with registration and payment deadlines.

Think you can divide (your assets) and conquer? Not so fast. In anticipation of this loophole, the Unitary Group Rule states that if you own fifty percent or more in an organization, you are still subject to the Corporate Activity Tax.Though the rules are not written yet, The Oregon Department of Revenue has a list of FAQ’s here: https://www.oregon.gov/DOR/programs/businesses/Pages/corporate-activity-tax.aspx.

To get an idea of what this looks like on paper and how it might affect your company financially, REDI consulted with Wes Price, of Price Fronk & Company, for a draft sample calculation here. Mr. Price tells us: “All businesses need to assume they are subject to this tax”.

We share this information to summarize forthcoming tax changes in the coming year. As an economic development department, REDI is very concerned about the effect the CAT will have on the ability to sell Oregon as a friendly and cost-competitive place to do business.