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Friday, June 14, 2019

Tax Alert: Significant Oregon and Washington State Tax Developments


Oregon Enacts Modified Gross Receipts Tax – Effective January 1, 2020

On May 16, 2019, Oregon Governor Kate Brown (D) signed House Bill 3427 (H.B. 3427), enacting a corporate activity tax (CAT) applicable to tax years beginning on or after January 1, 2020. Initial quarterly tax payments are due April 30, 2020, and the first annual return filing is due April 15, 2021. The Oregon CAT is anticipated to raise in excess of $1 billion per year for Oregon K-12 education.

The Oregon CAT is in addition to Oregon’s corporation income and excise taxes. The Oregon CAT, despite being called a “corporate” activity tax, applies to all “persons” with taxable commercial activity in Oregon and includes corporations (C and S), partnerships, limited liability companies, joint ventures, individuals, trusts, federally disregarded entities, sole proprietorships, foreign entities (including those disregarded for federal income tax purposes) and “any other entities.” Excluded entities include IRC 501©(3) tax-exempt organizations, governmental entities, state 529 plans, health insurance organizations, certain hospitals and care facilities.

What is Taxable Commercial Activity?

The Oregon CAT is a modified gross receipts tax on taxable commercial activity — defined as the total amount realized by a person, arising from transactions and activity in the regular course of the person’s trade or business sourced to Oregon — and is imposed at the rate of $250 plus 0.57% of commercial activity over $1 million (based on the unitary group’s total commercial activity).

Taxpayers whose taxable commercial activity does not exceed $1 million are exempt from the Oregon CAT. However, taxpayers with at least $750,000 in Oregon commercial activity are still expected to register with the Department of Revenue (DOR).

The Oregon CAT excludes over forty types of gross receipts, spanning numerous industries, from the definition of “taxable commercial activity,” including but not limited to:

  • intercompany transactions among members of a unitary group
  • receipts from the disposition of IRC Sec. 1221 and 1231 assets
  • contributions to capital
  • sales of motor fuel
  • dividends
  • distributive income received from a pass-through entity
  • sales to Oregon wholesalers who certify that the property will be resold outside of Oregon

When a company transfers property into Oregon for use in the course of a trade or business, the property is considered taxable commercial activity and the value of that property is deemed to be an Oregon-sourced receipt subject to the CAT, if transferred within one year of the company’s receipt the property. If the DOR determines receipt of the property outside Oregon and its subsequent transfer into Oregon was not intended to avoid paying tax, the property will not be considered taxable commercial activity.

A taxpayer may request, or the Department may require, an alternative sourcing method if the statutory method does not adequately reflect the taxpayer’s commercial activity attributable to Oregon.

Subtractions from Taxable Commercial Activity

The Oregon tax is a modified gross receipts tax, because it provides taxpayers with a subtraction from Oregon taxable commercial activity 35% of the greater of the taxpayer’s annual cost inputs or labor cost, both of which are apportioned according to the state’s corporate apportionment rules. The 35% subtraction cannot exceed 95% of the taxpayer’s Oregon commercial activity.

Labor costs are defined as the total compensation of all employees, but do not include compensation paid to any single employee in excess of $500,000.

Sourcing of Oregon Taxable Commercial Activity

The state of Oregon sources taxable commercial activity (gross receipts) according to a market-based sourcing methodology, as outlined below:

  • service receipts are sourced to Oregon if a service is “delivered” in Oregon
  • receipts from the sale, rental, lease, or license of intangible property are generally sourced to Oregon if the property is used in Oregon.
  • receipts based on the right to use the intangible property rather than on actual use are sourced to Oregon to the extent they are based on the right to use the intangible property in Oregon
  • receipts from the rental, lease or license of real or tangible personal property (TPP) are sourced to Oregon if located in Oregon.
  • receipts from the sale of real property located in Oregon are sourced to Oregon
  • receipts from the sale of TPP delivered to a purchaser in Oregon are sourced to Oregon

Oregon’s Definition of Substantial Nexus

Oregon’s definition of “substantial nexus” casts an extremely wide net, encompassing economic nexus and factor presence nexus. It specifically includes, but is not limited to, the following:

  • owning or utilizing capital in Oregon
  • holding a certificate of existence or authorization to do business in Oregon issued by the Oregon Secretary of State
  • maintaining residency or commercial domicile in Oregon
  • 25% of total property, payroll, or sales
  • $50,000 of property or payroll in Oregon
  • $750,000 of Oregon “Commercial Activity” (i.e. Market based receipts)
  • otherwise establishing nexus with Oregon “to the extent that the person can be required to remit” the Oregon CAT. Note that the Oregon has long applied its jurisdiction to tax income to the full extent constitutionally permissible

Public Law 86-272 does not apply to the CAT.

Unitary Group Filing Requirement

Unitary groups must register and pay the tax as a single taxpayer. Oregon defines “unitary group” as a group of persons with more than 50% common ownership, either direct or indirect, and engaged in a business activity that constitutes a unitary business.

The Oregon CAT unitary group filing requirement differs from the 80% common ownership threshold required for consolidated groups filing under the state’s corporate excise and income tax.

Oregon’s Initiative and Referendum Process

Despite the Governor’s signing of H.B. 3427, Oregon voters can still overturn the passage of H.B. 3427 via their right of referendum, which enables Oregon citizens to overturn statutes or laws passed by the Oregon legislature. If approved, the passage of H.B. 3427 would be up to the voters in Oregon’s next general election in November 2020.

Washington – Business and Occupation Tax Surcharges

The Washington legislature recently passed HB 2167, which imposes B&O tax surcharges. Beginning with business activities occurring on or after January 1, 2020, HB 2158 imposes business and occupation (B&O) tax surcharges on over 40 services at rates of 20%, with 33.33% and 66.66% imposed on business activities related to advanced computing.

20% surcharge on certain services

A 20% workforce education investment surcharge is applicable to business activities taxed under RCW 82.04.290(2), before application of any tax credits would be imposed on any person primarily engaged within Washington in any combination of over 40 enumerated activities. Some of the activities to which the surcharge would apply include:

  • computers and software
  • research and development
  • securities and commodities
  • information technologies
  • financial and investment services
  • telecommunications services, telecommunications networks
  • library or archive services, including operating web search portals
  • architectural, engineering and related services
  • non-store retailing (e.g., catalogs, phone, electronic media, internet, catalog showroom, mail-order house)
  • advice and assistance to businesses and other organizations on management, environmental, scientific, and technical issues
  • web hosting, streaming services, application hosting, data processing services
  • legal and paralegal services
  • business-to-business electronic markets that bring together buyers and sellers
  • accounting and auditing
  • health care (not including hospitals)
  • office administrative services
  • professional, scientific or technical services

For persons that report under more than one tax classification, the surcharge would only apply to services listed under this specific provision [RCW 82.04.290(2)]. If more than 50% of the person’s gross amount reportable (i.e., total value of products, gross proceeds of sales, and gross income of the business before deductions) under this chapter during the entire current or immediately preceding calendar year was generated from engaging in one or more of these activities, their entire gross proceeds are subject to tax under this chapter.

33.33% and 66.66% surcharge on advanced computing

Higher surcharges are imposed on select advance computing businesses, defined as “designing or developing computer software or computer hardware, whether directly or contracting with another person, including modifications to computer software or computer hardware, cloud computing services, or operating an online marketplace, an online search engine, or online social networking platform.” Any person that is a member of an affiliated group with at least one member of the affiliated group is deemed to be engaged in the business of advanced computing.

A 33.33% surcharge will be applied for an affiliated group with worldwide gross revenue of more than $25 billion, but not more than $100 billion, during the entire current or immediately preceding calendar year. That surcharge would increase to 66.66% for worldwide gross revenue over $100 billion. The combined surcharge paid by all members of an affiliated group could not be less than $4 million or more than $7 million annually.

The Legislature made clear that it “intends the provisions of this act to be applied broadly in favor of application of the surcharges,” and recommended that any provision of the act deemed ambiguous by a court, the tax appeals board, or any other judicial or administrative body “be construed in favor of application of the surcharges.”

Insights

The B&O tax surcharges would be in addition to taxes already imposed, and could be substantial. Taxpayers should review the extensive list of activities subject to the B&O tax surcharges, and consult a state tax professional to determine if they are liable for the additional tax.

Additionally, the legislature simultaneously passed bills changing the tax rate for specified financial institutions, significantly narrowing the qualifications for international investment management firms to be taxed at a preferential rate, and adjusted the graduated rates for real estate excise tax – which may result in significant increases in tax on real estate transactions. Taxpayers that could be affected by these changes should contact a state tax professional to understand the implications.

Washington – Changes to Nexus Standards for B&O and Sales Tax

On March 14, 2019, Washington Governor Jay Inslee signed measure SB 5581, which is meant to simplify the state’s economic nexus standards to be consistent with the U.S. Supreme Court’s decision in South Dakota v. Wayfair, and implements tax collection requirements for marketplace facilitators. (L. 2019, S5581, effective as noted.)

Retail Sales Tax Updates

Effective 7/1/19, Washington has revised the term “seller” to now include “marketplace facilitators,” regardless of whether making sales on their own behalf or on behalf of marketplace sellers. Additionally, the state has revised the type of sales that trigger the economic nexus threshold of $100,000 gross receipts & eliminated the economic nexus transaction threshold.

  • Effective 10/1/2018 to 12/31/2019 – The $100K threshold is based on cumulative gross receipts from retail sales in WA.
  • Effective 1/1/2020 – The economic nexus threshold for B&O tax will match the retail sales tax threshold of $100K. The threshold for retail sales tax and B&O tax will be calculated using all gross income, not just retail sales.
  • Effective 10/1/2018 to 3/14/2019 – Nexus established via either the $100K threshold; or 200 transactions with WA customers.
  • Effective 3/15/2019 – The 200 transactions nexus threshold and click-through nexus are eliminated.

Business and Occupation Tax Updates

Historically the B&O tax’s economic standards were subject to different standards than the WA retail sales tax economic nexus thresholds. SB 5581 intention is to minimize differences between retail sales tax and the B&O tax.

  • Effective 7/1/2017 (as applied to retail sales) to 12/31/19 – More than $267K (2017) or $285K (2018) of yearly gross receipts sourced/attributed to WA establishes economic nexus for out-of-state businesses.
  • Eff. 1/1/2020 – The $285K threshold is reduced to $100K, based on ALL gross income, not just retail sales.

Additionally, H.B. 1403 made various apportionment-related changes related to WA B&O tax. The changes include, but are not limited to, creating a “throw-out” provision, clarifying the steps required to petition for alternative apportionment, changing the definition of “Business activities tax” which no longer includes sales tax, use tax, or a similar transaction tax, further defining who qualifies as a “customer” and clarifying how the “customer location” is to be determined.

How Can We Help?

Armanino can provide the expertise to help you navigate significant changes in tax law. If you do business in Oregon or Washington and expect to be affected by these new developments, contact your Armanino tax partner today.

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