How the Commercial Activities Tax Affects You
By: Katy Brooks // Bend Chamber CEO
The $2.8 billion Commercial Activity Tax (CAT) is the funding mechanism for the Student Success Act and goes into effect January 1, 2020. Now that the CAT is out of the bag how will it affect your business?
The Bend Chamber Legislative Committee was aware that this liability needed to be addressed…
The 2019 legislative session began with a massive unfunded liability, but how to pay for it was still to be determined. The Bend Chamber Legislative Committee was aware that this liability needed to be addressed and discussed the need for a reasoned approach to businesses taxes with legislators at the April 10 Bend Chamber Day at the Capitol. The legislature was contemplating several approaches, including a CAT, Business Activity Tax, Gross Receipts Tax and other revenue legislation.
What started originally as an amendment to a business tax bill (HB 2019) morphed into the CAT (HB 3427-A) through a fast tracked process. The bill passed out of the Student Success Committee on April 29 and went to the Oregon House for a vote on May 1.
The Bend Chamber has long supported funding for schools, and although a large portion of the revenue raised will go to help schools, the method of collection will have significant impact to small business.
The Bend Chamber has long supported funding for schools, and although a large portion of the revenue raised will go to help schools, the method of collection will have significant impact to small business. In a letter of testimony opposing the CAT Katy Brooks, Bend Chamber President/CEO said, “For too many small businesses the proposed $2+ billion Commercial Activity Tax means the difference between the ability to hire and retain employees, provide benefits or sustain and grow their business.”
“For too many small businesses the proposed $2+ billion Commercial Activity Tax means the difference between the ability to hire and retain employees, provide benefits or sustain and grow their business.”
Central Oregon’s delegation voted against the tax. Representative Cheri Helt said “As a moderate and longtime education advocate, school board member and mom of three public school kids, I came to Salem wanting to support education, tax and pension reforms to boost classroom funding and student achievement. But I voted against a $2+B tax hike that will hammer small biz, raise consumer prices and fails to fix a broken pension system – the cause of Oregon’s classroom funding crisis.”
On the Senate side Republican leaders staged a four day walkout with an issue list of demands. Senator Knopp made a public statement stating that no new taxes should be passed without a viable PERS reform plan. After negotiations Senate members found a compromise and passed the Student Success Act on May 13.
The Governor signed the bill into law on May 16, 2019 which goes into effect January 1, 2020.
What is the CAT & Who is Affected?
A gross receipts tax is like a sales tax but paid by the seller instead of the customer. For example, a brewery may sell pints adding up to $1 million, but there are costs for ingredients, labor, production, sales and service to make that great beer. The CAT does not assess the brewery’s profit, just their sales. In this example, the brewery may be able to deduct 35% of costs, but the CAT will still affect their profit margin and impact their ability to reinvest in the business or our community.
Here’s a Short Summary:
- The term “commercial activity” means amounts realized by a person from the transactions of a trade or business.
- Persons subject to the tax include, but are not limited to, individuals, partnerships, C corporations, S corporations, and estates.
- The tax rate is equal to $250 PLUS the product of the taxpayer’s taxable commercial activity in excess of $1 million for the calendar year. Commercial activity is taxed by 0.57% for the year.
- The new tax is not considered transactional, so it is not subject to the rules of Public Law 86-272, which allows income tax exemption for sales of tangible personal property in certain circumstances.
- Taxpayers are allowed to subtract from the commercial activity sourced to the state 35% of the GREATER of cost of goods sold OR labor costs. Both will be apportioned amounts, similar to requirements for apportionment of income for income tax purposes.
- Any taxpayer with commercial activity in excess of $750,000 during the year must register with the Oregon Department of Revenue. An every individual doing business in Oregon with commercial activity in excess of $1 million must file an annual return by April 15 of the following year.